Having an arbitration clause in a business contract means the parties to the contract agree to arbitrate any future disputes Explain

Arbitration clause: We enter into contracts day after day. Taking a seat in a bus amounts to entering into a contract. When we put a coin in the slot of a weighing machine, we entered into a contract. We go to restaurants and take snacks; we have entered into a contract. In such cases, we do not even realize that we are making a contract. In the case of people engaged in trade, commerce and industry, we carry on business by entering into contracts. From the legal point of view, the purpose of a contract is to establish the agreement that the parties have made and to fix their rights and duties in accordance with that agreement[1].

Now, having an “arbitration clause” in a business contract means, the parties to the contract agree to arbitrate any future disputes[2]. As with any clause, all parties must agree to its use in the contract before the contract is signed. However, the courts may not create a contract for the parties. When the parties have no express or implied agreement on the essential terms of a contract, there is no contract. Courts are only empowered to enforce contracts, not to write them, for the parties.[3] A contract, in order to be enforceable, must be a valid. The function of the court is to enforce agreements only if they exist and not to create them through the imposition of such terms as the court considers reasonable.

ESSENTIAL ELEMENTS OF A VALID CONTRACT:

 From the definition we know that there are two elements in a contract, which are: (1) an agreement; (2) legal obligation.[4] In many countries in order to provide and protect the legality of a contract, law or “Act” has been developed. And the core elements of those Acts are same and those elements are essential in order to constitute a valid contract. So a valid contract sounds as follows: “All agreements are contracts if they are made by free consent of parties, competent to contract, for a lawful consideration and with a lawful object and are not hereby expressly declared to be void.”[5] Thus, the essential elements of a valid contract can be summed up as follows:

1. Agreement.

2. Intention to create legal relationship.

3. Free and genuine consent.

4. Parties competent to contract.

5. Lawful consideration.

6. Lawful object.

7. Agreements not declared void or illegal.

8. Certainty of meaning.

9. Possibility of performance.

10. Necessary Legal Formalities.

 ARBITRATION AND ITS PROCEDURE:

Disputes in a contract create a new scenario between parties who are involved in it. Disputes can arise from violating agreement or legal formalities or missing of any other core parts a valid contract, thus to resolve these disputes parties go for either in court or resolving it from outside court system, that is arbitration.

From the basic definition of Arbitration, we know that it is an agreement between two or more parties who are trying to resolve their disputes outside the mainstream court system.[6] But for the settlement purpose, there is a need of third wheel, which in this case can be judge an arbitrator, will act as “King Solomon” to decide who wins and who loses. So basically, it is a settlement technique in which a third party reviews the case and imposes a decision that is legally binding for both sides.

There can be binding and non-binding arbitration. A “binding” arbitration generally means that the winning party can take an arbitration award to a court of law and enforce it if the losing party does not comply with the terms of the decision. Whereas,” non-binding” arbitration refers to a situation where the parties agree to use arbitration as a forum to try to resolve their differences, but neither party is bound to comply with any decision by the arbitrator.

International arbitral rules generally allow parties to an agreement containing an arbitration clause to choose the substantive law that will govern disputes.

Although the parties may choose the law of a particular jurisdiction, they often specify that “general principles of law” apply. Sometimes an inability to agree on any other law motivates the choice of general principles; sometimes the parties believe the choice will ensure neutral outcomes. In either case, however, the benefits of choosing a neutral forum are reduced because of substantial uncertainty about the content of these general principles.

• Before getting into the arbitration procedure there has to be recognition from the court that the agreement is arbitral, for that arbitration agreement should have written documents signed by the parties, exchange of letters, telex, telegrams, fax, e-mails or other means of telecommunication providing a record of the agreement or an exchange of statement of claim and defence in which existence of the agreement is alleged by one party and not denied by the other.[9]

 Nevertheless, the parties then have to go for the selection of arbitrators.

• There are no limits for the parties’ autonomy to select arbitrators. If the parties fail to select arbitrators, section 12 of the Arbitration Act, 2001 (Bangladesh Arbitration Act 2001)[10] sets out the default procedure for such selection and states that the District Judge in case of arbitration other than international commercial arbitration and Chief Justice or a Judge of the Supreme Court designated by the Chief Justice in case of international commercial arbitration would select arbitrators. In order to invoke section 12, either party may apply to the Court for appointment of an arbitrator.

• The Arbitral Tribunal will be authorised to decide the dispute on the written pleadings, documents and written submissions filed by the parties without any oral hearings.  

 

• The Arbitral Tribunal shall have power to call for any further information/clarification from the parties in addition to the pleading and documents filed by them.  

 

• An oral hearing may be held if both the parties make a joint Request or if the arbitration Tribunal considers an oral hearing necessary in any particular case. 

