How to draft a notice to invoke arbitration under Section 21

Learn how to draft a Notice to invoke Arbitration under Section 21 of the Arbitration and Conciliation Act, 1996 and how to frame a reply to the same. If you are a legal professional, interested in entering into the field of arbitration, or already dealing with arbitral matters, then learning to draft an arbitration notice may come in handy for you!

Introduction

Everyone wants to make a career in arbitration and earn a ton of money, but the problem is what happens inside arbitral proceedings, nobody knows. If you are starting out as an independent counsel, you will have to slog for 2-3 years to witness an arbitration end to end, and that’s quite a long process.

So, I have decided to teach you a few crucial things to help you kickstart your journey. This article is one of many that are yet to come. In this one, I will teach you how to draft a notice to invoke arbitration, and also, what to do once you actually get such a notice.

It is how the arbitration process begins for all intents and purposes.

What do you think happens? Disputes arise, and automatically someone appears as an arbitrator? No. There are a few steps before and after. Let’s learn.

What are the stages of arbitration?

Stage 1: Existence of an arbitration clause

Arbitration is a creature of consensus. One party cannot force the other into arbitration or any form of alternative dispute resolution methods, to be fair.

So, one of the primary conditions under the Arbitration and Conciliation Act is that there has to be a written agreement where parties clearly and very unambiguously state their intent to go for arbitration.

It can be in the form of a separate agreement or a clause in any existing agreement. It should talk about:

Which disputes will be taken to arbitration (the scope)
The intent to arbitrate (the usage of the words “shall be referred to arbitration” suffice)
Number of arbitrators (should be an odd number)
Any qualifications of the arbitrator, if required
If the arbitration is going to be conducted by any arbitral institution or any institutional rules are to be followed even if the parties do not want involvement of an institution (yeah, that can also happen)
The seat of arbitration (it designates which courts will have jurisdiction)
The venue of arbitration (the actual place where the proceedings are conducted)
The language

Whatever else doesn’t land you in interpretation war, such as cost breakage, binding nature of the agreement etc. I will write a separate piece on this. You can read it later.

Now that you know about the arbitration clause, how will you invoke it?

By sending a Notice of Arbitration to the defaulting party.

Stage 2: Invoking the arbitration process by sending a Notice of Arbitration

When a dispute arises, either of the parties can send a notice to invoke arbitration. It has to be in writing, is sent under Section 21 of the Arbitration and Conciliation Act, and interestingly does not have a format.

So, we will learn in a bit what exactly is done here then.

Stage 3: Appointment of arbitrators

Once a notice is sent, the other party may agree and an arbitrator(s) may be appointed without any issue. Or the other party may not agree/not follow the rules of appointment. In such cases, a court has to be involved to appoint an arbitrator.

Sometimes, one of the parties may end up going to court even before a notice is sent, and in such a case, the other party may bring to the notice of the court that there is an arbitration agreement in place. The court then has to refer the matter to arbitration.

Don’t focus on this too much right now. It is for your information only.

Stage 4: Arbitral proceedings

Now that the arbitrators are appointed and the tribunal is formed, there will be a procedural hearing where timelines will be discussed for filing of documents, hearings etc.

In accordance with the timelines, all the pleadings are filed. The party who initiated the proceedings is called the Claimant and files the Statement of Claim, and the party defending is called the Respondent/Opposite Party/Defendant and files their Statement of Defense.

Stage 5: Hearing of parties

Of course, after the claim and defences are filed, the parties are given the opportunity to present their case. They can forego producing any oral evidence and fast-track the proceedings as per Section 29B of the Act, or a short tendering of evidence and cross-examination happens.

And, then the arbitral tribunal adjudicates the matter.

Stage 6: Arbitral award

After hearing the parties and evidence, the arbitral tribunal shall issue an arbitral award, which is binding on both parties. 90 days are there for the parties to challenge this award, according to Section 34 of the Act.

Now that you have an overview of the process, let us come back to our actual topic, which is the notice of arbitration.

Why is the Notice of Arbitration so important?

Can the party initiate the arbitral proceedings without sending a Notice of Arbitration?

Can a party be compelled to abide by the notice sent by an arbitrator appointed by the opposite party?

A simple answer is NO.

In several cases, the courts have highlighted the issue that such proceedings cannot be initiated without sending a Notice of Arbitration.

For example, Party ‘A’ unilaterally appointed an arbitrator, and when Party ‘B’ challenged such an appointment, Party ‘A’ approached the court to appoint an arbitrator. But do you know what? Party ‘A’ had not sent a Notice of Arbitration (Section 21) to Party ‘B’. On this ground, the court dismissed the application of Party ‘A’. These are the facts of West Bengal Power Development Corporation Limited v. Sical Mining Limited (2023 Calcutta High Court).

Let me exemplify the significance of notice of arbitration through the facts of Alupro Buildings System Pvt. Ltd. v. Ozone Overseas Pvt. Ltd. (2017 Delhi High Court). Party ‘A’ places an order for certain goods and makes the payment in full, but Party ‘B’ fails to deliver the complete material. So, Party ‘A’ appoints a sole arbitrator, who gives notice to Party ‘B’ to refund the amount for the undelivered material.

