PROJECT REPORT

ON
ARBITRATION AGREEMENT

Submitted ToMr. Prabhjot Singh Cheema

Submitted ByIti Jhanji

5th Semester
Section B
Roll No. 46/09

ACKNOWLEDGEMENT
I, Iti Jhanji, would like to thank my department University Institute of
Legal Studies, Panjab University, Chandigarh and my Director Prof.
Sangita Bhalla for giving me an opportunity to prepare a project report on
the topic ARBITRATION AGREEMENT under the able guidance of Mr.
Prabhjot Singh Cheema. I also extend my heartfelt gratitude towards the
library staff of the department and my parents and friends for rendering
their heartfelt support.

INDEX
1
2
3
4
5
6

Arbitration Agreement
Connotation of the term
Form of an Arbitration Agreement
What constitutes an Arbitration Agreement
Oral Arbitration Agreement not recognised
An Arbitration Agreement is not necessarily to be signed by both the

parties
7 Arbitrable Disputes
8 Whether Mutuality is required
Agreement

Arbitration Agreement (Section 7)

to constitute a valid Arbitral

1. 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.
2. An arbitration agreement may be in the form of an arbitration clause in a
contract or in the form of a separate agreement.
3. An arbitration agreement shall be in writing.
4. An arbitration agreement is in writing if it is contained in
(a) A document signed by the parties;
(b) An exchange of letter, telex, telegrams or other means of telecommunication
which provide a record of the agreement; or
(c) An exchange of statements of claim and defence in which the existence of
the agreement is alleged by one party and not denied by the other.
5. 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.
Section 7 defines an arbitration agreement. It refers to the disputes which have a
reason or which may arise between the parties in respect of a certain legal
relationship, whether contractual or not. A relationship which though legal may
not necessarily be a contractual as in case of professionals like a doctor and a
patient or a lawyer and his client, etc. particularly with reference to the liability
arising out of their negligence in their professional conduct. The word party
for the purpose of Part 1 of the Act connotes party to the agreement has
distinguished from party to the suit. Both, the claimant who has brought the
legal action and the respondent, who applies for reference of the dispute to
arbitration, must be parties to the arbitration agreement.
A dispute in the context of Arbitration Act means a dispute arising out of
assertion of claim by one party and its repudiation by the other party. In other
words, a dispute implies some kind of disagreement between parties concerning
some legal claim or liability1. It may be distinguished from the term difference
1 Salecha Cables vs. H.P.S.E. Board, (1995) 1 Arb. LR 422 (mp).

which means having different opinion as to the exact meaning of a particular

term in the contract. The difference or dispute must relate to some civil claim.
The existence of a dispute or a difference in an essential prerequisite for
arbitration. Where the dispute has been finally settled the parties cannot refute
the settlement and invoke the arbitration clause for reference to arbitration 2. The
section further states that an arbitration agreement is an agreement which
provides that in case of dispute, it is to be submitted to arbitration, the nature
of such agreement would be voluntary, however it does not matter whether such
dispute is a present or future dispute, Section 7(1) of the Act, recognises both
types of disputes.
Section 7(1) provides classification by means of agreement between the parties
that all or certain disputes are to be submitted to arbitration and also an
agreement in respect of existing dispute and future dispute. However it is
expected that arbitration agreement is to be made in specific clauses, but no
particular form of arbitration agreement is prescribed under the Act.
In Rukmanibai vs. Collector, Jabalpur3, the Supreme Court said that what is
required to be ascertained is whether the parties have agreed that if disputes
arise between them in respect of the subject-matter of the agreement such
dispute shall be referred to arbitration, and then such agreement would spell out
an arbitration agreement. That means what is required under Section 7(2) to (5)
is the terms of an arbitration agreement which must be very clear and specific,
maybe, in form of clauses and expression used in an arbitration agreement such
as arbitrator, arbitration and arbitral tribunal should be defined. The
clauses contained in an arbitration agreement are not like the clauses of a
contract because the clauses of an arbitration agreement are enforceable under
this Act.
Section 7(3) makes necessary that an arbitration agreement must be in writing
so, it does not recognise oral or verbal agreement. Section 2(a) of the
Arbitration Act, 1940 also provided similar condition in respect of an arbitration
agreement.

2 Nathani Steels vs. Associate Construction, (1995) 3 Supp. SCC 324.

3AIR 1981 SC 479, 481.

Section 7(4) affirms essential condition that an arbitration agreement must be

writing signed by parties and it recognises the modern mode of communication
such as telex, telegrams, letters and also a communication by means of telecommunication which forms a record of the arbitration agreement. Section 7(4)
(c) deals with an arbitration agreement contained in an exchange of statements
in respect of claim and defence in which the existence of the agreement is
alleged by one party and not denied by the other party.
Although, Section 7(4), clause (b) and clause (c) explains that it is not necessary
that an arbitration agreement in all cases should be signed by the parties4.
Section 7(5) explains that in a contract agreement if the reference is made as to
arbitration clause it will amount to an arbitration agreement. Thus, an
arbitration clause can be a part of a contract provided it is in writing. Now, it
is clear that this sub-section recognises the practice prevailing in such
documents of contract containing an arbitration clause.
i.

