An arbitration clause in a contract is usually to be found towards the end, and many a time, either in the euphoria of the deal or exhaustion from negotiation of the material clauses of the contract, parties fail to give adequate attention to formulating and drafting of the arbitration clause.This oversight can at times be fatal if the contract runs into difficulty and disputes arise between...
An arbitration clause in a contract is usually to be found towards the end, and many a time, either in the euphoria of the deal or exhaustion from negotiation of the material clauses of the contract, parties fail to give adequate attention to formulating and drafting of the arbitration clause.
This oversight can at times be fatal if the contract runs into difficulty and disputes arise between the parties. Arbitration clause in times of disputes can turn out to be the most critical clause of a contract, in particular when the agreement or contract in question is an international commercial arbitration, involving contracting parties who are subject to different international jurisdictions.
Whilst the quintessential questions to be considered while drafting an arbitration clause in any international contract are usually fairly standard the world over, in the present article, we will also point out the special factors to be considered in an international commercial arbitration1, where one of the parties is Indian and where, by virtue of the place of arbitration being India, Part I of the Arbitration and Conciliation Act 1996 ("1996 Act") applies to the proceedings. The following checklist enumerates elements that the parties must consider while framing an arbitration clause in an international commercial arbitration:
The first question for consideration in framing an arbitration clause is the scope of the arbitration clause/ arbitration. Unlike the courts, arbitral tribunals derive their jurisdiction from the arbitration clause and cannot travel beyond the four corners of the clause. Therefore, the parties must decide, in the most unequivocal terms, the jurisdiction of the arbitral tribunal. The parties could have an all encompassing clause by virtue of which all disputes and issues arising out of or in connection with the contract would be able to be referred to arbitration or they could also seek to limit the scope of reference to arbitration to limited or specific issues or categories of dispute.
The 1996 Act, recognizes both options and if parties are seeking a broader reference, the choice of the words: "arising out of" or "in connection with" would be effective terminology to be used in the arbitration clause, with Indian courts treating these terms to be of the widest amplitude2. The next element for consideration should be whether the dispute resolution clause is a multi-step resolution clause. The parties may determine preliminary steps which are required before entering into the process of arbitration. The parties may provide for negotiation or mandatory period of settlement talks or conciliation proceedings prior to reference of dispute to arbitration.
The third question for consideration is whether the parties are looking for adjudication by a single arbitrator or a tribunal of three arbitrators3. In deciding this question, issues such as the quantum of possible disputes, costs involved in terms of arbitration fees etc. are relevant. It may be borne in mind that if the arbitration is subject to Part I of the 1996 Act, in the event the arbitration clause does not set out the number of arbitrators, by default, the arbitral tribunal would consist of a sole arbitrator4.
The parties are usually free to decide the procedure and mode of selection for appointment of the arbitrator/arbitral tribunal. This is true for arbitrations subject to the 1996 Act as well5. In international commercial arbitrations, the nationality of the arbitrators at times is a factor for consideration between parties, and parties can provide for neutral nationality of the sole arbitrator or presiding arbitrator in case of a tribunal consisting of three members. While ICC Rules, specifically provide in an arbitration consisting of three arbitrators, for the chairman to be of a neutral nationality. As per the 1996 Act, a person of any nationality may be an arbitrator, unless otherwise agreed by the parties6.
In drafting of an arbitration clause, the next relevant factor for consideration is what would be the rules of procedure for conduct of the arbitration proceedings i.e. the curial law governing the arbitration proceedings and whether the same should be via selection of institution or crafting personalized rules. In international commercial arbitrations, parties can resort to institutional arbitrations governed by institutional rules such as ICC rules; Rules of Arbitration of the Singapore International Arbitration Centre (SIAC Rules) or resort to ad-hoc arbitration
Arbitration proceedings governed by the 1996 Act are essentially in the nature of ad-hoc proceedings and parties are free to agree on the procedure to be followed by the arbitral tribunal in conducting its proceedings7. While drafting an arbitration clause, the parties should also specifically define
- substantive law of the Contract and
- the law of the Arbitration Agreement Substantive law of the Contract.
Parties, while drafting the contract, must clearly specify the law governing the contract. Substantive law is the law that governs the merits of a dispute, that is, in the case of the contract, the party's substantive rights and ob-ligations, as opposed to the law governing procedure of arbitration. Since the substantive law is the governing law under which the contract is to be interpreted, it is at times set out as a separate "governing law clause" independ-ent of the arbitration clause.
The law applicable to the arbitration agreement governs the formation, validity, enforcement and termination of the arbitration agreement. It is advisable that parties define the law governing the contract and the law governing the arbitration agreement clearly to avoid disputes on these issues. Parties should also preempt from the nature of the contract, if interim relief such as injunctive relief and measures for conservation or protection of property, etc are required and provide for same.
In an international commercial arbitration where the place of arbitration is India, courts under Section 9 of the 1996 Act would have broad powers for granting interim measures before, during or after the making of the award, before its endorsement. The arbitration clause should also determine the language of arbitration. This clause holds value when the parties involved do not speak a common language.
After all the aforementioned deliberations, the parties must necessarily deliberate upon the 'seat' of arbitration. The choice of seat in recent times has emerged as the most relevant issue while drafting an arbitration clause. This is because the mandatory provisions of the lex arbitri (law of the place of arbitration) govern the procedural aspects of the arbitration. The seat also provides the legal structure, the courts and the judicial system that eventually controls the controversies over procedure.
As we mentioned in the beginning of this article, if the place of arbitration is specified as India in an arbitration clause, Part I of the 1996 Act would apply to such proceedings8 and the arbitral award passed in such proceedings would be treated as a domestic award9 Whilst the nomination of India as the seat /place of arbitration would automatically subject the arbitration pro-ceedings to Part I of the 1996 Act, Indian courts from the time of the judgement rendered in the matter of Bhatia International v. Bulk Trading S.A.10, followed by Venture Global Engineering v. Satyam Computer Services Ltd. and Anr.11 have been taking the view that the provisions of Part I of the 1996 Act would apply in cases of International Commercial Arbitration, unless parties by agreement, expressly or implied, exclude all or any of its provisions.
As on date of writing this article, a five-member constitution bench of the Hon'ble Supreme Court is reviewing this issue, however, as a cautionary measure, if parties to an International commercial arbitration are desirous of staying out of the ambit of applicability of Part I of the 1996 Act, they should expressly choose a seat of arbitration outside India and also specify in the arbitration clause-the intention of excluding the applicability of Part-1 of the 1996 Act.
Due consideration to the items in the aforementioned check list at the time of drafting of the arbitration clause would greatly aid parties in avoiding pitfalls that a carelessly drafted arbitration clause can create. Greater the degree of certainty, agreement on elements and unambiguous provisions, greater would be the flexibility available to the parties to resolve disputes and strategize a binding resolution.
Disclaimer - The views expressed in this article are the personal views of the author