Arbitration Agreement and Arbitration Clause Compared

Section 7(2) provides that an arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement. Both are arbitration agreements, and the requirements of writing, certainty of intention and an arbitrable subject matter apply equally to each. The difference is one of form and of timing, and it produces four practical consequences: when the agreement is made, how its scope is described, whether separability arises, and whether it can carry the waiver that the proviso to Section 12(5) requires.

1. The Provision

Section 7(1) and (2), Arbitration and Conciliation Act, 1996

(1) 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.

(2) An arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement.

The words which have arisen or which may arise show that the Act contemplates both kinds. A clause looks forward to disputes that may arise; a separate agreement made after a dispute has arisen looks back at one that has. The older vocabulary called the first an arbitration clause and the second a submission agreement, or compromis, and those terms are still used.

The two forms, and the four points on which they differ

2. The Differences

Basis	Arbitration clause	Separate agreement
Form	A term of the substantive contract	A distinct document, which may refer to the contract
Timing	Made before any dispute exists, at the time of contracting	May be made at any time, and is usually made after the dispute has arisen
Scope	Described in general words, such as all disputes arising out of or in connection with this contract, which the tribunal later construes	Described by reference to the dispute that has actually arisen, so the scope is precise
Separability	Arises, and is dealt with by Section 16(1)(a) and (b): the clause is treated as independent of the other terms	Does not arise; the agreement is independent by its own form
Waiver under Section 12(5)	Cannot carry it, because the proviso requires an express agreement in writing made after the dispute has arisen	May carry it, being made after the dispute has arisen
Bargaining position	Agreed when relations are good and neither party expects to litigate	Agreed when relations have broken down, which makes agreement harder to obtain
Common difficulty	Generality: what the clause covers must be worked out later	Obtaining consent at all; a party that expects to lose has no reason to agree

3. Why the Distinction Matters

Separability applies only to a clause. Section 16(1)(a) treats an arbitration clause forming part of a contract as an agreement independent of the other terms, and Section 16(1)(b) provides that a decision that the contract is null and void does not entail the invalidity of the clause. A separate agreement needs no such protection, because it is not part of the contract under attack.
Only a separate agreement can waive ineligibility. The proviso to Section 12(5) permits the parties to waive the applicability of that sub-section by an express agreement in writing made subsequent to disputes having arisen. A clause in the original contract cannot do it, however clearly worded, which is why clauses naming an officer of one party as arbitrator failed after 2015.
Scope is construed differently. A clause is construed to give effect to the presumed intention that all disputes from one relationship go to one forum. A separate agreement is construed by reference to the dispute it names, and a claim outside it is outside the reference for the purposes of Section 34(2)(a)(iv).
A separate agreement can be made after a suit is filed. In P. Anand Gajapathi Raju v. P.V.G. Raju, (2000) 4 SCC 539 the Supreme Court held that the parties may enter into an arbitration agreement even after a suit has been instituted and while it is pending, and that Section 8 then operates; the agreement in such a case is necessarily a separate one.

📖 Jagdish Chander v. Ramesh Chander, (2007) 5 SCC 719

Held: There must be a clear intention to refer disputes to arbitration and to be bound by the decision. A clause providing that the parties may, if they so desire, refer their disputes to arbitration is not an arbitration agreement but at most an agreement to enter into one, and no reference can be founded on it without a fresh consent of all parties.

Application to this topic: A permissive clause produces the worst of both positions: it is not a binding clause, and it leaves the party wanting arbitration to obtain a separate agreement at the very moment when the other side has no incentive to give one.

4. What Is Common to Both

Writing. Section 7(3) makes writing a condition of validity, satisfied in any of the ways set out in Section 7(4) and by incorporation by reference under Section 7(5).
Certainty of intention. The agreement must show an intention to refer and to be bound.
A defined legal relationship. Contractual or otherwise, but defined.
Capacity and lawful object. The ordinary requirements of the Indian Contract Act, 1872, with Section 28 of that Act expressly saving arbitration agreements.
An arbitrable subject matter. Neither form can confer jurisdiction over a dispute the law reserves to the courts.
Consequences of invalidity. Either form, if invalid, supports a challenge under Section 34(2)(a)(ii) or a refusal of enforcement under Section 48(1)(a).

⚠ A third form met in practice

Section 7(5) recognises incorporation by reference: a reference in a contract to a document containing an arbitration clause constitutes an arbitration agreement if the contract is in writing and the reference is such as to make that clause part of the contract. This is neither a clause in the contract nor a separate agreement, but a clause borrowed from elsewhere. A general reference to another contract does not suffice; a specific reference to its arbitration clause, or a general reference to a standard form containing one, may.

5. Drafting Points

In a clause, use mandatory words and cover all disputes arising out of or in connection with the contract, so that the scope is not narrowed by construction.
In a separate agreement made after the dispute, describe the dispute precisely and state whether related claims and counterclaims are included.
Use the separate agreement to settle what the clause could not: the identity of the arbitrator, the seat, the timetable, and any waiver under the proviso to Section 12(5).
Avoid permissive wording in either form.
Where a contract incorporates standard terms, check whether the arbitration clause in them is intended to apply, and say so expressly.

6. Related Topics and Provisions

Topic or provision	Connection
Form and Validity of the Arbitration Agreement	Writing, incorporation by reference and the tests of validity
Doctrine of Separability and Survival of the Arbitration Clause	Section 16(1) and why it applies to a clause
Multi-Tier and Pathological Arbitration Clauses	Defects of drafting in either form
Sections 7, 12(5), 16 and 34(2)(a), A&C Act, 1996	Form, ineligibility, jurisdiction and challenge
Section 8, A&C Act, 1996	Reference where the agreement is made after a suit is filed