The Arbitration Agreement: What Makes One, and What Breaks One

Three points that carry marks.

Signature is required only in clause (a). Under clause (b) there is no signature at all; what is needed is a record of the agreement in an exchange.

"Including communication through electronic means" was inserted by the 2015 amendment. Before it, an arbitration agreement concluded by an exchange of emails rested on reading "other means of telecommunication" widely. Now it is in the section.

Clause (c) is a striking provision, and students often misread it. If one party pleads in its statement of claim that there is an arbitration agreement and the other does not deny it in the statement of defence, the pleadings themselves constitute the written agreement. Silence in a pleading creates the agreement.

Section 7(5): incorporation by reference

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.

This is how a short purchase order picks up a long set of standard terms. Two conditions:

• the contract must be in writing; and
• the reference must be such as to make that arbitration clause part of the contract.

The second condition is the whole of the litigation on this sub-section. A general reference to another document is usually not enough by itself to import an arbitration clause; the reference must show that the clause was intended to become part of this contract. A specific reference to the arbitration clause, or a reference to the whole of a standard form on which the parties habitually deal, is a different matter.

The stamping question, and the seven-judge answer

This is the part of section 7 that changed most recently, and a student writing from a 2022 set of notes will state the law as it no longer is.

The problem. Under the Indian Stamp Act 1899 an instrument that is unstamped or insufficiently stamped is inadmissible in evidence under section 35 of that Act. Contracts containing arbitration clauses are often unstamped. So the question arose: if the contract cannot be looked at, can the arbitration clause inside it be acted on, and who decides, the court at the section 8 or section 11 stage, or the tribunal?

The answer, and it took three attempts. The Supreme Court held one way in SMS Tea Estates, another in Garware Wall Ropes, and a five-judge bench held in N.N. Global (the second decision of that name) that an unstamped agreement could not be acted upon. That produced a reference to a larger bench.

In Re: Interplay Between Arbitration Agreements under the Arbitration and Conciliation Act 1996 and the Indian Stamp Act 1899, decided 13 December 2023 by a bench of seven judges (Chandrachud CJI, Kaul, Gavai, Surya Kant, Pardiwala and Misra JJ among them), settled it. The Court's own summary of its conclusions is worth learning in its own words:

• Agreements which are not stamped or are inadequately stamped are inadmissible in evidence under section 35 of the Stamp Act. Such agreements are not rendered void or void ab initio or unenforceable.
• Non-stamping or inadequate stamping is a curable defect.
• An objection as to stamping does not fall for determination under sections 8 or 11 of the Arbitration Act. The concerned court must examine whether the arbitration agreement prima facie exists.
• Any objections in relation to the stamping of the agreement fall within the ambit of the arbitral tribunal.
• N.N. Global (2) and SMS Tea Estates are overruled; paragraphs 22 and 29 of Garware Wall Ropes are overruled to that extent.

The distinction to carry away is between inadmissible and void. An unstamped agreement is not a nullity. It cannot be received in evidence until the stamp duty and penalty are paid, and that can be cured. So the arbitration goes ahead and the tribunal deals with the stamping.

Who can be bound: parties, and non-signatories

Section 2(1)(h) defines a party as a party to an arbitration agreement, which suggests only signatories are bound. Commercial reality is less tidy: a group of companies may perform one transaction through several entities, only one of which signed.

The Supreme Court considered this in Cox and Kings Ltd v. SAP India Pvt Ltd, where a Constitution Bench delivered judgment on 6 December 2023 on the so-called group of companies doctrine and the position of non-signatories under the Act.

That judgment is in the queue in authorities/cases.json and has not been read for facts and holding, so this book does not state what it decided. Know that the question exists, know where it was decided, and read the judgment before asserting its ratio.

A worked example

Kavita's firm sends a purchase order to a supplier. The order is a one page document signed by both. It says "subject to our standard terms of supply, clause 14 of which governs disputes". Clause 14 of those standard terms is an arbitration clause. The standard terms are not attached and nobody stamped anything.

Is there an arbitration agreement? Work through section 7.