 

• If an oral hearing is held, the Arbitral Tribunal may dispense with any technical formalities and adopt such procedure as it deems appropriate and necessary for economic and expeditious disposal of the case.[11]  

 

PLACE OF ARBITRATION

 The place or venue of arbitration shall be Bangladesh. The Arbitration proceedings shall be held at such place or places in Bangladesh as the Council may determine having regard to the convenience of the Arbitrators and the parties. In a case in which one or both the parties are from overseas, the arbitration proceedings may also be held at any place outside Bangladesh at the discretion of the Council.[12]

• SUBMISSION OF DOCUMENTS  

The Claimant must file its statement of claim with the Request containing all relevant information supported by documents, including the names, addresses of the parties to the arbitration. On the other hand, the respondent may make a counterclaim against the Claimant provided the counterclaim arises under the same transaction as the original claim. He must submit the counterclaim with full details supported by the available documents.

After the commencement of the arbitration proceedings, no party shall make new claim or counterclaim which fall outside the limits of the respective claim, defence statement or counterclaim unless it has been authorised to do so by the Arbitral Tribunal.

• CONDUCT OF PROCEEDINGS

 The Arbitral Tribunal shall deal with any of the dispute submitted to it fairly and impartially and for this purpose each party shall be given reasonable opportunity to present its case orally, or in writing; or both, and each party shall be given reasonable opportunity to examine all the documents and other relevant materials file by other party or any other person concerned before the Tribunal

• HEARINGS 

 When a hearing is to be held, the Arbitral Tribunal, giving reasonable notice, fix the date, time and physical place of any meetings and hearings in the arbitration, and shall summon the parties to appear before it on the day and at the place fixed by it. If any of the parties, although duly summoned, fails to appear without valid excuse, the Arbitral Tribunal shall have the power to proceed with the hearing in his absence. The Arbitral Tribunal shall be in complete charge of the hearings, at which all the parties shall be entitled to be present.

• CLOSE OF PROCEEDINGS

 When it is satisfied that the parties have had a reasonable opportunity to present their cases, the Arbitral Tribunal shall declare the proceedings closed. Thereafter, no further submission or argument may be made, or evidence produced, unless requested or authorised by the Arbitral Tribunal.[13]  

Arbitration procedure ends here.

TERMINATION OF CONTRACT:

Termination occurs during the running of a contract and the contract just stops so that rights and liabilities in the future no longer apply. Accrued rights and liabilites (those that have already fallen due before the terminating event) are perfectly enforceable.

This is to be contrasted with rescission where the contract is treated as if it had never been.[14] It is a pre-requisite of rescission that it must be possible to go back to the situation before the contract was made. It is logically impossible to sue for breach of a contract that is successfully rescinded.

Remember, rescission is the remedy available when something has gone wrong during the negotiations for the contract, such as misrepresentation or misleading conduct, unconscionable dealing, undue influence, duress or mistake. Termination is the remedy available where either the contract has been frustrated or one party has committed a breach which is so serious that it justifies the other party putting an end to the contract by terminating it.

Having said all this, it must be pointed out that the usage of these two terms (termination and rescission) is often muddled. Judges quite frequently talk of rescission when they mean termination.

The doctrine of frustration – which is effectively a court order that the contract is no longer binding on either party (the contract just stops in its tracks) – is very rarely considered by the courts. The usual way in which the doctrine is raised is where some disaster has overtaken the contract and one party then fails to perform. The other party then complains that the first party is in breach. The answer to this may be that failure to perform is not a breach because the contract has been frustrated as a result of the disaster. In short, frustration, if successfully argued, is an excuse for failure to perform.

The doctrine, as I have said, is rarely argued successfully. This is because the courts have taken the view that one function of contract is to allocate risk and that, if something does go badly wrong, then this is just a risk which the contract ought to have contemplated.

See the passage on p 724 last para from the case of Paradine v Jane in 1647 which reflects the idea that contract promises should be kept, whatever the circumstances.

In other words, at the very moment that one party finds it very hard to perform, the other party wants an assurance of performance, or at least damages in lieu, because this is what contract is all about. People are paid to take the risk of difficult performance. The law nevertheless did allow some softening of this absolute principle and developed a doctrine of frustration.

This treatment of frustration will not be as detailed as most of the other areas of the law of contract which we have examined. This is partly because, as already noted, it is a rare in practice and also because we are limited in the time left to deal with the remaining topics in the course.[15]

BREACH OF CONTRACT AND REMEDIES:

Breach of contract is a legal cause of action in which a binding agreement or bargained-for exchange is not honored by one or more of the parties to the contract by non-performance or interference with the other party’s performance. If the party does not fulfill his contractual promise, or has given information to the other party that he will not perform his duty as mentioned in the contract or if by his action and conduct he seems to be unable to perform the contract, he is said to breach the contract.[16] Breach of contract is a type of civil wrong.[17]

There are three crucial remedies in American law. One is from the traditional law courts of England, and is seen in the form of a payment of money to the victim. This payment is commonly referred to as damages. Compensatory damages compensate an injured victim or plaintiff, and punitive damages punish someone who because of fraud or intentional conduct, is deemed to deserve punishment. Punitive damages serve the function in civil law that fines do in criminal law.

