The basic question in case of arbitration proceedings is whether the agreement in question can validly be called an arbitration agreement ? Despite being a valid agreement, it may or may not be an arbitration agreement.
For understanding this issue, Section-2(b) of the Arbitration & Conciliation Act,1996 may be referred which states that “arbitration agreement” means an agreement referred to in section 7. Section-7 of the Arbitration & Conciliation Act,1996 is reproduced below:
7. Arbitration agreement.—
(1) In this Part, “arbitration agreement” means an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not.
(2) An arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement.
(3) An arbitration agreement shall be in writing.
(4) An arbitration agreement is in writing if it is contained in—
(a) a document signed by the parties;
(b) an exchange of letters, telex, telegrams or other means of telecommunication [including communication through electronic means] which provide a record of the agreement; or
(c) an exchange of statements of claim and defence in which the existence of the agreement is alleged by one party and not denied by the other.
(5) The reference in a contract to a document containing an arbitration clause constitutes an arbitration agreement if the contract is in writing and the reference is such as to make that arbitration clause part of the contract.
In K. K. Modi v. K. N. Modi (1998) 3 SCC 573 , hon’ble Supreme Court laid down certain attributes which must be present for an agreement to be considered as an arbitration agreement. It was held as follows:
Among the attributes which must be present for an agreement to be considered as an arbitration agreement are :
(1) The arbitration agreement must contemplate that the decision of the tribunal will be binding on the parties to t he agreement, (2) That the jurisdiction of the tribunal to decide the rights of parties must derive either from the consent of the parties or from an order of the Court or from a statute, the terms of which make it clear that the process is to be an arbitration, (3) The agreement must contemplate that substantive rights of parties will be determined by the agreed tribunal, (4) That the tribunal will determine the rights of the parties in an impartial and judicial manner with the tribunal owing an equal obligation of fairness towards both sides, (5) That the judgment of the parties to refer their disputes to the decision of the tribunal must be intended to be enforceable in law and lastly, (6) The agreement must contemplate that the tribunal will make a decision upon a dispute which is already formulated at the time when a reference is made to the tribunal.
On the basis of the Section 2(b) and Section-7 of the Arbitration & Conciliation Act and the attributes laid down by the hon’ble Supreme Court in K. K. Modi v. K. N. Modi case, it transpires that the following essential ingredients must be present in an agreement to be classified as an arbitration agreement.