Gaurav Rai[1]
I recently conducted an online lecture on ‘Drafting an Arbitration Agreement’ at Jindal Global Law School on the invitation of my dear friend and Co-editor of The Arbitration Workshop, Gautam Mohanty. Pursuant to the same, I have decided to pen down a more detailed version of my lecture to help lawyers, contract drafters, and law students to get an insight into the dos and don’ts of drafting an arbitration clause. My suggestions are based on my experience of matters I have dealt with as a Legal Assistant to Arbitral Tribunals and on the interpretation given by the Supreme Court in the recent past to arbitration clauses. I believe the reason the Supreme Court had to interfere and interpret these arbitration clauses was because they were poorly drafted. My endeavour through this article would be to point out the common mistakes and to make suggestions to avoid the same. Also, I will put up multiple model drafts towards the end of the article, which incorporates all the elements, and then the reader can pick and choose the language to do a drafting exercise of its own.
Bargaining Power of the Party
Before we move into the necessary and optional ingredients of an arbitration clause, the most crucial factor to be kept in mind while drafting such clauses is to understand the bargaining power of your client while drafting a arbitral clause. A private party in a government contract will have little scope to make changes to a standard contract, based on the tender documents. Alternatively, a Government Entity in a government contract will have more power to make changes, however, what has to be seen is whether the government entity or PSU has the liberty to make changes to these standard forms or whether the same have been handed down from the ministry or another higher entity. In case the Government Entity of PSU has the authority to draft the standard form contract, the draftsman should be careful while drafting clauses and see to it that they are not one sided and give all powers to the Government entity regarding the appointment of the arbitral Tribunal. As has been the experience, the Courts has stripped down such arbitral clauses to the bare minimum to allow arbitration by removing the one sided power to appoint an arbitrator and hence not conforming to the arbitration clause between the parties.[2]
There might be some situations where the private party may have scope to dictate terms in a contract wherein the government entity does not have many similar works for there to be a standard form. It further helps the private sector client if they are the market leader in a particular segment in which the government is wishing to foray, giving the private party some edge over the drafting of the contract.
Ingredients of a Dispute Resolution Clause.
a. “Dispute”
Under Section 16 of the Arbitration and Conciliation Act, 1996, the Arbitral Tribunal has the power to deal with only those matters which are referred to it and which are within the scope of the arbitration clause/ agreement. One such circumcision is the meaning of the word dispute, which can be defined by the parties in the arbitration clause itself. For e.g., the contract may state that only when the parties discuss the issue with persons at a defined level and the parties are not able to resolve such issues amicably within 60 days, the same will become a dispute which can be resolved by arbitration. The parties may also make it clear as to what kind of disputes are not to be referred to arbitration. Such circumcision is called excepted matters. For eg. if the contract consists of transfer and sharing of intellectual property, the parties may carve out an exception and state that issues of IPR will not be referred to arbitration, and the appropriate courts will have jurisdiction to decide the issue of technology transfer. Even in insurance contracts only issues of quantification of insurance pay-out are referred to arbitration.
The parties may also provide for a multi-tier dispute resolution system, hence not allowing any dispute to be referred to arbitration unless the pre-arbitral dispute resolution process fails. I will discuss more about the multi-tier dispute resolution clauses later.
Hence, while drafting an arbitration clause, it will be necessary to see the client’s requirements regarding the escalation of the dispute to arbitration. Quite often, business and commercial interest would not want to escalate everything to arbitration and instead try and solve the issues and differences amongst themselves. In contradistinction to such definition of dispute and layers of escalation, parties may have an extensive and unfettered arbitration clause wherein it states that any dispute, difference, disagreement of any sort will be resolved by way of an arbitration. Such clauses might be necessary for the client who has clear black and white contracts, which has no scope of interpretation, and the client wants a favourable and quick ruling by way of an arbitration instead of delaying the process by using multiple steps.
b. Multi-tier dispute resolution
Multi-Tier Dispute resolution clauses are the trickiest part of the dispute resolution clause and must be drafted carefully, especially if dealing with domestic arbitration matters. Classically multi-tier dispute resolution clauses have been enforced by the Courts in the UK[3] and Singapore.[4] The Courts have followed the letter of the contract and disallowed the invocation of arbitration by the parties if they do not follow the pre-escalation procedure before invoking arbitration. In India, however, the courts are divided over the necessity of following pre-escalation steps. Some consider it mandatory[5] while others consider it only as an option.[6] Construction Contracts based on the FIDIC model provide for the dispute to be first referred to the Dispute Resolution Board (DRB) before being referred to arbitration. In PATI-BEL v. NHAI[7], the Delhi High Court upheld the rejection of the counterclaims of NHAI by the Arbitral Tribunal. NHAI had not raised the disputes with the DRB and had directly raised the counterclaims with the arbitral Tribunal. Hence the Arbitral Tribunal rejected the counterclaims as the same were beyond its jurisdiction.