Term agreement-Connotation of

The term agreement has been defined by the Contract Act as every promise
and every set of promises forming the consideration for each other is an
agreement. The consideration for an arbitration agreement is willingness of
either side to abide by the decision (award) of the arbitrator. An arbitration
agreement is reciprocal promise proceeding from either side. The test to
determine whether a particular clause amounts to a valid submission is whether
both parties are bound by the clause and not whether a right has been expressly
given to both the parties to initiate arbitral proceedings 5. Thus it can be said that
an agreement/arbitration agreement is an instrument containing reciprocal
promises between the parties with the object that in case of any dispute arising
out of a contract the same would be liable to be submitted for arbitration.

4 Banarsi Das vs. Cane Commr. AIR 1963 SC 1417.

5 Maritime Itraliana Steamship Co. vs. Burjor Framroze Joshi, AIR 1929 Bom. 185

ii.

Form of an arbitration agreement

Section 7(2) of the Act provides that an arbitration agreement may be in the
form of an arbitration clause in a contract or in the form of a separate
agreement. Thus, if there is an arbitration agreement either as an arbitration
clause in the agreement of a contract itself or there is a separate agreement for
purpose of arbitration, it makes no distinction in the eyes of law because it
satisfies the requirement of Section 7(2) of the Act. It appears from above
provision that Section 7(2) deals with external aspects of an arbitration
agreement, whereas a contract is generally used for incorporating an arbitration
clause for future disputes, a separate agreement can contain an arbitration clause
both for existing and future disputes. Thus, an arbitration clause is not required
to be endorsed in any particular form, what is required to be ascertained is
whether the parties have agreed that if disputes arise between them in respect of
the subject matter of the agreement such disputes shall be referred to arbitration,
than such an agreement would spell out an arbitration agreement6.
iii.

What constitutes an arbitration agreement

In Jagdish Chander vs. Ramesh Chander7, the Apex Court had occasion to lay
down the principle as to what constitutes an arbitration agreement, which are
the following:(a) Intention of parties- The intention of the parties to enter into an arbitration
agreement shall have to be gathered from the terms of the agreement. If the
terms of the agreement clearly indicating an intention on the part of the parties
to the agreement to refer their disputes to a private tribunal for adjudication and
a willingness to be bound by the decision of such tribunal on such disputes, it is
an arbitration agreement. While there is a specific form of an arbitration
agreement, the words used should disclose a determination and an obligation to
go to arbitration and not merely contemplate the possibility of going to
arbitration. Where there is merely a possibility of the parties agreeing to
arbitration in future, as contrasted from an obligation to refer disputes to
arbitration, there is no valid and binding arbitration agreement.

6Rukmanibai vs. Collector, Jabalpur, AIR 1981 SC 479.

7 (2007) 5 SCC 719.

(b) Clause relating to settlement of disputes- Even if the words arbitration

and Arbitral Tribunal (or arbitrator) are not used with reference to the process
of settlement or with reference to private tribunal which has to adjudicate upon
the disputes, in a clause relating to settlement of disputes, it does not detract
from the clause being an arbitration agreement if it has the attributes or
elements of an arbitration agreements. They are:1. The agreement should be in writing;
2. The parties should have agreed to refer any disputes (present or future)
between them to the decision of a private tribunal;
3. The private tribunal should be empowered to adjudicate upon the disputes in
an impartial manner, giving due opportunity to the parties to put forth their case
before it; and
4. The parties should have agreed that the decision of the private tribunal in
respect of disputes will be binding on them.
(c) Specific and direct intent to settlement of dispute by arbitration- Where
the clause provides that in that event of disputes arising between the parties, the
disputes shall be referred to arbitration, it is an arbitration agreement. Where
there is specific and direct expression of intent to have the disputes settled by
arbitration, it is not necessary to set out the attributes of an arbitration
agreement to make it an arbitration agreement. But where the clause relating to
the settlement of disputes, contains words which specifically exclude any of the
attributes of an arbitration agreement or contains anything that detracts from an
arbitration agreement, it will not be an arbitration agreement. For examplewhere an agreement requires or permits an authority to decide a claim or dispute
without hearing or requires the authority to act in the interests of only one of the
parties or provides that the decision of the authority will not be final and
binding on the parties, or that if either party is not satisfied with the decision of
the authority, he may file a civil suit seeking relief, it cannot be termed as an
arbitration agreement.

