Construction Contracts: Rising Importance Of Enforceable Arbitration Agreement

What Constitutes An Arbitration Agreement

Arbitration agreement, like any other agreement, is an arrangement whereby parties agree to resolve all or certain disputes that may arise out of, or in relation to a defined legal relationship between them through the process of arbitration. In India, the Arbitration & Conciliation Act, 1996 governs the procedure of arbitration and Section 2(1)(b) read with Section 7 of the Act prescribes the form and substance of an arbitration agreement. Existence of a valid and enforceable arbitration agreement is in fact a sine quo non for invoking the process of arbitration with respect to disputes arising under a contract.

There have been a catena of judgments from the Supreme Court of India and the various High Courts in India on what constitutes a valid enforceable arbitration agreement, and it has been held that wherever parties to a contract have agreed for resolving their disputes through arbitration, the only recourse available is the process of arbitration in complete exclusion to any other procedure available in law.

In one of its recent judgment passed in the case of Cox and Kings Ltd. Vs. SAP India Pvt. Ltd. & Ors^[2] the Supreme Court of India has laid down certain principles for interpreting and construing the existence (or non-existence) of an arbitration agreement and has held inter alia that an arbitration agreement is essentially a contract enforceable by law which meets all the requirement of a 'contract' under the Indian Contract Act, 1872 should be meet. Upon analysing the scope of Section 7 of the Act of 1996 and in the light of various previous judicial pronouncements, the Supreme Court has held that existence of an arbitration agreement must be recognised in substance, rather than in form. An arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement, but it shall be in writing. It is not necessary that such arbitration agreement must have been signed by the parties as its existence can even be culled out from the letters, correspondences, facsimile and messages exchanged between the parties showing their intention to resolve disputes through arbitration.

Essential Components Of Fair And Enforceable Arbitration Agreement

On a conspectus of the scheme of arbitration enshrined in the Arbitration & Conciliation Act, 1996 and the judicial pronouncements by the Courts with respect to the contents and enforceability of arbitration agreements, in the process of formulating arbitration clauses or arbitration agreements parties may consider the following aspects to obviate the initial hurdles in achieving an expeditious and fair adjudication of the disputes in their underlying contracts:

1. Scope of Arbitration

First of all, while indicating the scope of reference to arbitration, the arbitration clause shall clearly specify and indicate as to the nature of disputes that are referable to arbitration. In case certain disputes are considered as not referable to arbitration (called “excepted matters”), such intention should be clearly spelt out in the arbitration clause. The Supreme Court in the landmark case of General Manager Northern Railways & Anr vs Sarvesh Chopra^[3] upheld the right to carve out such exceptions in the arbitration agreement as regard the scope of reference to arbitration, which has been followed in many subsequent judicial pronouncements. However, it must be borne in mind that while “excepted matters” cannot be referred to arbitration, the aggrieved party will still have the right to agitate the issue before a court of law based on the established principle of law that no person can be left remediless against a legal wrong or an enforceable legal right.

2. Parties to Arbitration

While it was generally believed that only signatory parties to the arbitration agreement or contract can be the parties in an arbitration proceeding, however, the Supreme Court has held in the recent case of Cox and Kings (Supra) that even group companies which claim a right through another group company performing the contract can be a party to the arbitration proceeding arising under the contract, even though such group company may not be a direct signatory to the arbitration agreement under the contract. It, therefore, becomes incumbent upon the party formulating the arbitration agreement to bear in mind that in case the performance of contract would extend to some other group companies, the arbitration agreement must provide for inclusion of all such group companies in the arbitration procedure ensuing out of the contract.

3. Appointment of Arbitrators

A fundamental principle under the Act of 1996 and the process of arbitration is that the adjudication of disputes must necessarily be by an independent arbitrator or an arbitral tribunal, in a fair and impartial environment. However, it is a general practice seen in standard form contracts especially by government agencies (Employer) that the right to appoint the arbitrator(s) is vested with the Employer, who may either appoint an arbitrator of its choice, or propose a set of three to five names of persons for the other party to choose. This certainly creates grave apprehensions and reasonable doubts for the contractor as regards a fair and impartial adjudication of his disputes promised to him under the Act of 1996.

Before the 2015 amendment^[4] of the Arbitration and Conciliation Act, 1996, the one party could provide in the arbitration agreement an absolute right upon himself to appoint any person, including its own existing officials, as arbitrator(s) for adjudicating the disputes under the contract. However, a sea change was brought about on this aspect post the 2015 amendment. In order to uphold the fundamental principle of independence and impartiality in the arbitration process, the Amended Act of 1996 provided that no person who falls either in the restricted category under the Fifth Schedule or is prohibited under the Seventh Schedule of the Act of 1996 could be appointed as an arbitrator in a given case. Since thereafter, it is not within the one party's right to appoint any arbitrator unilaterally and any arbitral award rendered by such unilaterally appointed arbitrator has been held to be a nullity in law.

The above amended provisions were clarified by the Supreme Court in the case of TRF Ltd. v. Energo Engineering Projects Ltd.^[5] wherein it was held that the Managing Director of the Employer cannot act as the arbitrator for adjudicating the disputes raised by the contractor as he would be an interested party in the outcome of such arbitration. The said legal position was further clarified by the Supreme Court of India in a subsequent landmark judgement of Perkins Eastman Architects DPC & Anr. v. HSCC (India) Limited^[6] wherein reiterating the law in the TRF case (Supra) it was held that not only that the Managing Director of the employer was disqualified from acting as the arbitrator against the contractor's claims, but he even had no legal right to delegate such power to any person or to even nominate any other person to act as the arbitrator in the case. This law has been followed in numerous cases, both by the various High Courts and even the Supreme Court and holds good till date.