Hence, my suggestion would be to carefully draft the multi-tier dispute resolution clause using words that clearly indicate whether the pre-arbitral step is to be mandatorily performed or is it just an option for the parties before invoking arbitration. The use of words like “shall” and “may” can make it clear. Further, the clause can indicate that only on the failure of the previous step will the parties be able to move to the next step. There is no substitute to having clear, unambiguous language when drafting a contract clause.
c. Procedure for appointment arbitrators and the dilemma of disqualification of arbitrators.
The procedure for appointment of arbitrators has seen the maximum amount of legislation being devoted to it in the amendment of 2015 and 2019. There is an intense tussle amongst drafters of contracts and the legislature regarding the persons who can be appointed as arbitrators and the regulation regarding the same. The Supreme Court has also had a fair amount of input into the meaning of the disqualification requirements of the nominees to the arbitral Tribunal. Let us pull back a little and try to deconstruct the legislation, the judgments, and the ideal process to appoint arbitrators and, more importantly, who to appointed as arbitrators.
Appointment of arbitrators is governed by Section 11 of the Arbitration and Conciliation Act, 1996 as far as India seated arbitrations are concerned. Section 11 gives the parties the freedom to decide the procedure for the appointment of arbitrators. While drafting this portion of the clause, the client’s needs are to be kept in mind. In case a sole arbitrator has to be appointed, the appointment of a serving employee as of an arbitrator is invalid,[8] so is the unilateral nomination of a sole arbitrator.[9] In case the client wants only a Sole arbitrator, the only possible way is to jointly agree on a sole arbitrator, which is very difficult in practice to achieve. The authority to appoint a sole arbitrator can be given to an independent arbitral institution or the High Court (domestic) or the Supreme Court (India seated international commercial arbitration) as the case may be.
In case a three-member Arbitral Tribunal is to be appointed, the procedure mentioned in the Act under Section 11 is the simplest and safest. The Clause simply states that the members of the arbitral Tribunal will be appointed in the manner mentioned under Section 11. The procedure under Section 11(3) can be reproduced, and time lines be specified for the appointment by the parties. By putting timelines in the procedure, the other side can be forced to act quickly. Since, the parties are given to choose the procedure for appointment under the Act, the other side will lose the chance to nominate someone to the arbitral Tribunal if the times period lapses.[10] In which case, the concerned High Court or the Supreme Court will appoint the arbitrator for the defaulting party or a designated arbitral institution can be given the power to appoint an arbitrator for the defaulting party. Such a right will have to be given to the arbitral institution within the arbitration clause itself.
Further, the Clause can also mention how to appoint the Third/Presiding Arbitrator by again giving such powers to the arbitral institution such as Delhi International Arbitration Centre or the Mumbai Centre for International Arbitration. If your client is apprehensive about even one member being appointed from the opposite side which might sway the arbitral Tribunal, you may give the right of appointing the entire arbitral Tribunal to an institution. Drafting such a clause also applies to foreign seated arbitrations, and institutions such as the Singapore International Arbitration Centre, International Chamber of Commerce and Hong Kong International Arbitration Centre can help.
Government contracts will invariably have either a panel of arbitrators from which the choice of arbitrators is to be made by both the parties, or at the minimum, the Government will appoint a former employee or an engineer or former high ranking member from a sister concern as its nominee to the arbitral Tribunal. Honestly, I have witnessed some excellent technical persons as arbitrators who may not be well versed with the law but know the contracts inside out and are thorough professionals. They assist the other non-technical members of the Arbitral Tribunal and the Advocates for the parties in understanding the technical aspects of the case. The appointment of such former employees has been challenged several times in the Courts of this country. However, the understanding developed now is that there is no bar in appointing an expert professional who was a former employee of the organization appointing them. However, forming a panel of such former employees and asking the other party to also chose an arbitrator from such a panel has been looked down upon and must be avoided if your client is a government entity.[11]
d. Laws & Rules
(i.) Governing the Contract
In my limited understanding, two private domestic parties cannot choose their contract to be governed by foreign law. The substantive law governing a contract between two Indian domestic parties will always be the Indian Contract Act, 1872. If we are concerned with a contract of sale and purchase of goods, accordingly the Sale of Goods Act, 1932 will apply. So it is advisable to mention that the contract between the parties will be governed by the laws of India out of abundant caution. It is pertinent to mention here that I am referring to the substantive contract between the parties and not the law governing the arbitration agreement. The Arbitration agreement/ clause is separable from the main contract and is capable of being governed by a law other than the substantive law of the contract. If we are concerned with atleast one foreign party, it becomes all the more important to mention the law governing the contract between the party by a reference to the country of one party or the other.