(d) Mere use of word arbitration, not sufficient-But mere use of the word
arbitration or arbitrator in a clause will not make it an arbitration
agreement, if it requires or contemplates a further fresh consent of the parties
for reference to arbitration. For example use of words such as parties can, if
they so desire, refer their disputes to arbitration or in the event of any dispute,
the parties may also agree to refer the same to arbitration or if any dispute
arises between the parties, they should consider settlement by arbitration, in a
clause relating to settlement of disputes, indicate that the clause is not intended
to be an arbitration agreement.
Thus to constitute a valid arbitration agreement in terms of Section 7 of the
Arbitration and Conciliation Act, 1996 the aforesaid elements must essentially
be available in the contents of the relevant arbitration clause in the contract in
question.
iv.

Oral arbitration agreement is not recognised

According to Section 7(3) of the Arbitration and Conciliation Act, 1996 an

arbitral agreement must be in writing, it means the present act does not
recognise the so called oral arbitration agreement. However, Section 7(4) of the
act recognises the modern form of communication, like an exchange of letters,
telex, telegrams or other means of telecommunication provided these
communications provide a record of the agreement.
v.

An arbitration agreement is not necessarily to be signed by both the

parties

According to Section 7(4) (a) of the Arbitration and Conciliation Act, 1996 a
document, namely an arbitration agreement should be signed by the parties.
However, a plain reading of Section 7(4) (b) to (c) clearly shows that it is not
necessary that the arbitration agreement between the parties should, in all cases,
be signed by both the parties8.
It is sufficient if one party signs the written submission and the other accept it.
No particular form of writing or a formal agreement is necessary. The
agreement may be gathered from several documents or even in inferred from
correspondence consisting of a number of letters, though connected by oral
evidence or from other documents9.
8 Banarsi Das v. Cane Commissioner, AIR 1963 SC 1417.

In view of the above discussion, it can be safely affirmed that it is a well settled
legal position that Section 2(a) of the Arbitration and Conciliation Act, 1996
provides that an agreement in writing means that the terms of an agreement
should be expressed in writing and the agreement should be such that it binds
both the parties and that the actual signatures of both the parties on the
arbitration agreement is not essential. The agreement may be in the form of a
signed document by both the parties containing all the terms or a signed
document by one party or it may be an unsigned document containing the terms
of submission to arbitration. It is sufficient if one party signs the submission and
the other accept it. The acceptance may be by word of mouth or may be by the
conduct. If there is a submission clause in a contract it is not necessary that the
contract must be signed by the other party before the other party can be bound
by the submission clause, that party may accept the contract orally or he may
accept it by writing.
vii. Arbitrable disputes
It is settled legal position that the existence of disputes or differences is a prenecessary condition for the arbitration. It is also necessary that such disputes or
differences must come within the scope of arbitration agreement or arbitration
clause. The existence of arbitration clause is necessary and the contract in
question should not be void ab initio and if any dispute arises which does not
fall outside the arbitration clause, such disputes are arbitrable. Even in case of
frustration of contract if the arbitration clause is operative according to the
terms of the contract, dispute is arbitrable. Even on death of contract or
frustration of contract or repudiation of contract, the arbitration clause of the
contract may survive and dispute is liable to be referred to arbitration.
viii. Whether mutuality is required to constitute a valid arbitral agreement
It is well settled legal principle that the mutuality is a sine qua non of the
validity of a contract, which is equally applicable to an arbitration agreement
but the question is mutuality about what?

There are two views on this point-

9 Sukhmal Bansidhar v. Babu Lal Kedia, ILR (1920) 42 All. 525.

1. The Arbitration clause must give bilateral rights of reference. It means either
party may, in the event of dispute arising, refer to arbitration10.
2. Mutuality is permissible to stipulate in the arbitration clause itself to one
party to initiate arbitration in regard to disputes of his choice. Such a clause
would qualify as an arbitration agreement.
In the case of Union of India vs. Bharat Engineering Corporation 11, in the
instant case, the arbitration clause read as followsIn the event of any dispute or difference between the partiesthe contractor,
after 90 days of his presenting his final claim on disputed matters, may demand
in writing that the dispute or difference be referred to arbitration, such demand
for arbitration shall specify the matters which are in question, a dispute or
difference, and only such dispute or difference of which the demand has been
made and no other shall be referred to arbitration.
The Division Bench of the Delhi High Court has held that this Arbitration
clause did not amount to an arbitration agreement. An agreement to agree or a
contingent agreement was not permissible under Section 2(a) of the Arbitration
Act, 1940 as the arbitration agreement is required to be mutual, and only one
party having the right to exercise the option to commence arbitration
proceedings would not qualify as an arbitration agreement. It is only when the
option was exercised that it resulted in an arbitration agreement with mutual
rights to make the reference.
Unless there is an enforceable contract a privileged party cannot enforce arbitral
agreement on the other unprivileged party in the absence of mutuality. From the
above discussion it appears that the courts intend to encourage arbitration and
interpret arbitration clause to support the validity and enforceability of an
arbitration agreement rather than negating its validity and enforceability. In the
view of above discussion if two views are possible, the view supporting validity
and enforceability of arbitration agreement is to be preferred to the other view.

10 Baron vs. Sunder Land Corporation, (1966) 2 QB 56.

11 ILR (1977) 2 Del. 57 (DB).