An arbitration clause is a small paragraph with a very large consequence: it takes your dispute out of the civil court and puts it before a private tribunal whose award is binding and only narrowly challengeable.
What makes it valid
Section 7 of the Arbitration and Conciliation Act, 1996 requires an arbitration agreement to be in writing. That is satisfied by a clause in a contract, by an exchange of letters or electronic communications recording the agreement, or by an exchange of pleadings in which the existence is alleged and not denied. What the courts look for is a clear intention that disputes will be finally and bindingly decided by a private tribunal. A clause saying the parties "may consider arbitration" or "may approach a mediator" usually fails that test.
The consequence: Section 8
If a party files a civil suit despite the clause, the other side can apply under Section 8 and the judicial authority shall refer the parties to arbitration, unless it finds prima facie that no valid arbitration agreement exists. The application must be made not later than the date of submitting your first statement on the substance of the dispute. Miss that point and you may be taken to have waived the clause.
Two mechanics of that application matter. It will not be entertained unless accompanied by the original arbitration agreement or a duly certified copy; where the other side holds the original, the section lets you file a copy with a petition asking the court to call on that party to produce it, so its absence is no reason to delay. And the arbitration need not wait for the court: it may be commenced or continued, and an award made, while the Section 8 application is pending. A party that files a suit to buy time does not automatically get it.
The seat fixes the legal home of the arbitration and therefore which court has supervisory jurisdiction over it. The venue is merely where hearings are physically held. Clauses that say "arbitration shall be held at Bengaluru" without specifying a seat have generated years of litigation about which court can hear a Section 34 challenge. Say it explicitly: "the seat of arbitration shall be Bengaluru".
- A clear intention to refer disputes to arbitration, in binding language
- The scope: which disputes, expressed widely enough to cover related claims
- Number of arbitrators, and how they are appointed
- The seat of arbitration, which fixes the supervisory court
- The venue, if different from the seat, and stated to be only the venue
- Governing law of the contract, and of the arbitration agreement
- Language of the proceedings
- Institutional rules, or a statement that it is ad hoc
What a well-drafted clause fixes
- Seat, and separately the venue if different
- Number of arbitrators, and how they are appointed. A sole arbitrator is cheaper and faster for most commercial disputes
- Whether it is institutional (administered by an institution under its rules) or ad hoc. Institutional arbitration costs more up front and avoids a great deal of procedural fighting later
- Governing law of the contract, and the language of the proceedings
Two things worth knowing
First, the arbitration clause is treated as separable from the main contract, so an allegation that the contract is void does not by itself destroy the clause. Second, a clause naming a person as arbitrator who is disqualified under the Seventh Schedule, such as an employee or officer of one party, will not hold; that ineligibility cannot be contracted around except by an express written waiver after the dispute arises.
Both of those propositions sit in the statute. Section 16 empowers the tribunal to rule on its own jurisdiction, including on the existence or validity of the agreement, and provides in terms that an arbitration clause forming part of a contract is treated as an agreement independent of the other terms, and that a decision that the contract is null and void does not by itself invalidate the clause. It also fixes the timing: a plea that the tribunal has no jurisdiction must be raised not later than the submission of the statement of defence, and a party is not prevented from raising it merely because it appointed, or took part in appointing, an arbitrator. An objection kept in reserve for the challenge stage is usually an objection lost.
Section 42 provides that where an application under Part I has been made in a court, that court alone has jurisdiction over the arbitral proceedings and over all subsequent applications arising out of that agreement. So the court in which an urgent interim application is filed is very likely the court that will hear the eventual challenge to the award. For a Bengaluru seated domestic arbitration that is ordinarily the City Civil Court at Bengaluru, or the Commercial Court where the dispute meets the specified value, while an application to appoint an arbitrator goes to the High Court of Karnataka. Decide where you want to be before you file anything.
Before you rely on the clause, check the subject matter
A valid clause is not enough if the dispute is one a private tribunal cannot decide. Criminal matters, matrimonial and guardianship disputes, insolvency, testamentary proceedings and matters a statute reserves to a special forum fall outside arbitration altogether, and an award on them is liable to be set aside. Our note on disputes that cannot be referred to arbitration in India sets out the categories and the test. Where a contract mixes arbitrable and non-arbitrable claims, that is a drafting problem to solve now.
Two drafting points repay the ten minutes. An agreement that a party is to bear the whole or part of the costs of the arbitration in any event is valid only if made after the dispute has arisen, so a costs clause buried in the original contract will not do the work you expect. And if it is later said that the underlying contract is insufficiently stamped, do not assume the clause is dead: that question has been litigated heavily and the position has shifted more than once, so take current advice rather than abandoning the arbitration.