Arbitration Clause: Meaning
Arbitration Clause refers to a clause in a contract that binds the parties to settle their disputes through Arbitration. These drafted by arbitral institutions are ways to ensure flexible and smooth functioning while solving a dispute. These Model arbitration clauses are thoroughly incorporated into the contracts. These clauses are being to prevent various jurisdictional issues from arising between the countries. Arbitration Clauses generally remove a commercial dispute from a familial Judiciary to a common ground. This achieves a fair resolution of the disputed matter.
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To know more about Arbitration Clause, one must know about Arbitration. Arbitration is a part of the Alternative Dispute Resolution mechanism that helps the parties to achieve an out-of-court settlement. Arbitration is a form of ADR which allows the parties to resolve their dispute without Litigation.
Sec. 2a of The Arbitration and Conciliation act, 1996 defines Arbitration as “arbitration,” which means any arbitration whether or not administered by a permanent arbitral institution.
Among the various ADRs, arbitration tends to be a jurisdictional means of resolving disputes among the parties. This is due to the power of arbitrators (Adjudicators) to resolve the grievance and pass a decision. Arbitration is different from mediation and negotiations. In this, the parties have an active say on the solution achieved by the arbitral tribunal. This imposes a decision on them that is of final and binding nature.
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Consent to Arbitration
The main characteristic of arbitration is consent. Any dispute which an arbitrator solves is only achievable if both parties have agreed to this. This agreement generally takes the form of an arbitration clause in the contract before the occurrence of a dispute. Once the dispute has emerged, the parties may agree to submit the particular dispute to an arbitral tribunal.
Types of Arbitrations
Arbitration is generally of 2 types:
- Domestic Arbitration: In this type of arbitration, the parties to the dispute are from India and the conclusion to the dispute is through cognizance of the substantive law of India. In this type of arbitration process, the dispute arises in India, and parties in question are subject to the Indian jurisdiction
- International arbitration: These arbitrations may take place within the territory of India or outside India or it can have any element of foreign origin is termed as international arbitration.
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Sec. 2(1f) of the Arbitration and Conciliation Act, 1996 defines International Arbitration. It states that
“international commercial arbitration” means an arbitration relating to disputes arising out of legal relationships, whether contractual or not, considered as commercial under the law in force in India and where at least one of the parties is—
(i) an individual who is a national of, or habitually resident in, any country other than India; or
(ii) a body corporate which is incorporated in any country other than India; or
(iii) a company or an association or a body of individuals whose central management and control is exercised in any country other than India; or
(iv) the Government of a foreign country;
International Arbitration is simply arbitration on an international level. It is similar to the local court Litigations/trial. However, in International Arbitration, the parties having dispute are generally foreign Countries, foreign industries, foreign individuals.
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Advantages of International Arbitration
- International Arbitration resolves disputes more quickly than litigation since there is a limit to the applications from arbitration awards.
- International Arbitration can be less expensive than litigation.
- Arbitration on international level provides better-quality justice than litigation, since many domestic courts are overburdening with cases. Due to which it does not always allow judges ample time to decide legal decisions of esteemed quality.
- In Arbitration, parties have the power to select an arbitrator to solve their matters whereas they have no say during litigation.
- International Arbitration is much flexible than litigation
- International arbitration allows parties to select their procedure which is most suited for them as against litigation, where they have no choice for the judge.
- Arbitration for international purposes can be private which is useful if the parties wish to continue their venture or to avoid negative exposure
- International Arbitration is neutral. This is very necessary for neighbouring contracts. It creates a fair play which eleminates the possibility of a home ground advantage for one party.
- In many cases of international disputes, International Arbitration is the only solution for settlement. Due to the violation of a legal right, litigation may take upto 10 years or more
Arbitration Clause: Significance
Arbitration Clauses are now a key part of many agreements and contracts. However, it has 3 main characteristics, which are distinguishable and self-governing. They are Severability, Separability, and Severability. The arbitration agreement is acknowledged as diverse and separate from the underlying agreement known as the Separability Principle. This principle prevents the authority of one agreement from being under the influence of the other one creating full autonomy of an arbitration agreement. However, dispute resolution and choice of law clauses need crafting with utmost care.
The arbitration clause in the agreement provides the basis for arbitration. Moreover, in an agreement, it helps solve any present or future disputes between the parties. The appointed arbitrator then resolves the dispute as per the arbitration procedure as prescribed in the agreement/contract. In this, the main focus is the choice of law incorporated as the clause under the agreement.
Contents of an Arbitration Clause
The main contents of an arbitration clause should be:
- Information of the parties entering into contract
- The time of the clause to take into effect and its termination
- Whether the clause can be modified in the future
- The consequences of infringing the contract
Sample Arbitration Clause
The ICC proposes an arbitration clause that many companies are currently using
“Any dispute or difference whatsoever arising between the parties out of or relating to the construction, meaning, scope operation or effect of this contract or the validity or the breach thereof shall be settled by arbitration in accordance with the Rules of Arbitration of the Indian Council of Arbitration and the award made in pursuance thereof shall be binding on the parties.”
Indian Council of Arbitration