Arbitration Clause in Contract: Is It an Exception to Section 28?

INTRODUCTION

Section 28 of the Indian Contract Act, 1872 talks about the agreements in restraint of legal proceedings. This section holds an important role in the formation of contracts as this provide powers for the parties to enforce their rights while performing and executing the contract. This paper has specially on Exception 1 of this section which talks about contracts which possess an arbitration clause in order to deal with any disputes in the contract. This exception holds a huge amount of relevance in this period as most of the commercial contracts hold an arbitration clause in its contract. Hence, this paper would look to find answers on whether the Arbitration clause in the contracts is an exception to Section 28.

This paper looks to answer three important questions which help to clear clouds with regards to this topic:

  1. What is the aim of Section 28 and which kinds of contracts does not Section 28 of the Act protect?
  2. Whether the arbitration clause is an exception to Section 28?
  3. What are the rules and regulations for the incorporation of an arbitration clause?

AIMS AND TYPES OF CONTRACTS DOES SECTION 28 NOT PROTECT

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Section 28 of the Indian Contract Act, 1872 talks about the agreements in restraint of legal proceedings. An agreement is considered to be void if it tries to completely restrict a party from enforcing his rights present in a contract by means of the usual court proceedings. Pollock and Mulla state that the agreement is considered to be void if it limits the time of party which might have allowed him to enforce his right.

Though this is considered to be an important right for the parties, this is not considered to be absolute in nature. This causes the section to have exceptions. The section does look into every other contract except a contract which has an arbitration clause for proceeding a cause of action, a contract which refers to existing disputes of the contract by means of arbitration and a contract by a banking or financial institution stipulating a term of guarantee.

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This section has some objectives in its formation. This section wants to ensure that no person must not be in a position to exclude himself from the protection of courts by contracts. There are a lot of contracts taking place around us. In these cases, there are situations where parties do not have an equal footing with the other parties. These kind of laws help them to access the courts for enforcing the rights of the contractual parties.

ARBITRATION CLAUSE IN CONTRACT: EXCEPTION TO SECTION 28

Exception 1 of Section 28 state that this act would not be applicable to contracts which holds an arbitration clause within it for resolving any kind of dispute in the contract and is consented by both the parties. Over the years, various judicial pronouncements were made with regards to this exception and these judgments are greatly helpful in elaborating the application of this exception in Section 28.

In Société De Traction et D v. Kamani Engineering Co. Ltd., the Supreme Court held that the rule which states that any dispute which has arisen (or) may arise due to a subject or a class of subjects can be resolved by arbitration, is not illegal. The reason stated by the Court for the same was that the given exception does not try to deviate the objective of the Act as arbitration in no form is inequivalent to the justice rendered by the court as the arbitral awards delivered via arbitration are protected by the Arbitration Act, 1940

In World Sport Group (Mauritius) v. MSM Satellite Ltd., the Supreme Court provided the objective of this exception. The court said that this exception is meant to save contracts where the right to move to the court for appropriate rights is restricted but the parties were allowed to resolve their dispute via arbitration.

In New Zealand Insurance v. Nagpal Hosiery Factory, the Punjab High Court cleared clouds with regards to the legitimacy of the practice of arbitration. The court held that the clause that no action will be brought into effect until the arbitrators pass anything regarding the payment of the arbitral award has to be given effect to. This helps to understand that the process of arbitration is as legitimate as the court proceedings because of the fact that no form of enjoyment of the contract is allowed until the pronouncement of the arbitral award.

RULES AND REGULATIONS FOR THE INCORPORATION OF AN ARBITRATION CLAUSE IN A CONTRACT

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The Arbitration and Conciliation Act, 1996 is considered to be the most important source for the formation and the application of the arbitration clause in contracts made in India. In the case of M/s Elite Engineering and Construction (HYD.) Private Ltd. v. M/s Techtrans Construction India Private Ltd., the court framed certain rules and regulations for the incorporation of the arbitration clause.

Firstly, clear reference of the document containing arbitration clause is expected. Secondly, referencing of the arbitration clause must indicate the intention to incorporate the arbitration clause. Thirdly, the arbitration clause of the contract must be applicable to all forms of disputes in a contract. Fourthly, the contract while referring to another contract having the arbitration clause will not be acceptable. Only specific referring to the arbitration clause is acceptable. Fifthly, if the contract refers to the standard terms and conditions of an institution which is valid and binding, the arbitration clause in the terms and conditions must be specifically referred in the contract. Sixthly, if the contract refers to another contract which has the necessary terms and conditions, the contract will not be accepted until the arbitration clause of the other contract is specifically referred in this contract. Lastly, during a government contract, the terms and conditions of a contract where a government is a party will automatically be forming a part of the actual contract.

CONCLUSION

The arbitration clause of a contract acts as a means of providing an alternate and speedy form of justice when compared to the court proceedings. But, it must ensure that there is equal footing for both the parties and the rights of the parties are easily enforceable. Therefore, this paper is concluded stating that the arbitration clause in a contract can be an exception to Section 28.


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