I. Introduction
Arbitration today stands as a cornerstone of commercial dispute resolution in India. With the mounting caseloads in courts and the growing complexity of global commercial relationships, businesses and parties increasingly prefer arbitration to resolve disputes privately, expeditiously, and with flexibility. The Arbitration and Conciliation Act, 1996 (“the Act”), a legislative framework based on the UNCITRAL Model Law, provides the legal foundation for arbitration in India.
At the heart of any arbitration process lies the arbitration agreement, the document or set of communications that empowers the arbitral tribunal to decide the party's disputes. However, what constitutes a valid and enforceable arbitration agreement has been the subject of extensive judicial scrutiny. Section 7 of the Act defines the essentials of such an agreement, but practical questions often arise around its scope, form, and interpretation, particularly when disputes emerge in complex contractual relationships or in the absence of a formal arbitration clause.
This article examines the essential elements of a valid and enforceable arbitration agreement, explores whether party correspondences can substitute for a formal clause, and analyses key judicial precedents on when such agreements may be rendered non-enforceable due to uncertainty, lack of consent, statutory restrictions, or other defects.
II. Essentials of a valid arbitration agreement and grounds for unenforceability
Section 5 of the Act embodies the principle of minimal judicial intervention in arbitral matters, providing that “notwithstanding anything contained in any other law for the time being in force, in matters governed by this Part, no judicial authority shall intervene except where so provided in this Part.” This complements Section 7 of the Act by ensuring that once a valid arbitration agreement is established, whether through an express clause or through conduct meeting the requirements of Section 7, the role of courts is limited to facilitating the arbitral process, not obstructing it. Courts therefore exercise caution in scrutinising arbitration agreements, balancing the pro-arbitration mandate of Section 5 with the need to ensure that the agreement under Section 7 reflects a clear and binding intention to arbitrate.
While Section 7(1) of the Act expressly defines an “arbitration agreement” as an agreement by the parties to submit to arbitration all or certain disputes arising from a defined legal relationship, whether contractual or not, courts have repeatedly emphasized certain implied essentials that must be present to ensure the enforceability of such an agreement.
A valid arbitration agreement must reflect the parties firm intention to resolve disputes through arbitration. This is a cornerstone requirement because arbitration is based on the principle of party autonomy and consensual dispute resolution. The language of the agreement must therefore clearly manifest that the parties have agreed to refer disputes to arbitration and to abide by the arbitral process.
The Hon'ble Supreme Court in Jagdish Chander v. Ramesh Chander, (2007) 5 SCC 719, observed (para 8) that merely using the words “arbitration” or “arbitrator” in a clause does not automatically result in a binding arbitration agreement. The clause must exhibit a present and firm intention to arbitrate and must not leave the arbitration contingent upon further consent or negotiation. Clauses that indicate only a future possibility of arbitration are treated as unenforceable agreements to agree.
Further, the Court clarified that even if the words “arbitration” or “Arbitral Tribunal” are not used in a dispute resolution clause, the clause may still constitute an arbitration agreement if it contains the essential attributes of one. These attributes, as laid down in para 8, are:
- the agreement should be in writing;
- the parties should have agreed to refer any disputes (present or future) between them to the decision of a private tribunal;
- the private tribunal should be empowered to adjudicate upon the disputes in an impartial manner, giving due opportunity to the parties to put forth their case; and
- the parties should have agreed that the decision of the private tribunal in respect of the disputes will be binding upon them.
If these core elements are present, even an informal or broadly worded clause can amount to a valid arbitration agreement. Conversely, the absence of any of these elements may render the clause unenforceable as an arbitration agreement.
A further implied essential is that the agreement must impose an obligation on the parties to resolve disputes through arbitration, and the parties must unequivocally accept that the arbitral award will be final and binding. Ambiguous clauses that leave open the possibility of pursuing alternative dispute resolution mechanisms or court action may not satisfy this standard.
In BVEPL Bhartia (JV) v. State of West Bengal & Ors., AP-COM/991/2024, the Hon'ble Calcutta High Court (paras 37–38) examined a contract where the conciliation clause was mandatory, while the arbitration clause was phrased as optional. The Court held that such language, where arbitration is not an unequivocal requirement, does not amount to a binding arbitration agreement. Headings such as “Arbitration” in the contract are not determinative, the substance of the clause must reflect a binding commitment to arbitrate.
III. Dispute Must Arise from a Defined Legal Relationship
Section 7(1) of the Act requires that the disputes submitted to arbitration must arise out of a defined legal relationship. The legal relationship may be contractual or non-contractual but must be recognized by law. Consequently, matters based on moral, spiritual, or purely personal obligations, which do not give rise to legal rights and obligations, are not arbitrable.
This requirement ensures that the arbitration process remains within the boundaries of enforceable legal relationships, providing predictability and legitimacy to arbitral proceedings.
Section 7(3) of the Act mandates that an arbitration agreement must be in writing. The writing requirement promotes clarity, ensures that there is an objective record of the parties' consent, and protects the integrity of the arbitration process.
In Kerala State Electricity Board & Anr. v. Kurien Kalathil, (2018) 4 SCC 793 (paras 35-38), the Hon'ble Supreme Court held that an oral agreement to arbitrate, or oral statements made by counsel during hearings without written authority from the parties, cannot constitute a valid arbitration agreement under the Act.
