The Menace Of Inartistic Drafting Of An Arbitration Clause: Things To Keep In Mind

19/Jan/2021, 9:49 AM, Authored by Hiroo Advani & Tariq Khan

The words of Hon’ble Ms Justice Indu Malhotra in the case of Mahanagar Telephone Nigam Ltd. v. Canara Bank & Ors.,  judgment dated 08.08.2019 in Civil Appeal Nos. 6202-6205 of 2019, “that a valid arbitration agreement is the foundation stone on which the entire edifice of the arbitral process is structured” lay emphasis on the vitality of an Arbitration Clause.

Parties must know “how to draft an arbitration clause” and more importantly know “how not to draft an arbitration clause” as once a dispute arises between parties, the clause significantly impacts the dispute resolution process.

An arbitration agreement should always be meticulously drafted while anticipating different factors of the transaction. It is imperative to include which disputes can be referred to arbitration and the clause also needs to mention the seat of arbitration, venue of arbitration, governing law, a panel of arbitrators, etc. in case of an ad hoc arbitration.

The Supreme Court in the case of VISA International Ltd. v. Continental Resources (USA) Ltd (Arbitration Petition No. 16 of 2007) had clarified for parties to not take advantage of inartistic drafting of an arbitration clause in any agreement so long as the intention of parties is clear to go for arbitration in case of any future disputes which is evident from the agreement and material on record including surrounding circumstances.

However, the contrary is witnessed as parties are often found taking advantage of defective or inartistic arbitration clauses to resist arbitration and to delay the dispute resolution mechanism. Many commercial contracts showcase faulty dispute resolution clauses which lead to the arbitration clause itself being the bone of contention. Details of drafting are not focused on by parties leading to losses of money and time.

Some common examples of defective arbitration clauses are as follows:

1)     “All disputes arising out of the present contract shall be settled by way of arbitration.”

An unambiguous language with all the intricacies chalking out the essential elements stating the number of arbitrators, appointment mechanism, seat, applicable law, etc. makes the application of the clause more precise.

2)     “Any controversy under this contract shall be referred to arbitration under the rules of……, parties will mutually decide the arbitrators and in case of disagreement between the arbitrators chosen by the parties, it is agreed that the dispute shall be submitted to the courts of Delhi”

This is an example of a loosely drafted clause where firstly, it is not clear under what rules arbitration would be conducted. Secondly the number of arbitrators and what would render the clause ineffective is ambiguous? Lastly, it is not clear whether parties want to refer their disputes to arbitration or the courts of Delhi.

The arbitration clause should be wide enough to encompass all possible disputes and claims – this includes breach of contract as well as the claim for damages. The words “disputes relating to” or “arising in connection with the contract” is wider than disputes “arising under” the contract, which a court may interpret as that would include only contractual claims. The former will ensure one-stop adjudication and help in avoiding multiplicity of proceedings. The discretion to define the range of disputes is entirely left to the parties.

Excepted matters can also be specified in the arbitration clause to limit the jurisdiction of the arbitral tribunal. Recently, in the case of Triune Energy Services Pvt Ltd v. Indian Oil Petronas Pvt Ltd  O.M.P. (Comm) 5/2016 the Court relied upon the judgment of the Supreme Court in J.G. Engineers Private Ltd. v. Union of India & Another (2011) 5 SCC 758 to hold that an award adjudicating claims, which are excepted matters would violate Section 34 (2)(a)(iv) and 34(2)(b) of the Act. [Also see: M/S Mitra Guha Builders (INDIA) Company vs. Oil and Natural Gas Corporation Limited Civil Appeal No. 5511 of 2012].

An unambiguous, clear and mandatory arbitration clause would ensure submission of disputes to arbitration.

What must also be kept in mind is that if the dispute is governed under a special statute. In the case of Suresh Shah vs Hipad Technology India Private Ltd.  [Judgment dated 18.12.2020 in Arbitration Petition (Civil) No(s). 08/2020] the Court held that if the special statutes do not apply to the property and the tenancy created thereunder as on the date when the cause of action arises, are governed by an Arbitration Clause; then the dispute is arbitrable and there shall be no impediment whatsoever to invoke the Arbitration Clause.

Another important aspect of conducting effective arbitral proceedings is the composition of the Arbitral Tribunal. The number of Arbitrators has to be odd and not even so that the disputes are resolved without a tie. Parties to a dispute should consider whether the value of the contract and any potential dispute justifies the selection of three arbitrators as the same would be more expensive. Accommodation of the hearing date in three arbitrators’ diaries will also take more time, which will thwart the speedy resolution process. On the other hand, if the amount in dispute is small, then, it would be appropriate to appoint a sole arbitrator. In a three-member tribunal, both the claimant and respondent have the right to nominate one arbitrator each to ensure that the tribunal has the expertise and background to fairly decide the dispute in question.  If the number of arbitrators is not mentioned, some of the institutions provide default rules as per which the institution decides the number of arbitrators concerning the amount involved. Alternatively, parties may also specify in the arbitration clause that if the dispute is more than ‘X’ amount, then 3 arbitrators would be appointed and if it is less than ‘X’ amount, then a sole arbitrator would be appointed.

