Drafting Table

The Koinos Drafting Table (KDT) is an effort to cover the various issues one may come across while drafting an arbitration clause. It is an extension of the author’s webinar session on arbitration law.  

The KDT is a working and non-exhaustive document; it will be modified from time to time.

It is primarily focused on arbitrations involving at least one Indian party.

Comments and suggestions are welcome, do feel free to share them at rmkulkarni.ils@gmail.com.

Like all other content on the blog, nothing in the KDT should not be construed as legal advice.

ComponentParticularsSourcePoints to check and consider
Written and unambiguous agreementWhile oral agreements may be enforceable under the Indian Contract Act 1872, oral arbitration agreements are not enforceable under to the Arbitration Act.Section 7(3) of the Arbitration Act  The agreement has to be unambiguous.   If an arbitration clause says that the parties may choose to refer to arbitration if they so agree at the time of a dispute, such an arbitration clause is unlikely to be enforced   [See, Jagdish Chander v Ramesh Chander[1]]  

[Also see Municipal Corporation of Greater Mumbai & Anr. v. Pratibha Industries Ltd, Supreme Court]  

This judgment is discussed here on Koinos.
Form of an arbitration agreementArbitration clause in a contract   Separate arbitration agreement   Incorporate by reference [See, MR Engineers v Somm Datt Builders (2009)  and Duro Fulguera v. Gangavaram Port[2] (2017)]   Exchange of correspondence (See, Trimex International v. Vedanta Aluminum[3])Section 7(1) and (2) of the Arbitration ActStamp duty on the main contract  

Where the arbitration clause forms part of a contract, it is crucial to ensure that the contract is stamped in accordance with applicable law.  (See, Garware Wallropes v Coastal Marine[4])  

Otherwise, courts will not act on such an arbitration to appoint an arbitrator.  

Alternative  

One way to avoid this predicament may be to enter into a separate or standalone agreement providing for parties to resolve their disputes to arbitration.  

This is not to suggest, in any manner, that parties can or should avoid payment of stamp duty. It is only to make the arbitral process as seamless as possible.

If the underlying contract(s) is insufficiently stamped, the arbitration will eventually not be able to proceed effectively unless all applicable duty and penalty are paid.  
 
Scope of disputes   Parties’ underlying agreements often deal with various obligations.

Parties are free to agree on whether they would like to refer any and all disputes to arbitration; or restrict the scope of arbitral determination to only certain disputes arising out of the contract.  
See, e.g. Section 34(2)(a)(iv)[5] of the Arbitration Act    Specified disputes

For instance, insurance contracts often provide that only disputes relating to the quantum to be paid under the policy (liability being otherwise admitted) will be referred to arbitration.   [See, United India Insurance vs Hyundai Engineering[6]]  

Broad umbrella  [See, Chloro Controls v Severn Trent Water Purification[7]]  

Consolidated references on account of a broad clause and composite transaction(s)   [See, Ameet Lalchand v Rishabh Enterprises[8]

Per contra: Duro Fulguera v. Gangavaram PortSukanya Holdings v. Jayesh H. Pandya[9]]  
Asymmetrical arbitration clauses  Parties often agree that in case of a dispute under the contract, only one of the parties will be entitled to choose whether the dispute should be referred to arbitration or submitted to a court having jurisdiction.   This is prevalent in financing transactions.Refused enforcement by Delhi High Court in Union of India vs Bharat Engineering Corporation[10].  
Previously held enforceable by the Calcutta HC in New India Assurance Co Ltd v Central Bank of India & Ors.[11]  
The Supreme Court’s rationale in Perkins may be extrapolated to argue against any unilateral control over the dispute resolution process; in which case, asymmetrical arbitration may be held to be invalid.  

It would be interesting to see how the Supreme Court deals with this matter.  
Multi-tiered reference or escalation mechanism  Parties are free to agree that in case of a dispute, they should comply with certain conditions before the aggrieved party can formally refer the dispute to arbitration.