Sub-section (3) and (4)(a): the purchase order is a document signed by the parties, so the writing requirement is satisfied.

Sub-section (5): the arbitration clause is not in the signed document but in another document referred to. The contract is in writing, and the reference is not a vague one: it names clause 14 as the clause that governs disputes. That is a reference such as to make the arbitration clause part of the contract.

Sub-section (1): is there a defined legal relationship? Yes, the supply contract. Do the disputes fall inside the clause? That depends on its words.

And the stamping? On Interplay, an unstamped instrument is inadmissible in evidence but not void, the defect is curable, the objection does not fall for determination at the section 8 or 11 stage, and it is for the arbitral tribunal to deal with. The court at the reference stage asks only whether an arbitration agreement prima facie exists.

Now change the facts. Suppose there was no purchase order at all, only a series of emails in which Kavita wrote "as usual, disputes to arbitration in Mumbai" and the supplier replied "agreed, please ship". Section 7(4)(b) covers it: an exchange of communications through electronic means providing a record of the agreement. No signature is needed.

And if there were nothing in writing at all, only a conversation? Then there is no arbitration agreement. Section 7(3) is mandatory.

What beginners get wrong

An arbitration agreement need not be signed. Only clause (a) of section 7(4) requires signature; clauses (b) and (c) do not.

It need not be contained in a contract. Section 7(1) says the defined legal relationship may be contractual "or not", and section 7(2) allows a separate agreement.

An unstamped agreement is not void. After Interplay it is inadmissible until cured, the tribunal deals with the objection, and the court at the reference stage looks only for prima facie existence.

A general reference to another document does not automatically import its arbitration clause. Section 7(5) requires a reference such as to make that clause part of the contract.

Not denying an alleged arbitration agreement in a statement of defence can create one, under section 7(4)(c).

Quick revision

• 7(1): an agreement to submit all or certain disputes, arisen or which may arise, in respect of a defined legal relationship, whether contractual or not.
• 7(2): may be an arbitration clause in a contract or a separate agreement.
• 7(3): must be in writing.
• 7(4): writing means (a) a document signed by the parties; (b) an exchange of letters, telex, telegrams or other telecommunication including electronic means providing a record; (c) an exchange of statements of claim and defence where existence is alleged and not denied.
• 7(5): incorporation by reference works if the contract is in writing and the reference is such as to make the arbitration clause part of the contract.
• Interplay (13 December 2023, seven judges): unstamped agreements are inadmissible, not void; the defect is curable; stamping is not for determination under sections 8 or 11, where the court looks for prima facie existence; stamping is for the tribunal; N.N. Global (2) and SMS Tea Estates overruled.
• Cox and Kings (6 December 2023, Constitution Bench) considered non-signatories and the group of companies doctrine. Read it before stating its ratio.

Test yourself

1. Must an arbitration agreement be signed? No. Section 7(3) requires writing, and section 7(4) offers three ways of satisfying it. Only clause (a) speaks of a signed document. An exchange of communications providing a record under clause (b), or an allegation not denied in pleadings under clause (c), also suffices.

2. A one page order refers generally to "our standard terms". Those terms contain an arbitration clause. Is there an arbitration agreement? Section 7(5) requires the contract to be in writing and the reference to be such as to make that arbitration clause part of the contract. A bare general reference will often not satisfy the second condition; a reference identifying the arbitration clause, or to a standard form the parties habitually use, is far stronger.

3. What is the position of an unstamped contract containing an arbitration clause? On In Re: Interplay, it is inadmissible in evidence under section 35 of the Stamp Act but not void, void ab initio or unenforceable; non-stamping is a curable defect; the objection does not fall for determination under section 8 or 11, where the court examines only whether an arbitration agreement prima facie exists; and the objection is for the arbitral tribunal.

4. Can there be an arbitration agreement about a relationship that is not a contract? Yes. Section 7(1) requires a defined legal relationship "whether contractual or not".

5. A claimant pleads an arbitration agreement in its statement of claim and the respondent's defence says nothing about it. What follows? Under section 7(4)(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 is itself an arbitration agreement in writing.