Better the drafting, better the chances of winning- Arbitration

Chapter I:

Introduction

An arbitration agreement is an agreement between two or more persons to submit a dispute or a potential dispute arising between them in respect of their defined legal relationship to one or more impartial persons for resolution.

• Article 7 (1), UNCITRAL Model Law on International Commercial Arbitration 2006

• Article II (1), Convention on Recognition and Enforcement of Foreign Arbitral Award, New York Convention 1958

Arbitration provides for an alternative forum to the time consuming and expensive court proceedings and ensures speedy disposal of cases without the court’s intervention. Section 7 of the Arbitration & Conciliation Act, 1996, states that ‘Arbitration Agreement’ is an agreement by the parties to submit to arbitration, all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not.

• Section 7 modelled on the Report of the United Nations Commission on International Trade Law.

The Law Ministry has proposed to include a clause in the 1996 Act which would provide for a deemed arbitration clause unless expressly excluded by the parties in writing. The said clause would read as follows:

"Unless parties expressly and in writing agree otherwise, every commercial contract with a consideration of specified value (Rs. 5 crore or more) shall be deemed to have in writing specified arbitration agreement."

Chapter II:

Essential elements of an arbitration agreement

Some relevant cases:

• Bihar State Mineral Development Corporation v. Encon Builders Ltd, 2003 (7) SCC 418.

• K. K. Modi v. K. N. Modi 1998 (3) SCC 573

Independent Clause:

• Is treated as an independent contract.• Even if main contract is itself illegal and void. • The doctrine of Separability was established in English law by

Heyman v. Darwins, [1942] 1 All ER 337• This doctrine has been incorporated in the UNCITRAL Model

Law on International Commercial Arbitration. The Arbitration and Conciliation Act, 1996, which is based on the UNCITRAL Model Law, also explicitly adopts this approach in Section 16 (1) (b)

• Chatterjee Petrochem (I) Pvt. Ltd. v. Haldia Petrochemicals Ltd. and Ors, AIR 2012 SC 2753

• National Agricultural Coop. Mktg. Federation India Ltd. v. Gains Trading Ltd, AIR 2007 SC 2327

• When law recognises the same to be independent contract, then should be give importance. In any commercial transaction, first concern should be to evaluate the merits of the ‘exit’ from the contract.

Written Agreement:

• Must be in writing. • There is no particular form. • An oral agreement of arbitration is not legally recognized in

India. However, on many occasion Courts may from the circumstances finds the intention for arbitration. However, such situation should be avoided.

Capacity of the Parties:

• Must be a valid contract and binding on the parties.• Not influenced by fraud, coercion or undue influence. • Capacity for entering into the contract.

Intention:

• Intention to refer disputes already arisen or likely to arise in respect of a contract.

• Must be mutual.• Mutual agreement that award should be binding. • Must give bilateral rights of reference.

Certainty:

• If not certain or capable of being made certain - void. • The court will do its best, if satisfied that there is a

determinate intention to contract, to give effect to that intention, looking at the substance and not mere form.

Chapter III:

Concerns

• A badly drafted arbitration agreement increases the risks of parties engaging in a jurisdictional fight before the substantive one.

• Translates into increased costs, time and inconvenience to parties.

• Every arbitration starts with an arbitration agreement. • It provides the frame work under which the parties’ dispute

will be resolved. • Often, arbitration agreement is not given serious

consideration. • An arbitration agreement may affect arbitration either

positively or negatively depending on whether it is properly drafted.

Make sure to create a binding arbitration agreement:

“In case of dispute, the parties undertake to submit to arbitration, but in case of litigation the Court shall have exclusive jurisdiction”.

• Must be clearly stated that the parties have agreed to a binding arbitration.

• Arbitration is a creature of contract, if there is no contract, there is no agreement to arbitrate. E.g.:

• In case of above clause, the client will end up spending what will seem like an eternity, and a great deal of money, trying to resolve the dispute.

• The overriding goal of the drafter should be to draft a provision that, if, a dispute arises, will help the parties obtain an arbitration award without a detour through the court system.

• The drafter must produce an enforceable agreement.• Note that an unequivocal clause that does not firmly commit

the parties to arbitrate their disputes will not be enforced.

Make sure to give proper attention:• It is common to find that no one actually paid any attention to

the arbitration clause. • Days are spent to draft the main contract.• However, on the day of closing of the main contract, copy paste

job of the arbitration clause takes place. • More that 30% of the cases before tribunals it is found that the

arbitration clause is not properly drafted. • The clause must be designed to fit the circumstances of the

transaction and the parties.• The clause must anticipate the type of dispute resolution

process which is best suited to the client and the transaction• Be careful about giving in to the temptation to advise the client

to agree to arbitrate some types of disputes and go to court for others. This is done in case of engineering contracts a lot.