IV. Modes Through Which a Written Arbitration Agreement May Be Established
Section 7(4) of the Act provides that an arbitration agreement is in writing if it is contained in:
- a document signed by the parties;
- an exchange of letters, telex, telegrams, or other means of telecommunication (including electronic communications) that record the agreement; or
- an exchange of statements of claim and defence in which one party alleges the existence of the arbitration agreement and the other does not deny it.
Judicial interpretation of this provision reflects a pragmatic approach. In Larsen & Toubro Ltd. v. M/s Texmo Pipes and Products Ltd., Arb. O.P.(Com. Div.) No.191 of 2024 (paras 15, 16, 20), the Hon'ble High Court of Madras enforced an arbitration clause despite the parties not having signed the final contract. The Court found that the parties' conduct, including acceptance of purchase orders and invoices, coupled with exchanges of emails, established mutual consent to arbitrate in accordance with Section 7(4)(b) of the Act.
V. Subject Matter of the Dispute Must Be Arbitrable
A fundamental requirement of a valid arbitration agreement is that the subject matter of the dispute must be arbitrable, that is, capable of being resolved through arbitration. Certain types of disputes are legally non-arbitrable either because they affect rights in rem, involve public policy considerations, or require adjudication by statutory bodies.
In Vidya Drolia v. Durga Trading Corporation, (2021) 2 SCC 1 (para 50-55 & 76), the Hon'ble Supreme Court articulated a fourfold test to assess arbitrability:
- Disputes involving actions in rem (as opposed to in personam) are non-arbitrable.
- Disputes affecting third-party rights or requiring centralized adjudication are non-arbitrable.
- Disputes relating to the sovereign functions of the State are non-arbitrable.
- Disputes that are expressly or impliedly made non-arbitrable by statute are non-arbitrable.
Thus, disputes involving insolvency, testamentary matters, matrimonial disputes, and certain regulatory matters remain beyond the scope of arbitration.
VI. Reliance on party correspondences to establish an arbitration agreement in the absence of a formal clause
The second issue arises in situations where an agreement does not contain an express arbitration clause, yet the parties' conduct, or correspondences suggest an intention to resolve disputes through arbitration. Indian courts have held that such correspondences may suffice to constitute a written arbitration agreement under Section 7(4)(b), provided the communications demonstrate mutual consent to arbitrate.
In Lords Inn Hotels and Resorts v. Pushpam Resorts LLP, Comm. Arbitration Petition No. 14 of 2025 (paras 37–49), the Hon'ble High Court of Bombay referred the dispute to arbitration despite the absence of a formal arbitration clause in the executed agreement. The Hon'ble Court noted that earlier drafts and email exchanges had expressly referenced arbitration, and the final agreement ambiguously referred to “Clause (Arbitration) below,” which was omitted. Applying Section 7(4)(b) of the Act and the business efficacy test, the Hon'ble Court held that the parties' conduct established a binding arbitration agreement.
The Hon'ble Court examined the parties' negotiations and email correspondences and applied the “business efficacy” test to determine whether the parties intended to arbitrate disputes. The Court identified the following fivefold test for implying terms:
- Whether the implied term is reasonable and equitable;
- Whether it is necessary to give business efficacy to the contract;
- Whether it goes without saying (officious bystander test);
- Whether it is capable of clear expression; and
- Whether it contradicts any express term of the contract.
The Hon'ble Court found that the email trail demonstrated a shared intention to resolve disputes through arbitration and that omission of the clause in the final agreement was inadvertent. Relying on Section 7(4)(b), the Court held that an arbitration agreement could be inferred from the exchange of communications.
This decision aligns with the modern judicial trend of upholding the parties' true commercial intent and avoiding undue technicality in construing arbitration agreements.
VII. Conclusion
The enforceability of an arbitration agreement under Section 7 of the Act hinges on the presence of both express and implied essentials. The parties must unequivocally demonstrate a binding intention to arbitrate, originate from a defined legal relationship that gives rise to arbitrable disputes, and ensure the agreement is in writing. Courts have consistently held that any ambiguity, lack of certainty, or absence of mandatory language undermines the enforceability of such agreements.
The decisions in Jagdish Chander, BVEPL Bhartia (supra), and Vidya Drolia (supra) offer vital guidance on these principles.
At the same time, courts have adopted a pragmatic approach toward party correspondences and conduct. The Lords Inn Hotels (supra) decision exemplifies how emails and draft negotiations, if they sufficiently reflect mutual intent, can give rise to an enforceable arbitration agreement under Section 7(4)(b), even where the final signed contract lacks an express clause. The application of the business efficacy test serves as a useful tool to uphold genuine commercial expectations in such cases.
Overall, Indian courts have struck a careful balance between respecting party autonomy and ensuring that only properly formed arbitration agreements are enforced. While the framework remains anchored in the statutory language of Section 7 of the Act, judicial interpretations have evolved to prevent technical lapses from frustrating bona fide agreements to arbitrate. Going forward, clarity and precision in drafting, coupled with a documented record of party consent, will remain critical in ensuring that arbitration agreements withstand judicial scrutiny.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