The most common requirement is for parties to wait for a specified period (30/60 days) for attempting amicable settlement. 

Multi-tiered mechanism

In some transactions, especially in infrastructure and government contracts, the contractor is required to follow an escalation mechanism.

If there is a dispute, the contractor is required to approach a designated officer of the client/employer for her decision.

If the dispute remains fully or partially unresolved, the contractor must approach a senior officer for her decision.

If the contractor remains not satisfied, then she can write to the Managing Director expressing the contractor’s intent to submit the dispute to arbitration.

Each of these stages may have deadlines.
 
The enforceability of these provisions, especially in Section 11 applications, remain uncertain.   Suarabh Bindal and Gunjal Chhabra have analyzed this issue at length here on the SCC blog.In many cases, the invoking party may take the position that the parties’ differences have, in its view, become irreconcilable.   In such cases, it would be possible to argue that attempting negotiation would, therefore, be a futile exercise.

The court should exercise its jurisdiction to appoint an arbitrator under Section 11 of the Arbitration Act. 
Arbitrability  Under Indian law, certain disputes are not permitted to be resolved by arbitration. This mainly includes transactions that involve or affect rights in-rem or otherwise affect the public at large.  

While drafting an arbitration clause, it would be prudent to check whether the dispute in question is capable of arbitration.  
Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd.[12] (Supreme court’s landmark decision on arbitrability)Disputes which have been held to be non-arbitrable  

Relationship of tenancy   Himangni Enterprises vs Kamaljeet Singh Ahluwalia[13]   Vidya Drolia vs Durga Trading Corporation[14]  

Relationship of trust (under the Indian Trust Act 1882)  Shri Vimal Kishor Shah & Ors. Vs. Mr. Jayesh Dinesh Shah & Ors.[15]  

Serious fraud   Avitel Post Studioz Ltd. v. HSBC PI Holdings[16]  

Oppression and mismanagement (under the Companies Act 2013)  
Rakesh Malhotra v. Rajinder Malhotra[17]  


Disputes held to be arbitrable  
Contractual disputes involving intellectual property:  Eros International v. Telemax Links India Pvt. Ltd.[18]  
Governing law of the contract  Parties may choose any legal system to govern the substance of their transaction. A dispute between two or more Indian parties is mandatorily required to be governed by Indian law.

In an international arbitration, parties can choose any legal system to govern their contract. Parties commonly agree to be governed by the laws of England, Singapore, and Switzerland.  

Parties also often agree to certain additional frameworks, such as the 1980 United Nations Convention on Contracts for the International Sale of Goods (CISG) in contracts for sale of goods.
Section 28 of the Arbitration Act  

Where the place of arbitration is in India:
In a domestic arbitration the arbitral tribunal shall decide the dispute submitted to arbitration in accordance with the substantive law for the time being in force in India.

In an international arbitration:
the arbitral tribunal shall decide the dispute in accordance with the rules of law designated by the parties as applicable to the substance of the dispute; any designation by the parties of the law or legal system of a given country shall be construed, unless otherwise expressed, as directly referring to the substantive law of that country and not to its conflict of laws rules;

No law designated

Failing any designation of the law under by the parties, the arbitral tribunal shall apply the rules of law it considers to be appropriate given all the circumstances surrounding the dispute  

No express designation, closest connection

Where, however, the intention of the parties is not expressly stated and no inference about it can be drawn, their intention as such has no relevance. In that even, the courts endeavour to impute an intention by identifying the legal system with which the transaction has its closest and most real connection.   [See, NTPC v Singer Company[19]]      
Seat of arbitrationArbitration proceedings do not have a natural domicile or situs. Parties are free to choose a geographical location to which their arbitral proceedings will be ‘juridically’ anchored.

Once the parties decide a ‘seat/place’, the curial law of arbitration of such place will supervise and govern the arbitration proceedings.

Additionally, courts at that location will have jurisdiction over the arbitral proceedings.

