Unveiling Consent for Arbitration: Decoding the Exchange of Draft Agreements Between Parties

Step 1: Establishing Consent between Parties

The crucial step in establishing a valid and binding contract between parties is consent. What formulates consent? Is it only a document signed and stamped by the parties wishing to enter a commercial arrangement? Or can consent be established by actions of the parties over a period of time? Courts in India through various pronouncements by various High Courts and the Supreme Court of India have held that in this digital age affixing signatures to a document where the parties have finalised terms over emails or other communications is a mere formality[i].  The Apex Court has often held in the favour of effecting the contract than to invalidate it and being pedantic and legalistic in its approach[ii]. With the existence of the agreement confirmed, the focus shifts to discerning the parties’ intention to adopt arbitration as a method of dispute resolution. It is essential to establish the existence of said intention in order to conclude that parties were ad idem for adopting arbitration as a method of dispute resolution[iii]. This can be overtly expressed or implied through drafts exchanged between the parties. Implied confirmation may be inferred from the absence of modifications or absence of disputes regarding the arbitration clause during the exchange of drafts, even as negotiations transpire over other contractual terms[iv].

Step 2: Establishing Existence of the Arbitration Agreement

Section 7 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as “Act”) defines what is an Arbitration agreement and the same is extracted below:

“Section 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.”

It becomes crucial to observe that Section 7 of the Act does not prescribe a specific form for arbitration agreement and Section 7(2) explicitly states that arbitration agreement can be in a form of an arbitration clause within a contract, or it can be in the form of a separate agreement. Further, Section 7 (3) stipulates that the arbitration agreement must be in writing and Section 7 (4) (a) states that the arbitration agreement shall be in writing if it is a document signed by the parties but a further perusal of sub-clause (b) of section 7 (4) reveals that a written document which may not be signed by the parties even then it can be an arbitration agreement. Section 7(4)(b) provides that an arbitration agreement can be culled out from an exchange of letters, telex, telegrams or other means of telecommunication which provide a record of the arbitration agreement. Thus, an arbitration agreement even though in writing need not be signed by the parties if the record of arbitration agreement can be established[v].

To refer the dispute to the arbitration it must be established that an arbitration agreement exists between the parties. An arbitration agreement doesn’t necessarily need to be signed since the same can also be spelt out from the exchange of drafts between the parties through any of the above-mentioned means of communication. Once the contract is concluded, the mere fact that the parties have to prepare a formal contract and initial the same, does not affect the acceptance or implementation of the contract negotiated[vi]. However, if the parties do not consent entirely to the Arbitration clause during negotiations, the court may exercise its discretion to reject the existence of an arbitration agreement between the parties.

Step 3: Hence proved!

Successful navigation through the aforementioned steps serves as a robust defence against objections asserting commercial agreement was not signed by either party or that the draft commercial agreement isn’t binding due to disagreements on certain terms. Establishing an agreement to arbitration clause during the negotiation and finalization stages of the commercial agreement fortifies the existence of an arbitration agreement and establishing consent for the arbitration clause paves the way for a seamless resolution of disputes through arbitration.

In essence, this methodical approach acts as a legal safeguard, ensuring the enforceability of arbitration agreements within draft commercial agreement and fostering a framework for effective dispute resolution.

Nevertheless, a lingering question still persists: In the ongoing development of a commercial agreement, where amendments to specific terms were actively underway, and the court affirms the existence of a valid arbitration agreement and presence of consent between parties for referring the dispute to arbitration, what degree of efficacy do the clauses undergoing modification retain in the broader spectrum of dispute resolution?