The Arbitration Agreement and Reference to Arbitration: Sections 7 and 8

Everything in an arbitration rests on the agreement. It supplies the tribunal's jurisdiction, fixes the disputes that may be referred, identifies the persons bound, and survives the contract in which it is contained. Section 7 states what such an agreement is and the forms in which it may be made; Section 8 requires a judicial authority before which an action is brought in a matter covered by the agreement to refer the parties to arbitration. Around these two provisions lie the questions that generate most of the litigation in this field: whether the clause is certain enough to be enforced, whether it binds a person who did not sign it, and whether the subject matter is capable of being arbitrated at all.

1. Section 7: The Agreement and its Form

The elements the agreement must contain, and the forms in which writing is satisfied

2. Essentials of a Valid Arbitration Agreement

1. A dispute, present or future. There must be something capable of being decided. A clause referring a matter for determination before any difference has arisen is expert determination and not arbitration.
2. A defined legal relationship. It need not be contractual; the words whether contractual or not cover relationships arising in tort or from statute, so long as the relationship is defined.
3. An agreement to refer that dispute to arbitration. This is the operative promise, and it must be a promise and not a possibility.
4. An intention that the decision shall bind. The attribute which distinguishes arbitration from every consensual process; a clause under which the third person merely recommends is not an arbitration agreement.
5. Writing. Section 7(3) makes writing a condition of validity, satisfied in any of the ways set out in Section 7(4) and (5).
6. Capacity and lawful object. The agreement is a contract, so the requirements of the Indian Contract Act, 1872 apply; incapacity of a party is a ground for setting aside under Section 34(2)(a)(i).
7. An arbitrable subject matter. The dispute must be one that the law permits to be resolved privately, which is the question dealt with in Part 9 below.

3. The Forms in which Writing Is Satisfied

3.1 A signed document

The ordinary case. What must be signed is the document containing the clause, not the clause itself, and an unsigned tender or purchase order acted upon by both sides may satisfy Section 7(4)(b) or (c) even where Section 7(4)(a) is not met.

3.2 Exchange of communications

Section 7(4)(b) covers letters, telex, telegrams and other means of telecommunication, including electronic means, which provide a record of the agreement. The reference to electronic means was inserted in 2015, though electronic records were already given legal recognition by Sections 4 and 5 of the Information Technology Act, 2000. What the clause requires is a record of the agreement and not of a mere proposal, so an offer containing an arbitration clause which is never accepted in writing or by conduct does not satisfy it.

3.3 Exchange of statements of claim and defence

Section 7(4)(c) treats the pleadings themselves as the writing where the existence of the agreement is alleged by one party and not denied by the other. The provision operates as a form of admission, and a denial, however late, takes the case out of the clause.

3.4 Incorporation by reference

4. Clause, Separate Agreement and Submission

Section 7(2) recognises two forms. An arbitration clause is part of the substantive contract and is directed to disputes that may arise in future. A separate arbitration agreement is a distinct document; where it is entered into after the dispute has arisen and refers that existing dispute, it is often called a submission agreement. Nothing turns on the form for the purposes of validity, but two practical differences follow. A submission agreement can describe the dispute precisely, which avoids arguments about scope; and because it is made after the dispute has arisen, it may also operate as the express agreement in writing required by the proviso to Section 12(5) if the parties wish to waive an arbitrator's ineligibility.

5. Arbitration Agreements Distinguished

6. Multi-Tier and Pathological Clauses

A multi-tier clause requires the parties to pass through one or more stages, typically negotiation between named officers followed by mediation, before arbitration may be invoked. Such clauses are valid, and the pre-arbitral steps are ordinarily to be complied with as written, since they form part of the bargain. Two qualifications are settled in practice. Where the pre-arbitral step has become an empty formality, because the parties have already taken irreconcilable positions or the period fixed has expired, the court will not allow it to be used to delay the reference. And where the clause fixes no period for the earlier stage, the court reads a reasonable time into it rather than permitting indefinite obstruction. The safe course in drafting is to state the steps, to fix a definite period for each, and to provide that arbitration may be invoked on its expiry.

A pathological clause is one drafted so badly that it is difficult to operate. The recurring varieties are these.

