Substantive Validity v. Formal Validity in Arbitration

An arbitration proceeding ousters the national jurisdiction and therefore the validity of an agreement so powerful is to be dealt with carefully. Analysing the validity of an arbitration agreement is necessary to establish that the parties have consented to submit dispute to arbitration.

There are two types of validity of an arbitration agreement, Substantive Validity and Formal Validity.

Substantive Validity deals with the issue of consent and capacity which is noted down in Article V(1)(a) of the New York Convention, 1958. Consent means that whether the parties have consented to get their dispute adjudicated through Arbitration or not. Capacity means that the legal entity providing consent should have the capacity to provide the consent to get their dispute adjudicated through Arbitration.

Formal Validity deals with the issue of written exchange of consent between the parties which is noted down in Article II(2) of the New York Convention, 1958. The provision deals with two points. Firstly, the arbitration agreement should be in writing and secondly, the written arbitration agreement should be exchanged between the parties.

Having said this, it is important to note that the Substantive Validity of an Arbitration Agreement is primarily dealt with in light of the domestic laws whereas the Formal Validity derives its origin primarily from the foreign treaties like New York Convention, 1958 and UNCITRAL Model Law on International Commercial Arbitration. Provisions similar to the New York Convention articles are also found in Section 5(2) of the English Arbitration Act, 1996. The English Arbitration Act adds on the New York Convention on the point of “agreement in writing” to state that even if the agreement is evidenced in writing, then also, the arbitration agreement ticks the formal validity parameter that the agreement needs to be written. Section 5(4) of The English Arbitration Act further elaborates upon the “evidenced in writing” concept stated in Section 5(2)(c) stating that an agreement shall be evidenced in writing even if it is recorded by one of the parties or a third party.

Article 7 of the UNCITRAL Model Law on International Commercial Arbitration also deals with the concepts of formal validity and also acknowledges the electronic usage in today’s time to state that the written exchange of agreement can also take place through electronic communication means.

Article 178 of the Swiss Private International Law Act, 1987 follows the New York Convention principles and enumerates the principles of formal validity of an arbitration agreement.

Section 7 of the Indian Arbitration Act, 1996 also deals with the concept formal validity and follows the scheme of UNCITRAL Model Law.

The concepts of substantive validity are dealt with in Section 11, 13 and 14 of the Indian Contract Act. These provisions deal with a party’s capacity and consent to contract.

The courts have taken the view that the requirements of validity of an arbitration agreement are essential and canot be deviated from. The Italian Supreme Court, Corte di Cassazione in the case of Robobar (UK) v. Finncold SAS (Italy), 1993 held that the formal validity of an arbitral agreement cannot be derogated from. The Swiss Supreme Court in the case of Compagnie de Navigation et Transport SA v. Mediterranean Shipping, 1995 took a slightly different view wherein it held that “certain behaviour can replace compliance with a formal requirement” The case brought into play the concept of good faith to do away with the need of signature to express consent.

Although the concepts of validity of arbitration agreements are enumerated in detail, the Courts tend to take a pro arbitration approach. The English Courts in the case Paul Smith v. H&S International Holdings[1], have held doubtful and ambiguous clauses to be valid. A similar approach has been taken by the Swiss Federal Tribunal[2] wherein the Tribunal held that defective or pathological clauses in the arbitration do not necessarily make the arbitration agreement void, instead the fundamental will of the parties to submit to arbitral jurisdiction is to be considered.

[1] [1991] 2 Lloyd’s Rep 127(QBD)

[2] 4A_676/2014 (3 June 2015)