How to insert an Arbitration Clause

To insert an arbitration clause in an agreement, follow these steps:

1. Determine the Need: Assess whether arbitration is the preferred method of dispute resolution for the agreement. Consider the nature of the relationship, potential disputes that may arise, and the advantages of arbitration over litigation.

2. Consult Legal Advice: Seek guidance from a qualified legal professional to ensure compliance with applicable laws and regulations. They can provide specific advice tailored to your jurisdiction and the nature of the agreement.

3. Draft the Clause: Craft a clear and comprehensive arbitration clause. Include the following key elements:

a. Agreement to Arbitrate: Clearly state that any disputes arising from the agreement will be resolved through arbitration. Specify that the parties waive their right to litigate the dispute in court.

b. Choice of Arbitration Rules: Specify the arbitration rules that will govern the proceedings, such as those provided by a reputable institution like the International Chamber of Commerce (ICC), American Arbitration Association (AAA), or any other recognized arbitration body.

c. Appointment of Arbitrators: Outline the process for appointing the arbitrators. Specify the number of arbitrators (usually one or three) and any qualifications or requirements for their selection.

d. Seat or Venue: Indicate the location or venue of the arbitration proceedings. This determines the jurisdiction and the procedural laws that will apply to the arbitration.

e. Language: Specify the language in which the arbitration proceedings will be conducted.

f. Governing Law: Determine the governing law that will be applied to the agreement as a whole, separate from the arbitration process itself.

g. Confidentiality: Include provisions on the confidentiality of the arbitration proceedings and any related documents.

h. Finality of the Award: State that the arbitral award will be final and binding on the parties, with limited grounds for appeal or challenge.

4. Incorporate the Clause: Insert the arbitration clause in the appropriate section of the agreement. Ensure that it is clearly visible, preferably in a separate section or paragraph, and that it is easily understandable to all parties.

5. Review and Execute: Review the agreement, including the arbitration clause, with all parties involved. Seek their agreement and consent to the terms of the agreement, including the arbitration clause. Once everyone agrees, execute the agreement by signing it.

It is important to note that each jurisdiction may have specific legal requirements and considerations for arbitration clauses. Therefore, it is advisable to consult with a qualified legal professional to ensure the clause is drafted and implemented correctly according to the applicable laws.

Arbitration Clauses and Checkpoints

• A binding arbitration agreement must be in writing.

• When parties opt against ad-hoc arbitration, it is essential to choose an arbitration institution to oversee the conduct of arbitration proceedings. This ensures procedural functionality in the arbitral proceedings, including the naming of arbitrators and continuance of administrative assistance.

• Ad hoc arbitration in India appears to follow Indian court protocol and procedures, which are unversed and sometimes burdensome in the international context.

• In case the parties fail to specify the distinction between ‘venue’ and ‘seat’ of the arbitration in the arbitration agreement, it will substantially affect the time and costs associated with the dispute settlement process

• Steer Clear of vague language and specify the “seat” mainly when the intention is to have a seat outside India and where Indian law is designated to be governing law of the underlying contract.

• It is, of course, advisable to include a ‘governing law’ clause in every contract. Though non-Indian parties may choose to opt for another legal system due to reasons for familiarity, the substance of Indian contract law is, however, to a large extent, within the normal aspirations of the majority of non-Indian parties and can typically be accorded to as a part of a larger settlement.

• Clauses that mandate the parties to take specific steps before the start of arbitration proceedings (such conducting meetings to solve the dispute through other means before referring it to arbitration) are often referred to as “escalation clauses,”

• These clauses should be treated with caution, as they can cause substantial delays while (as is often the case) failing to achieve the objective of effective negotiations.

• If you consider such a clause desirable, or if a counterparty insists, then be mindful that such a clause can prevent the commencement of arbitration until periods set out in the clause have expired – and with that in mind make sure that the relevant timeframe is short and transparent.

• In general, it is a rule of thumb to avoid specifying, in an arbitration clause, qualifications that the arbitrators must fulfil (in particular, a condition that only the retired judges of the Supreme Court of India or the various High Courts of India can be nominated to the tribunal).• This is because such limitations minimize the pool of arbitrators available, sometimes causing significant damage to your interest. 

Points To Remember While Drafting Arbitration Agreement in India.

·         The seat of Arbitration – To determine the procedural rules which would apply to the arbitration, it essential to specify the seat of the arbitration. It is of extreme importance to understand the difference between the venue and seat of the arbitration. The venue of arbitration is limited to it being the place where the hearing would take place. In contrast, the seat of arbitration has a detrimental effect on the procedure of the arbitration. The seat of arbitration has a wide ambit it and brings within its purview not only the evidentiary rules but also rules for enforcement and execution of the award.

·         Procedure for Appointing Arbitrators –  • Section 11 of the Arbitration and Mediation Act applies to the appointment of arbitrators. It provides that, “unless otherwise decided by the parties, a person of any nationality may be named as an arbitrator. The parties are free to agree on the protocol for the appointment of the arbitrator(s). If the parties fail to reach an agreement, each party shall nominate one arbitrator in an arbitration with three arbitrators, and the two arbitrators shall then nominate a third arbitrator to be the presiding arbitrator”.

Where the dispute concerns an international commercial transaction, the arbitrator to be named shall not be of the same nationality as the parties to the dispute.

·         Language of Arbitration –. It is essential to specify the language of the arbitration in the arbitration agreement. Especially in a country like ours, where Hindi and English are not the only two languages spoken, it would be very difficult to determine and resolve disputes. Choosing the language of the arbitration is also very cost-effective, as it will save you parties from paying exorbitant fees to the translators.

·         Number and Qualifications of Arbitrators – According to Section 10 of the Arbitration and Reconciliation Act of 1996, the parties may decide the number of arbitrators, given that the number selected is an odd number. If the parties fail to determine the number of arbitrators, the arbitral tribunal shall be composed of a single arbitrator.

·         Parties can choose type of Arbitration – Either institutional or ad hoc arbitrations. If the parties prefer the former, then they must be bound by the arbitration institutions laws. Many of these institutions have their own set of procedural rules, which will, in turn, apply to the arbitral proceedings. Whereas, in the case of ad-hoc arbitrations, the parties themselves have to set out the procedure for arbitration by themselves. In ad hoc arbitrations, no support is obtained from the arbitral institutions.

·         Governing Law – This is the law regulating the principal point of contention between the parties to a dispute. The parties should state the law they wish to be governed by, which could, in the future, give way to conflicts. It is also known as substantive law which governs the arbitration agreement.

·         Name and Address of the Arbitration Institution – If the parties refer their disputes to an arbitration centre, then it is necessary to state in plain and unambiguous terms the name and address of the arbitration facility.

We propose that non-Indian parties should adopt the following general approach:

o Consider, first of all, whether Indian law is needed.

o If this is not necessary, then if you can do so as by using your bargaining power, choose a non-Indian law such has UNIDROIT Principles or CISG, as they are conducive to facilitation of international trade.

o If you are required to opt for Indian law (whether under a legal requirement or as a matter of commercial bargaining power) have a trained professional review the contract.

o This is done to ensure that due consideration is given to those areas in which the Indian contract law varies from the contract law of other systems (s)