Depending on the nature of arbitration and parties’ agreement, such court may have exclusive jurisdiction over the arbitral proceedings – regardless of where parties reside/carry on business or the cause of action has arisen.  
Section 2(2) of the Arbitration Act (Part I shall apply where the place of arbitration is in India)   Section 20(1) of the Arbitration Act (Parties are free to agree on a place of arbitration)Exclusive jurisdiction of courts

An express designation of a “venue”, and no designation of any alternative place as the “seat”, combined with a supranational body of rules governing the arbitration, and no other significant contrary indicia, the inexorable conclusion is that the stated venue is actually the juridical seat of the arbitral proceeding

[See, BGS SGS SOMA v. NHPC[20]]  

[See also: (Application under Section 11) Mankatsu Impex v Airvisual[21]

(Irrelevance of ‘seat’ in domestic arbitration) Quippo Construction Equipment vs. Janardan Nirman[22]]  

Unilateral right to choose seat

Parties cannot agree that the seat of arbitration will be Place ‘A’ or any other place chosen at the sole discretion of one of the parties.

L&T Finance v. Manoj Pathak[23] (Bombay HC)    
 
Venue of arbitrationIn addition to the juridical seat or place of arbitration, parties are also free to choose a location they would find convenient to physically hold the arbitration proceedings.

Ideally, the venue should be located within the territorial limits of the seat/place. Otherwise, it would create an anomalous situation – e.g. when the ‘seat’ is India and the ‘venue’ is London.  
Section 20(3) of the Arbitration Act    Designation of rules of an institution headquartered outside the chosen venue.  

Even though ‘venue’ is not synonymous with ‘seat’, in an arbitration clause which provided for arbitration to be conducted in accordance with the Rules of the ICC in Paris (a supranational body of rules), a provision that ‘the venue of arbitration shall be London, United Kingdom’ did amount to the designation of a juridical seat of such arbitration.   Roger Shashoua & Ors. v. Mukesh Sharma [2009] EWHC 957 (Comm)   (affirmed by the Indian Supreme Court in BALCO and BGS Soma)
 
Law governing the substance of the arbitration  In addition to the substantial law governing their main contract, parties can also agree to the substantial law the arbitration agreement and proceedings.

However, the law of the arbitration proceedings would essentially be dictated by the laws of the seat of arbitration chosen by the parties.

For instance, if the arbitration is seated in India – Part I of the Arbitration Act will necessarily apply. If the arbitration is seated in London, then the UK Arbitration Act 1996 should apply.

For an arbitration seated in London, it would be anomalous for parties to agree that the arbitration will be governed by the Indian Arbitration Act.  
Section 2(2) of the Arbitration Act   If India (or an Indian city) is the seat of arbitration, then the Arbitration and Conciliation Act 1996 must apply.Enforcement of an unworkable arbitration clause     [See, Enercon (India) v Enercon GmBH[24]]          
Law or rules governing the procedure of the arbitral proceedings.  Parties can also choose the rules that govern the conduct of the arbitral proceedings.Section 19(2) of the Arbitration Act [Subject to Part I, the parties are free to agree on the procedure to be followed by the arbitral tribunal in conducting its proceedings] Mandatory provisions, such as Section 18, will continue to apply.Parties should ensure that their choice for the rules of arbitration are consistent with the arbitral institution chosen by them.  

For instance, one should avoid a clause providing for the arbitration to be administered by the MCIA in accordance with the SIAC Arbitration Rules.  
Institutional arbitrationParties are free to choose whether their arbitration will be administered by an institution or in an ad-hoc manner.  

Based in India

Mumbai Centre for International Arbitration (MCIA)    

Based outside India

SIAC – Singapore International Arbitration Centre    

LCIA – The London Court of International Arbitration (LCIA)

DIAC – Dubai International Arbitration Centre

ICC – International Chamber of Commerce

HKIAC – Hong Kong International Arbitration Centre  

DIS – German Arbitration Institute  

SCMA – Singapore Chamber of Maritime Arbitration  

LMAA – London Maritime Arbitrators Association  

Most institutions also provide a model arbitration clause suited to their rules of arbitration.

