Disputes are an intrinsic component of the legal system, arising from variances in understanding, implementation, violation of obligations, infringement of rights, or unexpected events. In the Indian context, it is crucial to effectively resolve contractual disputes to preserve an ideal business environment in a country undergoing fast economic growth and increased corporate operations. Nevertheless, the existing legal system needs assistance to provide prompt decisions. The court procedures are widely known for their lengthy duration, sometimes extending the pursuit of justice beyond reasonable time limits. Although settling conflicts in court is not intrinsically fruitless, the excessive number of cases overwhelms the legal system, resulting in harmful problems such as significant delays, extensive backlogs, and costly litigation costs. This is especially problematic in contractual disputes, as even minor issues can snowball into protracted legal conflicts.
In such a setting to solve these apparent flaws, Alternative Dispute Resolution (ADR) emerges as a viable route, delivering quick and cost-effective justice. This very idea has been present in India in the form of the Arbitration and Conciliation Act, 1996, Mediation Act, 2023, and even Section 89 of the Civil Procedure Code, 1908, where the Courts encourage individuals to resolve conflicts under the ADR process, which is a time-saving mechanism that aids to resolves issues quicker than court hearings, ensuring speedy resolutions, where proceedings occur privately, fees and expenses are less, and its scheduling is adaptable. Moreover, a neutral third party oversees ADR proceedings.
Today, this very mechanism is incorporated by individuals in their commercial agreement, as a dispute resolution clause, which may consist of methods like conciliation, mediation, negotiation, or arbitration, to avoid early and needless court actions.
Significance of Arbitration
Even if conciliation, mediation, or discussion are considerably more flexible and efficient than arbitration, individuals who adopt a dispute resolution clause in contracts prefer arbitration because not only can the parties pick an arbitrator to evaluate the evidence but also the decision carried out in arbitration have legal enforceability, making it legible and effective with limited options of review or appeal. As part of their crystallized dispute resolution policy, up to 91% of businesses prefer arbitration to litigation to resolve disputes, according to a report by PwC India[1].
Arbitration may seem identical to any court proceeding. However, there is more to arbitration than the selection of an arbitrator and the presence of legally binding force. Unlike litigation, the dispute resolution procedure is less stringent, and the judge/arbitrator may not hear any other case simultaneously, allowing arbitration to be concluded more swiftly. Moreover, arbitration can incorporate a degree of bargaining, providing the arbitrator greater freedom in their final arbitral award decision; apart from that, this approach is prevalent in commercial disputes and other industries such as securities, labor, employment, and construction. In international contracts, arbitration has been a preferred means of dispute resolution, and most crucially, it helps prevent class-action lawsuits. In brief, parties add arbitration clauses to handle future conflicts swiftly and cost-effectively.
Conditions for Arbitration Clause in a Contract
As per Section 7(1) of the Arbitration and Conciliation Act, 1996, ‘”arbitration agreement” means 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.’ As per Section 7(2), an arbitration agreement may be in the form of an arbitration clause in a contract or the form of a separate agreement. However, there is no universally applicable format for arbitration clauses in contracts and simply mentioning an arbitration clause is not sufficient, for a contract to fully benefit from arbitration. Therefore, to optimize the likelihood of effective and efficient dispute resolution through the translation of an interest or dispute into an arbitration clause, it is critical to strategically ascertain the client’s interest in the dispute, the contract’s characteristics, the parties involved, the types of conflicts that are probable to arise, and the countries that are likely to be involved in any potential dispute. Additionally, comprehension of circumstances that may necessitate extraordinary provisions—such as temporary relief, confidentiality, and other critical matters—might be required. In conclusion, every arbitration clause must be suitably crafted by the specific circumstances, criteria, and parties involved in the dispute. A hastily drafted arbitration clause can potentially develop into a pathological provision that is unenforceable or requires clarification, resulting in costly and time-consuming legal conflicts.
Arbitration clauses can be drafted in 3 ways: primary, general, and complex clauses, depending on the type of contract, which include:
- Primary clauses are essential terms required for a sustainable arbitration agreement, commonly contained in institutional model agreements.
- General clauses: These are typically used in contracts involving significant transactions, where extra elements are provided beyond the opening phrases, addressing specific matters including venue, language, and governing law.
- Complex clauses: These consist of elements beyond primary clauses, such as confidentiality, discovery, multi-party arbitration, and waiving of appeals. They require careful adaptation to prevent discrepancies and maintain validity across jurisdictions.
Other requirements may include that the arbitration agreement must be written.
Independence of Arbitration agreement
If a contract refers to a document containing an arbitration clause, and the contract is in writing, then that arbitration clause is considered part of the contract, as per Section 7 (3) and (4) of the Arbitration and Conciliation Act, 1996. However as per the Doctrine of Severability, if a small part of a law doesn’t follow the parent law, the court can remove that part and keep the rest of the law intact. Under the same instance as well, as per Section 16(a) and (b) of Arbitration and Conciliation Act, 1996, the arbitration provision in a contract is viewed as different from the primary contract itself and consequently remains valid even if the contract expires or becomes null and void. Similarly, even if both parties mutually terminate the arbitration agreement, still in case of disputes involving the primary agreement’s/ primary contract terms or subject matter, dispute will be handled by arbitration, as stated in the case of Ashok Thapar v. Tarang Exports (P) Ltd, (2018).[2] Thus the arbitration clause, a distinct agreement in the contract, exists independently from its other clauses. Despite of this, the ultimate resolve depends upon the nature of the controversy and its effect upon the existence or survival of the contract itself, as provided in the case of Mulheim Pipecoatings Gmbh v. Welspun Fintrade Ltd,(2013)[3].
Conclusion
From the detailed analysis presented in the text, it’s clear that the significance of arbitration clauses in contracts is multifaceted and substantial. They provide a structured path for resolving conflicts, enhance contract enforceability, and protect all parties’ interests, making it valid and legally robust. Moreover, being independent of the contract itself, the enforceability of the arbitration process remains intact even if parts of the contract are disputed or nullified.
But even so, the effectiveness of an arbitration clause and its value in commercial agreements greatly depends on its meticulous drafting, which could include constituents such as the governing law, the seat of arbitration, the appointment of the arbitrator, or the language. Such a well-crafted arbitration clause, tailored to the specific needs and contexts of the parties and the nature of the contract, is essential to ensure that disputes are resolved efficiently without further complications. The potential pitfalls of poorly drafted clauses—such as being unenforceable or requiring extensive legal interpretation—are highlighted and encourage the need for precision and foresight in contractual drafting.
Thus, such clauses must be comprehensive and customized to address all potential issues, ensuring that arbitration is an efficient alternative to traditional litigation and supports India’s broader economic and legal environments
[1]AK492- May 2013 Corporate Attitudes & Practices.indd-https://www.pwc.in/assets/pdfs/publications/2013/corporate-attributes-and-practices-towards-arbitration-in-india.pdf
[2] (2018) SCC Online Bom 1489
[3] (2013)SCC Online Bom 1048
Author: Gautam Bhatia, CHRIST (Deemed to be University), Bangalore
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