(ii.) Governing the Arbitration – Law of the Seat of the Arbitration
The other law that has the most significant effect on the entirety of the arbitration proceedings is the law of the seat of the arbitration. The arbitration proceedings are such that two parties of different countries can choose a neutral location to conduct their arbitration. Such a location is called the seat of arbitration. The laws of the Seat of the arbitration govern the arbitration proceedings. To put it simply, the Arbitration Act applicable in the seat will govern the arbitration proceedings and the designated courts of the Seat of Arbitration will have supervisory jurisdiction over the arbitration. This becomes extremely relevant as these courts will decide any challenge to the arbitral award made by the arbitral Tribunal. It is imperative to draft this section of the clause perfectly, as it has caused the most litigation.
It is advisable that if there is foreign seat of arbitration such as Singapore, London, Paris, Hong Kong etc., then an appropriate institution is appointed to conduct the arbitration such as the Singapore International Arbitration Centre, London Centre for International Arbitration, ICC Paris, Hong Kong International Arbitration Centre respectively. Now, this suggestion comes with a caveat. Although, the arbitration is conducted in a more structured manner when administered by an institution, the fee structure, however, of such institutions is directly connected to the claims made by the parties. Hence the parties must be careful about making exorbitant over the top claims and counterclaims. Also, the entire fee for the arbitration is payable at the beginning and can be escalated if the claims and counter claims increase.
The problem of the seat of arbitration may seem to affect only foreign seated arbitrations but more recently and based on my experience, I can state that even in domestic arbitration choosing the seat of arbitration specifically is very important. The reason being there has been a stark contrast in the manner the designated high courts and commercial courts handle matters related to their supervisory jurisdiction in arbitration matters. The High Court of Delhi, in my experience, has been very efficient and consistent in handling arbitration applications whether it is regarding appointment or arbitrators or granting an extension of time for making the award or dealing with Section 9 applications for interim relief. On the other hand if the parties chose Hyderabad as the seat of arbitration, the High Court does not even have the jurisdiction to deal with the arbitration matters and the same goes to the District Court where the applications of the parties may not move quite as efficiently. Furthermore, the parties have the liberty to choose arbitration institutions as the Delhi International Arbitration Centre and the Mumbai Centre for International Arbitration to have a more structured arbitration by choosing Delhi or Mumbai as the seat of arbitration respectively. The Supreme Court has made it clear in Indus Mobile v. Datawind[12] that once the seat is designated in a domestic arbitration, the courts of the seat get exclusive jurisdiction to deal with the issues of arbitration arising between the parties.
It is also advisable to state out of abundant caution that after the parties state what the seat of the arbitration will be, they may additionally state that the arbitral Tribunal in consultation with the parties may conduct the proceedings in any venue, they deem fit and convenient. Such a choice will not affect the seat chosen by the parties (emphasis supplied).
e. Model clauses
Based on the discussion above on the several possible ingredients of arbitration clauses, the readers can now go through the examples given below which attempt to cover the different options amongst the ingredients to form an arbitration clause. I shall do this instead of drafting full fledge arbitration clauses because it will be difficult to draft multiple permutations of various ingredients and the options amongst them.
1. Straight to Arbitration - All-inclusive/ excepted matters & dispute defined.
Any dispute or disagreement regarding the interpretation, fulfilment or obligations of the parties under this agreement shall be resolved by arbitration.
OR
All disputes or disagreements which relate to __________________________ under the agreement shall be resolved by arbitration.
Any dispute or disagreement regarding the _____________________________ shall not be open to be resolved by arbitration and the parties shall be open to seek remedies from the courts of ________________ (Exclusive jurisdiction clause assigning jurisdiction to one of the courts which would normally have the jurisdiction in the first place to the parties to the agreement.)