Recently, in Perkins Eastman Architects DPC and in HSCC (India) Ltd. (2019) SCC OnLine SC 1517the Supreme Court held that “a person who has an interest in the outcome or decision of the disputes must not have the power to appoint a sole arbitrator.”Thus, a party cannot unilaterally appoint a sole arbitrator in a dispute.

Specifying the language is a crucial element of an arbitration clause as it can reduce the potential pool of arbitrators. It is important to specify the language of the arbitration as bilingual proceedings can be very inconvenient and time-consuming. Imagine a case where one party is from Japan, another is from Russia and the arbitrator is from England. In such a case, if pleadings are filed in Russian and Japanese languages and an Award is passed in English, it would lead to a lot of confusion. The language that is used can save a considerable amount as translators’ fees could be mitigated. If the language is not specified, the arbitrators get to choose. The result may not be what you would expect. Therefore, it is necessary to mention such a language in an arbitration clause which is universal and which can be easily understood by the parties, arbitrators and the courts. A uniform language substantially reduces the potential perplexities which may arise in an arbitration proceeding.

With respect to the “seat of arbitration”, the Supreme Court in the case of Mankastu Impex Private Limited V. Airvisual Limited (2020) SCC OnLine SC 301 held that the seat of arbitration is a vital aspect of any arbitration proceeding. The significance of the seat of arbitration is that it determines the applicable law while deciding the arbitration proceedings as well as judicial review over the arbitration award. Accordingly, the clause of an arbitration’s seat should specify the place of arbitration. The seat determines the procedural rules which engulf the arbitration and gives exclusive jurisdiction to a court to challenge an arbitral award or for the appointment or removal of the arbitrator. Hence, one should be aware of the prevailing practice in the jurisdiction of a chosen seat of arbitration and must select a seat where courts are experienced in international arbitration. The seat of arbitration is essentially a choice of law whereas the hearing venue can change as per the convenience of the parties which will not impact the supervisory jurisdiction of the judicial seat. References like “venueor “place” must be avoided as an objection may be raised by either party that these are merely physical or geographical locations and not the legal or judicial seat of arbitration. Thus, leaving it open for the court to ascertain the seat of arbitration which would eventually delay the arbitration proceedings.

Further, in BGS SGS Soma JV V. NHPC Ltd. (2019) SCC OnLine SC 1585, the Supreme Court of India clarified that the designation of a seat confers exclusive jurisdiction on the courts of the said seat; and a place of arbitration, regardless of its designation as a seat, venue or place, is the juridical seat of arbitration unless there is an indication to the contrary.

Another crucial aspect is that the parties have to take into account whether they want their arbitration to be supervised and administered by a recognized arbitral institution or whether they want an ad hoc procedure where parties approach the concerned courts for resolving these issues as there is no institution supervising the arbitration. If you use an ad hoc procedure you can still use a set of institutional rules or agree on your own rules and procedures.

Most institutions provide model arbitration clauses which should be adopted if a party has a particular institution in mind e.g. SIAC, ICC, LCIA etc. Interestingly, when an institution is chosen for arbitration proceedings, it becomes contractually binding on the parties to follow the rules of such an institution. One must bear in mind that by choosing an arbitral institution, parties do not choose the home jurisdiction of that institute e.g. seat may be in London whereas arbitral institution may be SIAC and that there is no linkage between the two.

The comprehensiveness of an “arbitration clause” is essential though it need not be in any particular form. What is required to be ascertained is the intention of the parties to settle their disputes through arbitration. The meaning of a contract must be gathered by adopting a common-sense approach, and must not be allowed to be thwarted by a pedantic and legalistic interpretation. An ‘arbitration agreement’ is a commercial document inter partes and must be interpreted to give effect to the intention of the parties, rather than to invalidate it on technicalities. Therefore, a clause including all terms and conditions must be framed in a language which is not complex and can be easily interpreted. Words like “may” must not be used and should be replaced with “shall” to provide an express agreement to arbitrate.

The seat of arbitration must be pre decided and specified. The language and venue must also be chosen on the basis of convenience of the parties.

Institutional Arbitration must be promoted and given preference over other methods by the parties.

Lastly, owing to unprecedented times due to the pandemic, the only way of conducting hearings is by using virtual platforms. Thus, it is imperative that parties may provide in the arbitration clause that they agree to conduct virtual hearings to avoid any potential challenges which may arise on the principle of natural justice not being followed.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.