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Syed Mahaboob Peer

Whether incorporating the ‘Arbitration Clause’ in any ‘Contract Agreement’ is commendable? OR, the Independent ‘Agreement of Arbitration’ is better?

The Section 2(1)(b) of the Arbitration & Conciliation Act, 1996 defines the “Arbitration Agreement” to mean an agreement referred to in Section 7 of the Arbitration & Conciliation Act, 1996.

The Sub-section (1) of Section 7 of the Arbitration & Conciliation Act, 1996 read as “In this part, ‘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.

The above Sub-section (1) of Section 7 of the Arbitration & Conciliation Act, 1996, has, inter-alia, clearly conveying that the parties of both sides of the contract have equal right to submit all or certain disputes to arbitration.

The Sub-section (2) of Section 7 of the Arbitration & Conciliation Act, 1996 read as “an arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement”.

This Sub-section clearly conveys that the ‘Arbitration Agreement” that entitles the disputers to prefer any Arbitrator or Arbitrators could be in any of the following forms:

1) The ‘presence’ of an “arbitration clause” in any contract; or

2) A particular and an Independent ‘Agreement of Arbitration’ for the purpose.

Further, in defence of the above Sub-section (2), the Authors of the Arbitration & Conciliation Act, 1996, have put in Sub-section (5) which read as “The 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 arbitration clause part of the contract.”

If the ‘arbitration clause’ that forms a part of anycontract’ or any reference containing therein, the arbitration clause in the ‘contract agreement/document’ constitutes an ‘arbitration agreement’. In such cases, there is every possibility to be not only a “partial” or “partialness” or “partiality” one in nature (showing an unfair preference for one person), but also has an undue advantage to that ‘one & the same’ party only (particularly to that person who keeps ready of the printed ‘contract agreement/document’ for getting it signed instantly by the another party), which is almost against the ‘Principles of Natural Justice’ unless otherwise such clause is drafted in a fair & lawful manner.

Let us now, as an example, peruse one model of such ‘arbitration clauseforming part of an ‘agreement/contract document’. Have a look at the following ‘arbitration clause’ added in the conditions laid under the agreement already Prepared & Printed by a NBFS Company:

ARBITRATION: All the disputes, differences and/or claims arising out of these presents or as to the construction, meaning or effect hereof or as to the rights & liabilities of the parties hereunder shall be settled by arbitration to be held in NEW DELHI in accordance with the provisions of the Arbitration & Conciliation Act, 1996 or any statutory amendments thereof or any statute enacted for replacement thereof and shall be referred to the Sole Arbitrator of a person to be nominated/appointed by “ABC” Company. In the event of death, refusal, neglect, inability or incapability of the persons so appointed to act as an Arbitrator, the “ABC” Company may appoint a new Arbitrator. The award including the Interim Award/s of the Arbitrator shall be final and binding on all parties concerned. The Arbitrator may lay down from time to time the procedure to be followed by him in conducting arbitration proceedings in such manner as he considers appropriate. Any proceedings to be initiated in any Court of Law in pursuance of this arbitration shall be instituted and held in the Court at NEW DELHI.”

A plain reading of the above ‘arbitration clause may leave an impression over it to have found it as “proper & formal” one, but if one looks through the eyes of Law –

1) The wording of the above ‘arbitration clause’ is inconsistent & contradictory in terms of provisions of the Arbitration & Conciliation Act, 1996.

2) It is most partial, by covering a major scope of favoritism, preferences & includes most undue-advantages in favour of the “ABC” Company. As far as the

(a) Selection of Arbitrator/s is concerned, the parties of both parts of the Contract/Agreement are free to, and have to determine the number of the Arbitrators [vide Section 10(1) of the Act], and/or the parties of both parts of an agreement/ contract are free to agree on a procedure for appointing the Arbitrator/s [vide Section 11(2) of the Act], and that each of the either party has to nominate/ select the Arbitrator/s on the basis of their mutual & unanimous consent. But, the above ‘arbitration clause’ has almost seized / waived the Right of the another/contracting party.

(b) Place of Arbitration [i.e., Establishment (Jurisdiction) of the Arbitration Court] is concerned, both the parties are free to agree on the place of arbitration, and/or both the parties may decide mutually so. But, the “ABC” Company (referred in the above ‘arbitration clause’) has itself finalized the decision of its own, and the same has been incorporated in its ‘arbitration clause’. It is almost one sided and against not only the provisions of Equal Treatment of Parties under the Arbitration & Conciliation Act, 1996, but also against the ‘Principles of Natural Justice’.

3) There has an undue advantage to the party who keeps the printed ‘contract agreement/document’ ready for getting it signed instantly by another party, which has differed from the neutrality & is also against the principles of the ‘Appointment of Arbitrator/s’. In such a situation there would be a clear ‘breach’ of provisions laid under Section 11 of the Arbitration & Conciliation Act, 1996, which is nothing but a clear denial of the ‘right’ of the another party (to the contract) in lieu of his righteous/virtuous choice for the ‘Arbitrator’.

4) Unless the readily kept printed ‘contract agreement/document’ (in which the mollified ‘arbitration clause’ is incorporated) is signed by the needy borrower, the loan will not be sanctioned/granted (irrespective of his fondness, acceptance or willingness to ‘arbitration clause’ or its contents). On one side such situation creates the greatest disadvantage to the borrower, and on the other side this creates the undue advantage to the Financier/Loaner.

In the light of the above points, the perused example/model of the above ‘arbitration clauseforming part of an ‘agreement/contract document’ is to be ‘null & void’.

Rather, any such ‘arbitration clauseforming part of an ‘agreement/ contract document’ ought to be in the following simple form:

ARBITRATION: In case of dispute, if any, no party shall refer the matter to any Court of Law, but shall be referred to the arbitrator/s mutually chosen by both side parties of THIS CONTRACT/AGREEMENT. The ‘rest’ of the points in this regard shall be vested or applicable as per the provisions of the Arbitration & Conciliation Act, 1996 only.”

Since there is every chance of taking undue-advantage by the greedy financiers/loaners, by getting signed blindly on the subjective ‘agreement/ contract document’ (preferably or intentionally keeping in disguise about the ‘arbitration clausein it), it would be better if there has any ‘mandatory’ to have an exclusive “Agreement of Arbitration”. So that, while signing another “Agreement’ the party, at-least, could come to know about such “Agreement of Arbitration” and his commitment thereto. It is an undeniable fact that whereas the highly educated are being-deceived/falling-prey to such mollified ‘Arbitration Clause’, what about the fate of ill-literates?

Therefore, there ought to have a mandate to prefer always an Independent ‘Agreement of Arbitration’, which would not only be very much better, but also be fair, impartial, understandable & justified.


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  1. Shrikanth Manda says:

    Good article. However if arbitration clause is complete in all manners its ok. We do seperate clause covering all aspects which is handy.

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July 2024