The second category of remedy comes from the Chancellor of England, commonly called the Chancery Court, or, more commonly, equity.

The injunction is a type of equitable remedy,[18] as is specific performance, in which someone who enters into a contract is forced to perform whatever promise has been reneged upon. Two additional equitable remedies are the equitable lien and the constructive trust.

The third broad group is declaratory remedies. Common examples are the declaratory judgment and the action to quiet title, and these remedies usually involve a court’s determination of how the law applies to particular facts without any command to the parties.[19] Courts give declaratory remedies about many different kinds of questions, including whether a person has a legal status, which the owner of a property is, whether a statute has a particular meaning, or what the rights are under a contract.

While those are the three basic categories of remedies in American law, there are also a handful of others (such as reformation and recession, both dealing with contracts whose terms need to be rewritten or undone).

 CONCLUSION:

Each year, many millions of business transactions take place. Occasionally, disagreements develop over these business transactions. Many of these disputes are resolved by arbitration, the voluntary submission of a dispute to an impartial person or persons for final and binding determination. Arbitration has proven to be an effective way to resolve these disputes privately, promptly, and economically.

Arbitration and chartering are both contracts, which must be negotiated, agreed upon and performed.[20] It is the thesis of this paper that all contracts, including arbitration and chartering, should be entered into and performed in good faith. Viable arbitration requires that each party be in good faith; otherwise multiple proceedings, the questioning of every point of law, unnecessary procedures and appeals, inordinate delays and the resulting high costs only result in failure to arrive at a just solution in a reasonable time.

Judges, on the other hand, as opposed to arbitrators, have more authority to deal with recalcitrant parties or their attorneys who may intentionally or unintentionally put a spoke in the wheel of expeditious and fair proceedings.

Similarly chartering, which has its roots in the common law, which latter has never had a general doctrine of good faith, nevertheless would be better off with good faith as a basic principle in its negotiation and performance? Otherwise uncertainty in the performance of the charter party is likely. And the present-day practice of solving chartering disputes principally by

Arbitration only exacerbates the problem exponentially.

REFERENCE:

1. Retrieved from: “Commercial law and Industrial law” by A. K. Sen & Jitendra Kumar, pg. 12-15
2. Retrieved from: http://en.wikipedia.org/wiki/Arbitration_clause [accessed at February 19, 2012]
3. Retrieved from: http://legal-dictionary.thefreedictionary.com/contracts [accessed at February 19, 2012]
4. Retrieved from:  Business Law “Commercial law and Industrial law” by A. K. Sen & Jitendra Kumar, pg. 12-15
5. Retrieved from: http://alternative-dispute-resolution.lawyers.com/arbitration [accessed at February 18,2012]
6. Retrieved from: http://en.wikipedia.org/wiki/Arbitration [accessed at February 18, 2012]
7. A. REDFERN & M. HUNTER, LAW AND PRACTICE OF INTERNATIONAL COMMERCIAL ARBITRATION 72-75 (1986).
8. See page: “Arbitration Procedure” http://www.arbitrators.cz/en/arbitration-procedure.html [ accessed at February 19, 2012]
9. See “The Arbitration Act 2001” Section 12, pg.6 : http://www.doulah.net/bdlaws [ accessed at February 19, 2010]
10.   Retrieved from: http://www.jurisint.org/doc/html [ accessed at February 19, 2012]
11.   See “ Arbitration Procedure” in the context of Bangladesh: http://www.jurisint.org/doc [ accessed at February 19, 2012]
12.   See Article “Termination of contract on the grounds of frustration “http://law.anu.edu.au/colin/lectures/frust.htm [ accessed at february 19, 2012]
13. Retrieved from: http://law.anu.edu.au/colin/lectures/frust.htm [ accessed at February 19, 2012]
14. Retrieved from: http://bizlawfirm.com/all-practice-areas/breach-of-contract/ [ accessed at February 19, 2012]
15. See book: Glanville Williams. Learning the Law. Eleventh Edition. Stevens. 1982. p. 9
16. Douglas Laycock, The Death of the Irreparable Injury Rule (Oxford Univ. Press 1991).
17. Bray, Samuel (2010). “Preventive Adjudication”. University of Chicago Law Review 77: 1275, 1281.
18. See : “Good Faith in Contract Particularly in the Contracts of Arbitration and Chartering” By: Prof. William Tetley, Q.C. McGill University, (published in (2004) 35 JMLC 561-616)
19. See book: “Law, Ethics and Communication” by S.S. Gulshan, G. K. Kapoor, Manisha Paliwal, pg. 5-6

20.  Retrieved from: Article “Arbitration Law in Bangladesh” http://www.vakilno1.com/saarclaw/bangladesh/

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