India: Drafting Arbitration Agreements – Need For Care And Caution

Last Updated: 19 July 2011
Article by K. S. Ravichandran

Dispute Resolution Clauses of commercial agreements invariably contain one or more clauses known as Arbitration Agreement. Time and again, we have always endeavoured to impress upon the need to ensure that an Arbitration Agreement should be as comprehensive as possible. The scope of the Dispute Resolution Clause should be spelt out clearly; probably in a broader manner. Many a times, at the time of drafting the Arbitration Agreement, it may not be possible to visualize who are likely to be parties to a future litigation, subject matter whereof would be directly connected to the main commercial agreement in which the Arbitration Agreement forms a part.

Therefore in this newsletter we thought it fit to give simple thumb rules to decide who are supposed to be parties to the Arbitration Agreement and what should be the scope of the Arbitration Agreement.

Identifying the Parties

First and foremost task will be to determine the rights and obligations of Parties. While finalizing the draft of an agreement, say a joint venture agreement, one must go through the same with a fine tooth comb and identify the rights and obligations of each party to the agreement. One may come across that the agreement under scrutiny mentions about rights and obligations of persons who are not parties to the said agreement at all. Where the Arbitration Agreement forms part of the main commercial agreement, parties to the commercial agreement will normally [unless otherwise stated] be the parties to the Arbitration Agreement too. On the basis of such a scrutiny, if one comes across persons who are entitled to certain rights and persons who are liable to undertake or carry out certain obligations, such persons must be added as parties to the commercial agreement itself. If that is not possible or desirable, it would be better to execute a separate and comprehensive Arbitration Agreement adding all the Parties to the main commercial agreement and all those persons who are not Parties to that agreement as Parties to the Arbitration Agreement.

Reference Documents

Second task will be to check if the main commercial agreement contains reference to any other agreement containing material covenants conferring rights and imposing obligations. If so, it would be better to declare that those agreements are also connected agreements. It is necessary to add in the main commercial agreement, a precise description of such agreements as Reference Documents. While doing so, it would be essential to see whether all the parties to those agreements are also parties to the main commercial agreement and whether there are other persons who are while being parties to those agreements are not parties to the main commercial agreements

Binding Associates / Affiliates and connected persons

Where companies or any other bodies corporate or firms and concerns are parties to an agreement, it would be better to ensure that the agreement covers their directors and other principal officers too in a binding manner. Otherwise it may become difficult to enforce the Arbitration Agreement against them if they ought to be necessary parties. Where there are references to associates / affiliates, the expressions should be clearly defined and depending upon rights conferred / obligations undertaken, such persons should also be added as Parties.

Deed of Adherence

It is usual to assume that directors and shareholders are bound by those covenants which bind their companies. However it would always be better to ensure that the agreements specifically incorporate a covenant or two to say that the directors are bound by the covenants contained in the agreements. It is also important to ensure that new directors make a declaration to the effect that they agree to be bound by the agreements to which their company is a party. This requirement applies to a company or firm which has undertaken material obligations under the main commercial agreement. Such declaration could be in the form of simple statement or writing or a deed of adherence so that it is possible for the right holder to bind not only the company but also its directors.

Need for Removing Inconsistencies

Where the arbitration agreement in the main commercial agreement and the arbitration agreement, if any in the Reference Documents are inconsistent without any synchronization, it would be better to identify such inconsistencies and iron out those issues so as to make them co-exist.

Statutory rights and Remedies

It is also important to keep in mind that there are several matters where statutory rights are conferred upon certain categories of people such as creditors or shareholders and statute confers certain powers upon certain statutory bodies or tribunals or quasi-judicial forums or courts of law. For instance, notwithstanding the right to invoke arbitration to resolve disputes, a creditor may intend to seek a winding up of the debtor company. Under the Companies Act, 1956, the power to order a winding up is with the Court. Arbitral tribunal cannot order the winding up of the Company. Therefore while construing the true scope of an Arbitration Agreement to initiate a dispute resolution process, aspects such as arbitrable nature of the dispute and competence of the tribunal should also be kept in mind.

Conclusion

Arbitration Agreements may form part of the main commercial agreement. They are nevertheless considered as separate contracts. Even when the validity of main commercial agreements is under challenge due to an alleged fraud, courts have held that an Arbitration Agreement, which forms part of such a commercial agreement, remains and retains their validity. Therefore it goes without saying that the significance of an Arbitration Agreement should be appropriately appreciated and they must be construed accordingly. Care must be exercised while drafting Arbitration Agreements.

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.

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