A similar practice of some of government agencies in insisting that the arbitrator or the members of any arbitral tribunal being chosen from a panel of arbitrators maintained by such government agencies has being subject matter of litigation. It may be relevant to note that choosing an arbitrator from a panel maintained by an arbitral institutions incorporated under Section 11(3A)^[7] of the Act of 1996 is not the same as choosing from the panel of arbitrators maintained by one of the contracting parties itself. In the latter case, the element of bias cannot be completely ruled out and the other party may be justified in having an apprehension against choosing one of the Employer's panel arbitrators.

Although the Supreme Court had held in the case of Voestalpine Schienen GmbH vs. Delhi Metro Rail Corporation Ltd.^[8] a party cannot be compelled to choose the arbitrator(s) from the panel of arbitrators maintained by the Employer being against the spirit of independence and impartiality, in a subsequent case of Central Organisation for Railway Electrification vs. ECI-SPIC-SMO-MCML JV.^[9] a three Judges bench of the Supreme Court held that in case the suggested panel of arbitrators contains a sizeable number of proposed arbitrators, the arbitration clause requiring the contractor to choose arbitrator from such panel is legally enforceable. However, the said judgment has been challenged and referred to a larger bench in Union of India v. M/s. Tantia Constructions Ltd.^[10] as well as JWS Steel Ltd. vs. Southwestern Railways and Anr.^[11]

In a recent case, the Delhi High Court in Rani Constructions Pvt Ltd Vs UOI^[12] dealt with an arbitration clause which provided for arbitration as per the rules of the Society For Affordable Redressal of Disputes (SAROD). The contractor had approached the High Court for appointment of arbitrator on the ground that the said rules mandatorily provided for a pre-condition requiring the party invoking arbitration under the rules to first take its primary membership. Since both the parties to the contract were not having a primary membership of the Society, the arbitration procedure prescribed in the arbitration clause was unworkable. In the circumstances, Court held an arbitral institution chosen by the parties to appoint an Arbitral Tribunal cannot insist upon the party for taking its primary membership as a pre-condition for invoking arbitration under its rules.

In order to uphold that spirit of the Arbitration and Conciliation Act, 1996 which is inspired by globally acceptable norms of arbitration, incorporation of such terms in the arbitration needs to be discouraged. After all, an arbitral award is intended to be final and binding except for a very limited scope of challenged and interference by the Courts.

4. Seat of Arbitration

Yet another important aspect of formulating an arbitration agreement is regarding choosing the seat and venue of arbitration. It must be understood that the seat of arbitration is the place which the parties choose to principally hold the arbitration meetings, whereas the venue of arbitration can be any place at which the arbitrary tribunal or the parties may choose to hold or hearing temporarily and for a specific purpose or even convenience.

Prior to the decision of the Supreme Court in Indus Mobile Distribution Private Limited Vs. Datawind Innovations Private Limited and Ors^[13], it was generally understood that the Court to have jurisdiction over the arbitration proceedings as well as for enforcement of an arbitral award is the Court(s) as defined in Section 2(1)(e) of the Act of 1996, and in case the subject matter of arbitration lay within the jurisdiction of more than one Court, the parties could choose to vest exclusive jurisdiction in any of such Courts having jurisdiction over the subject matter. However, the Supreme Court in the case of Indus Mobile (Supra) held that in case the arbitration agreement between the parties specified a particular place as the “seat of arbitration”, the Civil Court within whose jurisdiction such seat of arbitration exists has the exclusive jurisdiction over the arbitration matter.

Therefore, it is important that the parties must choose the seat of arbitration keeping in mind the effectiveness of implementation of the arbitral procedure and also the enforcement of the arbitral award in the matter. Needless to say that contract where foreign entities are involved, the choice of seat is a far more fundamental issue that should be seriously deliberated upon while drafting an arbitration agreement.

5. Governing Law

No less important is the issue relating to the substantive law governing the contract as well as the curial law governing the arbitral procedure in international arbitrations that may fall under Part II of the Arbitration and Conciliation Act, 1996. While it is advisable to have the law governing the performance of the contract as the one prevailing in the country where the contract is to be performed, the curial law may be the one governing the rules of arbitration. The five-judge Bench of  Supreme Court of India in the case of Bharat Aluminium Company vs. Kaiser Aluminium Technical Service, Inc. and Ors^[14] discussed the concept and essence of both curial law and substantive law. The observations of the Apex court in this case were instrumental in bring about progressive amendments in the Arbitration and Conciliation Act, 1996^[15].

While there are ample judicial precedents from the Supreme Court of India and the various High Courts as to the contents of a fair, reasonable and enforceable arbitration agreement complying with the foundational norms set forth in the Arbitration & Conciliation Act, 1996, the discrepancies continue to exist, making the arbitration clauses/ agreements susceptible to challenge. Surely, if the fundamental ingredients and their implications as highlighted in this article are kept in mind while drafting arbitration clauses/agreements, chances of rejection of the arbitration agreement or even arbitral awards on a purely technical and procedural ground can be obviated.

The author is an Advocate & Views are personal.