Valid Arbitration Agreement – Pre-Requisites of

Para 22 of the judgment in P. Dasaratharama Reddy Complex v. State of Karnataka, (2014) 2 SCC 201 is important and sets out from K.K. Modi v. K.N. Modi, (1998) 3 SCC 573 as to what are the valid pre-requisites for a valid arbitration:

“One of the questions formulated by the Court was whether clause 9 of the memorandum of understanding constituted an arbitration agreement and whether the decision of the Chairman, IFCI constituted an award. It was held as under:

“(1) The arbitration agreement must contemplate that the decision of the tribunal will be binding on the parties to the agreement,

(2) That the jurisdiction of the tribunal to decide the rights of the 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 agreement 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.

The other factors which are relevant include, whether the agreement contemplates that the tribunal will receive evidence from both sides and hear their contentions or at least give the parties an opportunity to put them forward; whether the wording of the agreement is consistent or inconsistent with the view that the process was intended to be an arbitration, and whether the agreement requires the tribunal to decide the dispute according to law.

In Bihar State Mineral Development Corporation v. Encon Builders (India) (P) Ltd., (2003) 7 SCC 418, it was held that a clause which is inserted in an agreement for the prevention of a dispute, will not be an arbitration agreement. Shyam Sunder Agarwal v. P. Narotham Rao, (2018) 8 SCC 230.

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