• Permissive wording, providing that the parties may refer disputes to arbitration, which on the authority of Jagdish Chander is not an agreement to refer at all.
• A non-existent or misdescribed institution, where the rules of a body that does not exist or has been renamed are adopted; the reference may be saved if the institution can be identified with reasonable certainty.
• Conflicting clauses, where the contract contains both an arbitration clause and a clause conferring exclusive jurisdiction on a court; these are ordinarily reconciled by treating the jurisdiction clause as identifying the supervisory court.
• An unworkable appointment mechanism, such as a requirement that each party nominate an arbitrator with no provision for the third, or a clause vesting the appointment in a person now ineligible under Section 12(5); Section 11 supplies the machinery where the agreed procedure fails.
• Uncertain scope, where the clause refers only some undefined class of disputes, leaving the tribunal to decide under Section 16 what falls within it.

The approach of the courts is to save the clause where the intention to arbitrate is sufficiently clear, and to strike it down only where no intention can be spelt out. The principle is one of validation: a construction that gives the clause effect is preferred to one that renders it inoperative.

7. Separability, Survival and the Persons Bound

Separability, the persons bound by the agreement, and what survives the contract

7.1 The doctrine of separability

Section 16(1) provides that an arbitration clause forming part of a contract is to be treated as an agreement independent of the other terms, and that a decision by the tribunal that the contract is null and void does not entail ipso jure the invalidity of the arbitration clause. Two consequences follow. A challenge to the validity of the contract does not deprive the tribunal of jurisdiction, because the tribunal's authority comes from a separate agreement. And the clause survives events that bring the main contract to an end, including termination, repudiation, frustration and breach, since the very purpose of the clause is to provide a forum for disputes arising from such events. The clause does not survive where the contract was void ab initio in a manner that also vitiates the agreement to arbitrate, as where there was no consensus at all or a party lacked capacity, or where a statute bars arbitration of the subject matter.

7.2 Non-signatories and the group of companies doctrine

The expression claiming through or under a party, used in Section 8 and in Section 45, continues to cover successors in interest: assignees, legal representatives, subrogated insurers and, in composite transactions, parties to ancillary agreements forming part of a single commercial arrangement. A stranger to the agreement remains outside the tribunal's reach, and this is one of the standing limitations of arbitration as against litigation.

7.3 Assignment, death and insolvency

• Assignment. Where the benefit of a contract is validly assigned, the arbitration clause goes with it, and the assignee is bound by and entitled to rely on it as a person claiming through the assignor. A novation, by contrast, replaces the old contract with a new one, and whether the clause survives depends on the terms of the new agreement.
• Death. Section 40 provides that an arbitration agreement is not discharged by the death of a party, and is enforceable by or against the legal representative of the deceased. The mandate of an arbitrator is likewise not terminated by the death of the party who appointed him. The section is subject to any law by virtue of which a right of action is extinguished by death, so a purely personal claim that does not survive is not saved by it.
• Insolvency. Section 41 provides that where a contract containing an arbitration clause is to be carried out by a receiver, the clause is enforceable by or against him so far as it relates to the disputes arising, and provides for the court exercising insolvency jurisdiction to order a reference where the receiver does not adopt the contract.

8. Section 8: Reference by a Judicial Authority

The conditions for a reference are these. There must be an action brought before a judicial authority in a matter which is the subject of an arbitration agreement. The application must be made by a party to the agreement or a person claiming through or under him. It must be made not later than the date of submitting the first statement on the substance of the dispute, so a party who files a written statement dealing with the merits loses the right. The application must be accompanied by the original agreement or a duly certified copy, and Section 8(2) provides a procedure where the original is with the other party. If these are satisfied, the reference is mandatory: the word is shall, and the only escape is a prima facie finding that no valid agreement exists.

The words notwithstanding any judgment, decree or order of the Supreme Court or any court, and the prima facie standard, were inserted by the amendment of 2015 to prevent an extended enquiry into the validity of the agreement at the reference stage. The scope of that enquiry was settled in Vidya Drolia v. Durga Trading Corporation, (2021) 2 SCC 1, which held that the court at the stage of Section 8 or Section 11 examines the existence and validity of the agreement only prima facie, and leaves all other questions, including arbitrability in a doubtful case, to the tribunal under Section 16.

9. Section 8 Compared with Section 11

10. Arbitrability of the Subject Matter

The four-fold test, the categories it produces and the earlier framework

The distinction between rights in rem and rights in personam remains the organising idea. A right in rem is available against the world at large and its determination affects persons who are not before the tribunal; a right in personam is available against a determinate person and may be compromised by that person. The refinement made in Vidya Drolia is that a subordinate right in personam arising out of a right in rem is arbitrable, which is why a claim for damages for breach of a licence is arbitrable although the grant of the underlying statutory right is not.

11. Related Topics and Provisions