   
See e.g., Section 2(6) of the Arbitration Act (Where Part I, except section 28, leaves the parties free to determine a certain issue, that freedom shall include the right of the parties to authorise any person including an institution, to determine that issue)  Ad-hoc arbitration is better for smaller claims.  

Institutional arbitration, on the other hand, is systematic and comparatively more efficient; but can be quite expensive.  

The Mumbai Centre for International Arbitration (MCIA) has set out here its views on why institutional arbitration is more beneficial than its ad-hoc counterpart.
Number of arbitrators  Parties are free to agree on the number of arbitrators, ideally between 1 and 3 persons – but not an even number.  Section 10 of the Arbitration Act [(1) The parties are free to determine the number of arbitrators, provided that such number shall not be an even number. (2) Failing the determination referred to in sub-section (1), the arbitral tribunal shall consist of a sole arbitrator]Choice of even number of arbitrators and waiver  

Under an application under Section 34, the challenging party argued that the award should be set aside since the arbitration was conducted by two arbitrators.

Given that Section 10 specifically and mandatorily bars the parties’ choice of an even number of arbitrators, it was argued that the arbitration under challenge would be void and invalid.  

The Supreme Court observed as follows:   ‘[…] The question still remains whether Section 10 is a non-derogable provision. In our view the answer to this question would depend on the question as to whether, under the said Act, a party has a right to object to the composition of the Arbitral Tribunal, if such composition is not in accordance with the said Act, and if so, at what stage. It must be remembered that arbitration is a creature of an agreement. There can be no arbitration unless there is an arbitration agreement in writing between the parties.

A conjoint reading of Sections 10 and 16 shows that an objection to the composition of the Arbitral Tribunal is a matter which is derogable. It is derogable because a party is free not to object within the time prescribed in Section 16(2). If a party chooses not to so object there will be a deemed waiver under Section 4[25].
 
Arbitrator’s qualifications and eligibility  Parties can agree that the arbitrator(s) must be specialist in a certain discipline. They may require an arbitrator to hold certain educational or professional qualifications, e.g. in engineering or accounting.     Section 11(8)(a) of the Arbitration (while appointing an arbitrator, the court is required to duly consider the qualifications required for the arbitrator by the agreement of the parties).    Section 12(3)(b) (appointment of an arbitrator can be challenged if he does not possess the qualifications agreed to by the parties)  Watch out for the 2019 Amendments  

The newly added Eighth Schedule sets out certain mandatory requirements in respect of the arbitrator’s qualifications and experience.  

For instance, parties cannot appoint a person who is not an advocate within the meaning of the Advocates Act, 1961 having ten years of practice experience as an advocate.   There are similar restrictions on persons from other professions.  

Some of these requirements are onerous – and may be held to be unconstitutional in the future.  

Manner of appointing arbitrators  Parties are free to choose a procedure for appointing the arbitrator(s). Some variants are: Sole arbitrator agreed to by all parties to the agreement;    If the parties don’t or cannot agree to a sole arbitrator, then each party will appoint one arbitrator. These two arbitrators will then appoint a third (presiding) arbitrator.   One of the parties will choose one or three arbitrators from a pool/panel of several prospective arbitrators.  Section 11(2) of the Arbitration Act.   Parties agreement will always be subject to other statutory requirements, such as under Section 12(5) and 12(7) of the Arbitration Act.Unilateral appointment  

One party to the agreement cannot have the right to appoint the arbitrator.  

[See, Perkins Eastman Architects DPC and another v. HSCC (India) Limited[26]]  

Pool of arbitrators  

Parties often agree, especially in government contracts, that one of the parties will be entitled to choose one or more arbitrators from a pool or panel of persons who are retired or serving officers of the other party, ie the government entity in question.                                                                                                             In Central Organisation For Railway Electrification vs ECI SPIC SMO MCML (JV)[27], the Supreme Court observed the following:   Thus, the right of the General Manager in formation of Arbitral Tribunal is counterbalanced by respondent’s power to choose any two from out of the four names and the General Manager shall appoint at least one out of them as the contractor’s nominee.     