2. Multiple steps/ Escalation
2 step
Any dispute or disagreement regarding the interpretation, fulfilment or obligations of the parties under this agreement shall be notified to the opposite party within 60 days of the disagreement. The parties shall mandatorily attempt to resolve the disputes amongst themselves in good faith within 60 days of notifying the dispute to the opposite party.
If such dispute is not resolved or the time period for the resolution of the dispute by amicable negotiations expires, the aggrieved party may resolve the dispute by way of arbitration.
OR
3 step
Any dispute or disagreement regarding the interpretation, fulfilment or obligations of the parties under this agreement shall be notified to the opposite party within 60 days of the disagreement. The parties shall mandatorily attempt to resolve the disputes amongst themselves in good faith within 60 days of notifying the dispute to the opposite party.
If such dispute is not resolved or the time period for the resolution of the dispute by amicable negotiations expires, the aggrieved party shall resolve the dispute by way of Conciliation as per the Arbitration and Conciliation Act, 1996.[13]
On the failure of the conciliation process or the expiry of 180 days from the beginning of the conciliation process whichever is earlier, the parties have a right to resolve their disputes by way of arbitration.
3. Appointment of arbitrators and procedural rules of arbitration Ad hoc / Institutional Arbitration.
Each party to this agreement shall appoint one arbitrator and the two arbitrators shall appoint the Presiding/ Third Arbitrator. (if there are only two parties to the agreement).
4. At the minimum – Substantive law and Seat.
This contract will be governed by the laws of India/USA.
The Place of Arbitration shall be New Delhi. The parties are free to choose any venue for the meetings to be held in consultation with the members of the arbitral Tribunal.
OR
This contract will be governed by the laws of India/USA.
The Place of Arbitration shall be Singapore/ Paris/ Hong Kong and shall be administered by the Singapore International Arbitration Centre/ ICC Paris/ Hong Kong International Arbitration Centre as per their rules. The parties are free to choose any venue for the meetings to be held in consultation with the members of the arbitral Tribunal.
[1] Gaurav is an Advocate working in the area of Arbitration Law and Contracts primarily as a Legal Assistant to Justice A.K. Patnaik (Former Judge, Supreme Court of India). He can be contacted at raigaurav.legal@gmail.com. [2] TRF Ltd. v. Energo Engineering Projects Ltd., 2017 (8) SCC 377; Afcons Infrastructure Ltd. vs Rail Vikas Nigam Limited on 29 May, 2017, ARB.P. 21/2017, Judgment dated 29.05.2017 of the Delhi High Court. [3] Cable & Wireless PLC v. IBM United Kingdom Limited, 2002 EWHC 2059.. [4] International Research Corp PLC v. Lufthansa Systems Asia Pacific Pte Ltd and another, [2013] SGCA 55(Singapore). [5] M/s. Haldiram Manufacturing Company Pvt. Ltd. v. M/s. DLF Commercial Complexes Limited, 193 (2012) DLT 410 (India); Tulip Hotels Pvt. Ltd. V. Trade Wings Ltd, Arbitration Application No.4 of 2007 – Bombay High Court at Goa decided On 19.03.2008, (India). [6] Ravindra Kumar Verma v. M/s B.P.T.P. Limited & Another, 2015 147 DRJ 175; Union of India v. Baga Brothers, FAO No. 387/2006, decided on 07.07.2017 (India). [7] NHAI v. PATI-BEL (JV), O.M.P. (COMM) 314/2017, Del HC,(India)., . [8] TRF Ltd. v. Energo Engineering Projects Ltd., 2017 (8) SCC 377. [9] Perkins Eastman Architects DPC and Another v. HSCC (India) Ltd., AIR 2020 SC 59 [10] Siemens Limited vs Jindal India Thermal Power decided on 30 January, 2018 by the Delhi High Court in ARB.P. 243/2017 [11] M/s Voestalpine Schienen GMBH v. Delhi Metro Rail Corporation Ltd., (2017) 4 SCC 665; AFCONS Infrastructure v Rail Vikas Nigam Limited ARB.P. 21/2017 decided by the Delhi High Court on 29.05.2017. [12] Indus Mobile Distribution Private Limited v. Datawind Innovations Private Limited and Ors. (2017) 7 SCC 678 [13] Parties can define the contours of the conciliation as allowed by the Act.
Comments