Make sure to avoid omission:

“Any disputes arising out of this Agreement will be finally resolved by binding arbitration”.

• This clause is probably enforceable because it clearly requires the parties to arbitrate disputes. However, it does not achieve the goal of an arbitration clause, which is to stay out of court.

• Should not omit a crucial element from arbitration, e.g.

Make sure to avoid over specificity:

• Rather than providing insufficient detail, the drafter provides too much.

• Don’t take it as a challenge to show how many terms have been invented.

• Over specificity may create a situation where the same is extremely difficult to put into practice.

“The Arbitration shall be conducted by three arbitrators, each of whom shall be fluent in Spanish and shall have twenty or more years of experience in the design of buggy whips, and one of whom, who shall act as chairman, shall be an expert on the law of the Spanish Empire”.

Make sure to not have unrealistic expectations:

“The claimant will name its arbitrator when it commences the proceeding. The respondent will then name its arbitrator within seven (7) days, and the two so named will name the third arbitrator, who will act as chair, within seven (7) days of the selection of the second arbitrator. Hearings will commence within fifteen (15) days of the selection of the third arbitrator, and will conclude no more than three (3) days later. The arbitrators will issue their award within seven (7) days of the conclusion of the hearings.

• It is good to have a deadline or time frame but avoid being stringent.

• Time frame should be such that it is definite but leaves space for flexibility.

• Solution is like arbitration to be completed in 90 days or in a certain number of hearing etc. However, same would depend on the nature of transaction underling the main contract

Make sure to not be litigation envy:

• Avoid asking the tribunal to follow court rules.• It should be informal and for speedy disposal of disputes

rather than going through the court procedures.

Make sure to not be overreaching:

• Avoid the temptation to tilt the arbitration process in favor of his or her client.

Chapter IV:

Factors which must be kept in mind

Jurisdiction:

“Any dispute or difference which may arise in respect of this agreement or any of the provisions of this agreement, or out of or in connection with this contract shall be settled by arbitration”

• The jurisdiction of the arbitral tribunal is conferred by the arbitration clause and an arbitral tribunal has no jurisdiction to entertain any matter not referred to it by the parties.

• Whether an arbitration clause will confer jurisdiction on an arbitral tribunal to entertain any form of dispute arising from the substantive or underlying contract depends on whether the clause is broad enough.

• Broad clause:

“Any dispute or difference arising hereunder”

• The words 'disputes relating to' or 'arising in connection with' the contract are wider than disputes 'arising under' the contract, which a court may interpret as covering only contractual claims.

• Narrow clause:

Funding:

• Parties are liable for the fees & expenses of an arbitral tribunal in equal shares.

• If, a tribunal’s fee is incomplete, the tribunal may suspend or terminate the arbitration.

• Situation may arise where a party may stop or refuse to pay its share of arbitration fees. If this happens, it will mean that the tribunal’s fee is incomplete and will result in delay, frustration, stifling of arbitration, suspension and termination of arbitration

• Most of the known arbitration laws and institutional arbitration rules does not provide for a solution to such situation.

• If, non-defaulting party is allowed to pay the entire fees, then the arbitration proceeding may be subject to issues like:

o Whether the non defaulting party is rich enough to pay the entire fees

o Whether the non defaulting party would be able to recover part of the fees from the defaulting party and at what cost

o If the award is passed in favour of the non defaulting party – same may be subject to issue of biasness.

• Solution - to include in the arbitration agreement that each party shall continue to pay its shares of the fees and in the event of default, it shall be deemed that the defaulting party has will fully admitted to the case of the non defaulting party.

Substantive Law:

• This is the law that governs validity, interpretation, performance, breach & termination of the underlying contract, the rights & obligations of the parties therein and the level of damages. E.g. Indian Contract Act.

• The tribunal will apply Indian Contract Act to adjudicate the dispute.

“The expression proper law of a contract refers to the legal system by which the parties to the contract intended their contract to be governed. When the intention of the parties to a contract with regard to the law governing the contract is not expressed in words, their intention is to be inferred from the terms and nature of the contract and from the general circumstances of the case, and such inferred intention determines the proper law of the contract.”

• National Thermal Power v. Singer Company and Ors, AIR 1992(3) SCC 551

Law governing arbitration Agreement:

• National Thermal Power v. Singer Company and Ors, 1992(3) SCC 551

“The law governing the arbitration is not the same law which governs the contract, but it is the law which is in force in the country in which the arbitration is being conducted.” “The validity, effect and interpretation of the arbitration agreement are governed by its proper law. Such law will decide whether the arbitration clause is wide enough to cover the dispute between the parties. Such law will also ordinarily decide whether the arbitration clause binds the parties even when one of them alleges that the contract is void, or voidable or illegal or that such contract has been discharged by breach or frustration.”

