Form and Validity of the Arbitration Agreement

Section 7(3) requires an arbitration agreement to be in writing, and Section 7(4) and (5) explain how that requirement is satisfied. The provisions are liberal in substance: what must be recorded is the agreement, not necessarily a signed clause, and an exchange of communications or of pleadings will do. Validity is a separate question governed by the ordinary law of contract, with two formalities that are frequently confused with it. Registration is not required, and want of stamp renders the instrument inadmissible but does not make the agreement void.

1. The Requirement of Writing

Writing is a condition of validity and not merely of proof. An oral agreement to arbitrate, however clearly established, is not an arbitration agreement within the Act, and an award made on such a reference is liable to be set aside under Section 34(2)(a)(ii). Indian law has not adopted the relaxation made to Article 7 of the UNCITRAL Model Law in 2006, under which an agreement concluded orally but evidenced in any form is sufficient.

The questions in order, and the formalities that do not affect validity

2. The Four Routes to Writing

2.1 A document signed by the parties

The ordinary case, and the only one in which signature matters. What must be signed is the document containing the clause, not the clause itself. Where one party signs and the other performs, the agreement may still be in writing under clause (b) or (c), and the absence of signature is then immaterial.

2.2 Exchange of communications

Clause (b) covers letters, telex, telegrams and other means of telecommunication, including communication through electronic means, which provide a record of the agreement. The words including communication through electronic means were inserted by the amendment of 2015, though Sections 4 and 5 of the Information Technology Act, 2000 already gave legal recognition to electronic records and signatures. The clause requires a record of the agreement, so an offer containing an arbitration clause that is never accepted in writing or by conduct will not do; what is needed is an exchange from which agreement can be spelt out.

2.3 Exchange of statements of claim and defence

Clause (c) treats the pleadings in the arbitration itself as the writing, where the existence of the agreement is alleged by one party and not denied by the other. It operates as a form of admission. A denial takes the case out of the clause, and the claimant must then establish the agreement in one of the other ways.

2.4 Incorporation by reference

The exception for standard forms was carried further in Inox Wind Ltd. v. Thermocables Ltd., (2018) 2 SCC 519, where a general reference in a purchase order to the standard terms and conditions of one of the parties was held sufficient to incorporate the arbitration clause contained in those terms. The distinction to remember is between a two-contract case, such as a main contract and a sub-contract, where a specific reference is required, and a single contract incorporating standard terms, where a general reference may suffice.

3. Validity

Once the agreement is in writing, its validity is tested by the ordinary law. Four questions arise.

1. Capacity. The parties must be competent to contract under the Indian Contract Act, 1872. Incapacity of a party is a ground for setting aside the award under Section 34(2)(a)(i).
2. Consensus and certainty. There must be a clear intention to refer disputes to arbitration and to be bound by the decision. A permissive clause is not enough, on the authority of Jagdish Chander v. Ramesh Chander, (2007) 5 SCC 719.
3. Lawful object. Section 23 of the Contract Act applies. Section 28 of that Act, which avoids agreements in restraint of legal proceedings, expressly saves a contract by which the parties agree to refer disputes to arbitration, so an arbitration clause is not caught by it.
4. Arbitrable subject matter. An agreement to arbitrate a dispute the law reserves to the courts confers no jurisdiction; Section 2(3) preserves any law by virtue of which certain disputes may not be submitted to arbitration.

4. Formalities that Do Not Affect Validity

• Registration. An arbitration agreement does not require registration. Where it is contained in an instrument which itself requires registration, such as a lease for a term exceeding one year, the consequences of non-registration attach to that instrument under the Registration Act, 1908; the arbitration clause, being a collateral provision, may still be relied on.
• Signature. Not indispensable, as Govind Rubber holds, provided the record shows agreement.
• A named arbitrator. The agreement need not name the arbitrator or fix the number; Sections 10 and 11 supply the default of a sole arbitrator and the machinery for appointment.
• A seat. The agreement need not name a seat; Section 20 permits the tribunal to determine the place failing agreement, though naming the seat is strongly advisable.

5. Consequences of Invalidity

6. Drafting Points

• Use mandatory language: all disputes arising out of or in connection with this contract shall be referred to arbitration.
• State the seat expressly, and distinguish it from the venue if hearings are to be held elsewhere.
• State the number of arbitrators and the appointment mechanism, avoiding any procedure that gives one party control over the constitution of the tribunal.
• Where standard terms are to be incorporated, refer to them clearly, and where a separate contract is being referred to, refer specifically to its arbitration clause.
• Where an institution is chosen, name it accurately and adopt its rules by reference, which also brings in its appointment and fee machinery.

7. Related Topics and Provisions