See also, Voestalpine Schienen Gmbh v. Delhi Metro Rail Corporation[28]  

Institutional arbitration

Arbitration rules of most institutions have a mechanism and preconditions for appointing arbitrator(s).

Here, parties need not agree to a procedure of appointment.

While parties remain free to agree to a sole arbitrator or nominate their respective arbitrators, institutional rules would also provide that no appointment will be made unless the nominee arbitrator(s) are also compliant with the institution’s requirements.

 
Exclusive jurisdiction of courtsParties are free to agree that any one court will have exclusive jurisdiction over court matters arising out of their contract     [See, Indus Mobile Distribution Private Limited vs Datawind Innovations[29]]    
Injunctive reliefsIn international arbitration seated outside India, parties can agree to exclude Section 9.Section 2(2) of the Arbitration Act   (Provided that subject to an agreement to the contrary, the provisions of sections 9, 27 and clause (a) of sub-section (1) and sub-section (3) of section 37 shall also apply to international commercial arbitration, even if the place of arbitration is outside India, and an arbitral award made or to be made in such place is enforceable and recognised under the provisions of Part II of this Act.)  Effect of referring to institutional rules  

Reference to institutional rules does not by itself mean that parties have excluded Sections 9.  

[See, Raffles Design v Educomp Professional[30]] (Raffles)  

[See also,  Mr. Ashwani Minda & Anr. v. U-Shin Ltd. & Anr., where Raffles was distinguished by the Delhi High Court.      

Soft lawsParties can agree to other procedural matters, such as application of the rules of evidence.   e.g. IBA Rules on the Taking of Evidence in International arbitration  Sections 18 and 19 in ad-hoc.     Institutional arbitration   Institutional rules also generally provide that arbitrators can choose the applicable rules of evidence etc.    See, Arbitration Materials on Koinos.  

[1] (2007) 5 SCC 719

[2] (2017) 9 SCC 729

[3] 2010 (3) SCC 1

[4] 2019 SCC OnLine SC 515

[5] (iv) the arbitral award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration: Provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, only that part of the arbitral award which contains decisions on matters not submitted to arbitration may be set aside

[6] CA No. 8146 OF 2018 (Supreme Court)

[7] (2013) 1 SCC 641

[8] CA No. 4690 of 2018 (Supreme Court) 

[9] (2003) 5 SCC 531

[10] ILR 1977 Delhi 57

[11] AIR 1985 Cal 76

[12] (2011) 5 SCC 532

[13] CA 16850 OF 2017 (Supreme Court)

[14] CA NO.2402 OF 2019 (Supreme Court)

[15] CA No. 8164 OF 2016 (Supreme Court)

[16] CA No. 5145 OF 2016 (Supreme Court)

[17] MANU/MH/1309/2014

[18]  Notice of Motion NO. 886 OF 2013, Bombay High Court

[19] 1993 AIR 998 | (1992) 3 SCC 551

[20] CA No. 9307 of 2019

[21] Arbitration Petition No. 32 of 2018, Supreme Court

[22] CA No.2378 OF 2020 (Supreme Court)

[23] Com. Arb. Pet. No. 1315 of 2019, on 31 Jan 2020

[24](2014) 5 SCC 1

[25] Section 4, Arbitration Act. Waiver of right to object.—

A party who knows that—

(a) any provision of this Part from which the parties may derogate, or

(b) any requirement under the arbitration agreement,

has not been complied with and yet proceeds with the arbitration without stating his objection to such non-compliance without undue delay or, if a time limit is provided for stating that objection, within that period of time, shall be deemed to have waived his right to so object.

[26] (2019) SCC Online SC 1517

[27] CA 9486 of 2019 (Supreme Court)

[28] (2017) 4 SCC 665

[29] (2017) 7 SCC 678

[30] MANU/DE/2754/2016