Procedural Law:

• Referred as the Lex Arbitri or Curial Law.• Curial law is the law governing the arbitration proceedings.

Sumitomo Heavy Industries Limited v. ONGC Limited and Others, AIR 1998 SC 825

• To determine the Curial Law in the absence of express choice of the parties, it is first necessary to determine the seat of arbitration.

• This is the law that governs the law of the arbitration• Ascertaining the power of the tribunal to rule on its

jurisdiction

• The conduct of the reference• The form and finality of award• Determines who administers the arbitration• Parties may choose a national law to govern their arbitration

and as well appoint an institution to govern the arbitration.• It is desirable that parties agree on this at the time of the

agreement.

“The curial law, i.e. the law governing the conduct of the individual reference.”

“The curial law governs; the manner in which the reference is to be conducted; the procedural powers and duties of the arbitrator; questions of evidence; the determination of the proper law of the contract.”

• Danger inherent in intending to agree on this later is that parties are not likely to agree once a dispute has arisen between them.

• Dozco India (P) Ltd. v. Doosan Infracore Co. Ltd., (2011) 6 SCC 179

Language:

• Language for conduct of arbitration.• May be different from the language of the contract.

Number of Arbitrators to be appointed:

• Whether sole or more than two arbitrators• Note that cost of arbitration will shoot if more than one

arbitrator• If there are more than two parties to the arbitration

agreement, the drafting may need to be adjusted.

Voiding the Arbitration Agreement:

• Always use the word ‘shall’.• Don’t use ‘may’• The agreement must be certain. It should not be optional but

should be mandatory. • Improperly drafted or unclear agreement - may be void and

not enforceable.

Institutional or ad hoc:

• The clause must state whether parties want arbitration to be administered and supervised by a recognized arbitral institution or whether they want an ad hoc procedure.

• In an ad hoc procedure one can still use a set of institutional rules or agree to their own rules and procedures.

Sovereign immunity:

• Sovereign, or state, immunity is the immunity of a state from being sued in the courts of another state.

• If one is contracting with a state or state body one may need to consider including a waiver of any immunity, both as to jurisdiction and execution, in the arbitration agreement.

• The choice of seat is again very important here. • Where the defense of sovereign immunity is raised, the

tribunal's ability to consider that defense will be determined in accordance with the law of the seat of the arbitration.

• If one is contracting with a state, one needs to ensure that the arbitration clause stipulates a seat where the law follows a restrictive approach on sovereign immunity - for example, London or Geneva as opposed to the People's Republic of China.

Seat:

• ‘Seat’ is interchangeable in usage with term ‘place’. • Note that ‘seat’ is different from ‘venue’. Both may be same

or may be different. • It determines the national law governing the arbitration.• National court exercises supervisory and supportive roles. • Whether an arbitral award will be recognized and enforced.• Solution: always mention the seat of arbitration e.g. London

• Note and be careful: Enforcement of an award will be dependent whether the seat is in a country that is party to an international convention such as the New York Convention. One must bear in mind that the New York Convention enforces awards by reference to the seat of the arbitration, not the country that the parties come from. E.g. Republic of Yemen is not a signatory, so an arbitration award made in Yemen is not enforceable under the New York Convention, but a Yemeni company can enforce an award under the New York Convention made in Paris.

Venue:

• Parties agree for convenience to hold arbitration in a particular place.

Place:

• Interchanged in usage with ‘Seat’ and also ‘Venue’.

Chapter V:

Section 9 of the 1996 Act

• It provides for the making of orders for interim relief to parties before, during or after arbitration.

• Its origins in Article 26 of the UNCITRAL Arbitration Rules, 1976 but differs from this provision insofar as the latter is restricted in its elaboration of specific grounds under which interim relief can be claimed.

• In the case of Jindal Vijayanagar Steel (JSW Steel Ltd.) v Jindal Praxair Oxygen Co. Ltd., (2006) 11 SCC 521:

o Mumbai was the seato The arbitration clause specifically provides for a dispute

resolution meeting as a precondition for invocation of the arbitration clause – such meeting was held in Mumbai.

o The pipeline supply agreement was approved by the Board of Directors of the appellant Company in Bombay.

o The agreement amended in Bombay. o The entire senior management of the appellant is located at

Mumbai.o The appellant had its corporate office at Mumbai.o Appellant carrying on business at Mumbaio The appellant shifted its registered office to Mumbai during the

pendency of Section 9 petition in the Bombay High Court.

