How to Write an Arbitration Clause in a Contract?

As per The Arbitration and Conciliation Act, 1996, Sec 7 (1), “Arbitration Agreement” means an agreement by the parties to submit to arbitration all or certain disputes which have arisen on which may arise between them in respect of a defined legal relationship, whether contractual or not.. Sub-section (2) of section 7 provides that an arbitration agreement may be in the form of an arbitration clause in a contract or in the form of separate agreement (Geo-Group Communication Inc. v. IOL Broadband Ltd. 2010(1)SCC 562:

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In practice, parties record their agreement to refer disputes that may arise, as an arbitration clause in the contract between them for supply of goods or services and not in a separate agreement to refer dispute to arbitration. This is for convenience. 

• The arbitration clause mainly deals with the following:-
• Number of arbitrator who will conduct the arbitration proceedings,
• The mode of appointment of arbitrator by each party, 
• The place where the arbitrator sit to conduct the arbitration proceedings, called ‘seat of the arbitration’, 
• The rule applicable to substance of dispute accordance with the substantive law for the time being in force in India, which is governed by Sec-28 of the Arbitration and Conciliation Act, 1996,
• The time within which the award is to be made,
• The cost to be borne by the parties on the expenses of arbitration and such matters.

It is recommended that, all terms used in the arbitration clause are important, as those terms are going to be interpreted by the arbitral tribunal. By interpreting arbitration clauses, arbitral tribunals will attach primordial importance to the text of the clause itself. They will look at what the parties actually agreed to, not at what they could have agreed to, but ultimately did not, agree. The best-drafted arbitration clauses are ones that are simple, precise and non-ambiguous. The ambit or scope of application, of the arbitration clause relates to issues and disputes that are covered by the clause and, thus, can be resolved via arbitration. Here again, the wording used in the arbitration clause is important. Although parties can agree to arbitrate specific contract claims only, they are also free to provide a deliberately broad scope of the arbitration agreement covering not only all disputes under a contract, but also disputes related to it, including, in some cases, non-contractual claims. In their arbitration clause, the parties are free to agree on the number of arbitrators that will sit on an arbitral tribunal; usually one or three members are specified. The number of arbitrators will have a direct impact on the overall costs that the parties will need to pay for the arbitrators’ fees. If a three-member tribunal is to be appointed in a case where only a small amount of damages or receivables are at stake, the costs relating to the arbitrators’ fees may be disproportionate given the amount in dispute. If the parties require arbitrators to possess any kind of specialized knowledge or special qualification, this should be explicitly specified. The Arbitration and Conciliation (Amendment) Ordinance, 2020 (Amendment 2020) provides that qualifications, experience, and norms for accreditation of arbitrators shall now be specified by regulations which are still to be issued by the Government. Hence it remains to be seen what criteria will be laid down. Even so, in the event of inconsistency, the qualifications specified by the parties in the agreement is normally adhered to by the courts and not departed from unless there are strong grounds for doing so (Iron and Steel Co. Ltd vs. M/S. Tiwari Road Lines, (2007) 5 SCC 703).