“though the parties had agreed to the place of arbitration being Kolkata conferring jurisdiction to the Courts of Kolkata, this does not oust jurisdiction of Court where the cause of action has arisen”.

• Swastic Gases P. Ltd v Indian Oil Corpn Ltd, Civil Appeal No. 5086 of 2013 (Arising out of SLP (C) No. 5595 of 2012):

“...In cases of international commercial arbitrations held out of India provisions of Part I would apply unless the parties by agreement express or implied, exclude all or any of its provisions. In that case the laws or rules chosen by the parties would prevail....”

• Bhatia International v. Bulk Trading AIR 2002 SC 1432:

• The law laid down by in Bhatia case was subsequently followed in 2008 judgment of Venture Global Engineering v. Satyam Computer Services Ltd. and Another, (2008) 4 SCC 190.

• In Indtel case, [2008] 10 SCC 308, the courts adopted the power to appoint arbitrators in arbitrations seated outside India pursuant to Section 11 of the Act.

“...In a foreign seated international commercial arbitration, no application for interim relief would be maintainable under Section 9 or any other provision, as applicability of Part I of the Arbitration Act, 1996 is limited to all arbitrations which take place in India. Similarly, no suit for interim injunction simplicitor would be maintainable in India, on the basis of an international commercial arbitration with a seat outside India....

• Bharat Aluminium Co. (2012) 9 SCC 649

• Bharat Aluminium Co. (2012) 9 SCC 649

o Para 96 changes the law as was settled by Jindal Case.o The term "subject matter of the arbitration" cannot be

confused with "subject matter of the suit".o The term "subject matter" in Section 2 (1) (e) is confined to

Part I.o The provision in Section 2(1) (e) has to be construed keeping

in view the provisions in Section 20 which give recognition to party autonomy.

o The legislature has intentionally given jurisdiction to two courts i.e. the court which would have jurisdiction where the cause of action is located and the courts where the arbitration takes place.

o This was necessary as on many occasions the agreement may provide for a seat of arbitration at a place which would be neutral to both the parties. Therefore, the courts where the arbitration takes place would be required to exercise supervisory control over the arbitral process.

• In Vachaspati Case, 2013 SCC Online Bom 1296 & Stewarts Case, 2014 SCC Online Bom 18:

o Interpreted BALCO Case and in particular para 96.o That it applies prospectively and law of land.o Court of venue and also cause of action both have

jurisdiction. o Appeal pending in Supreme Court.

o Balco appear to have used ‘seat’ and place’ as interchangeable.

o Now two courts will have jurisdiction. o Have not expressly overruled Tindal Case.o Affect of section 42 of the 1996 Act – if first application in

Venue Court then what happens to sections 34 and 36 applications.

• Problems:

Chapter VI:

Check list

• Have the parties been properly identified?• Is there a clear reference to arbitration?• What disputes are to be referred to arbitration?• Where is the seat of arbitration to be?• How is the substance of the dispute to be determined?• What is the law of arbitration to be?• Is there a choice of the procedural law?• How will the tribunal be appointed?• Is there an appointing authority?• Is the tribunal required to have any particular attributes or

qualification?

• How many members of the tribunal will there be?• Are procedural and/or evidential rules or the rules of an

institution to be adopted, and, if so, which ones?• What will be the language of arbitration?• Is specific provision for confidentiality required?• Should applications and appeals to the court be excluded (to

the extent permissible under the Arbitration and conciliation Act, 1996)?

• Is a waiver of sovereign immunity required?• Are provisions for multi party arbitration, consolidation or

concurrent hearings required?

Chapter VII:

Conclusion

• Please do not narrow your thought process with terms like ‘corporate’.

• Law evolves with time through its interpretations by the courts etc.

• Litigation, in whatever form, goes to the root of legal system and practice.

• Ensure that litigation is one of the first foundation step in your legal career.

• Whatever transaction work – you have to know that no commercial relation is for eternity.

• Whatever transaction work – you draft documents because parties want certainty and do not trust each other.

• Whatever transaction work – you have to anticipate the worst outcome i.e. litigation

• Whatever foundation work - you have to think the way out i.e. exit.

• For all planning you need to control your ideas/thoughts. • To control ideas/thoughts - you need to know the facts.• To control facts, you should do the following:

o Arrange the file date wise chronologicallyo Paginate and use post tico Make List of Dateso Get the List of dates approved by Client

o Remember Client is the creature of the factso Then look at the relevant lawo Draft the Arbitration Agreemento Drafting is the process by which you have to

accommodate the thought within the four corner of the paper.

o Ensure that you use simple, no Latin phrase and that a third party is able to read and understand what you have written.

LAW IS COMMONSENSE MADE COMPLICATED