Do you know what happened? As the appointment of the arbitrator was done without sending the notice of arbitration, the proceedings could not be commenced. How can the proceedings commence, when the opposite party was not given the opportunity to accept the claims, deny the claims, or even KNOW the claim?

Key takeaway: A Notice of Arbitration provides the respondent an opportunity to acknowledge, contest, or even amicably resolve the dispute before proceeding further.

Particulars to be included in the Notice of Arbitration

As I have already told you, there is no format for the notice. But there are a few things that you need to mandatorily mention.

Details of the parties: Key information like name, address of the parties involved, and contact information for legal representatives, if applicable.
Arbitration agreement reference: The reference to the arbitration clause or agreement which provides the basis of arbitration.
Existence of dispute: A short summary of the facts leading to the dispute has to be mentioned.
Proposal for arbitrators: Suggest the name of the arbitrator(s) whom you want to appoint.
Time period to reply: Give 15-20 days to reply or the automatic 30 days period to reply kicks in as per the statute.

These details, as you will notice, are basically to give the other party an intimation that there is a dispute that has arisen, and hence the sender wants to invoke arbitration. Hence, the name of an arbitrator is proposed to which the other party can agree/disagree. We will learn what happens if they disagree in a while.

How to draft a Notice of Arbitration to invoke the arbitration proceedings

Let’s understand this through a scenario

Suppose, there is a company called Sunset Builders Pvt. Ltd. It entered into a real estate development agreement with the Urban Infrastructure Development Board on October 10, 2020, for a commercial project in Thane, Mumbai. The contract outlined a target completion date of October 10, 2022, and included certain specific conditions, such as the requirement to source materials solely from suppliers who have been approved by the Board and engage only designated engineers.

Sunset Ltd. abided by all the stipulated conditions throughout the project, maintained regular communications, and ensured that every contractual obligation was met.

But, because of delays in the delivery of materials from the Urban Board-approved suppliers, Sunset Ltd. had to face significant setbacks. Sunset Ltd. repeatedly notified and requested timely action from the Urban Board, but in vain, and that caused severe disruptions to the project timeline.

Due to these delays, Sunset Ltd. was able to complete the project by May 10, 2023 (a delay of 220 days).

Even though several attempts were made by Sunset Ltd. to mitigate the delay, and extensions were also requested, Urban Board still insisted on imposing liquidated damages amounting to Rs. 2,40,00,000/- for the delay.

In addition to the project delay, the delayed material supplies led to substantial price increases for raw materials, which amounted to Rs. 1,92,48,000/-. Sunset Ltd. attempted to claim these additional costs under the Price Escalation Clause in the contract, but Urban Board refused to reimburse these expenses, stating that the price escalations were not valid due to the failure to meet the contract’s timelines.

It was contested by Sunset Ltd. that the delays and price hikes were a direct result of Urban Board’s failure to ensure timely delivery from their approved suppliers, and that they should not be held liable for the liquidated damages. Furthermore, the Urban Board’s refusal to cover the increased costs represented a clear breach of the agreement.

In an effort to resolve these issues amicably, Sunset proposed negotiation as the primary method for resolving the dispute, as stipulated in the contract. The contract clearly outlined that negotiation was the preferred method of dispute resolution, and arbitration would only be pursued if negotiations failed. However, despite several rounds of negotiation, the parties were unable to come to a mutually agreeable solution. The arbitration clause read as under:

Any dispute arising out of or in connection with this Agreement shall be referred to a sole arbitrator to be appointed as per the Arbitration and Conciliation Act. The venue of the proceedings shall be Thane, and the seat of arbitration shall be Mumbai. The award passed by the arbitrator shall be final and binding on both the parties.

With no resolution in sight, Sunset proceeded to initiate arbitration proceedings in accordance with the contract’s arbitration clause.

We will represent Sunset Ltd. and draft the Notice.
The explanation part shall be in red.

[ON THE LETTERHEAD OF THE LAW FIRM]

BY REGISTERED POST A/D

To, Date: [Insert Date]
Urban Infrastructure Development Board
[Address]
[City, State, Pin Code]

Explanation – The subject line should clearly state that the notice is for the appointment of the Arbitrator

Subject: Notice for appointment of Arbitrator under Clause 22 of terms and conditions of the agreement dated 10th October 2020

Dear Sir/Madam,

Explanation – After your salutation, you will start by giving the name and address of your client on whose behalf you are addressing this notice.

We are concerned for Our client, Sunshine Builders Pvt. Ltd., having its registered office at [Address] (hereinafter referred to as “Our Client”) and we hereby address you as under:

Explanation – In your first paragraph you will give a brief introduction of the business of your client and also of the opposite party to whom you are addressing this notice.

That Our Client is engaged in the business of construction and infrastructure development and you are a statutory board that is responsible for facilitating urban infrastructure development.

Explanation – In the next paragraph, you will give a reference to the specific agreement that was entered into between your client and the opposite party by mentioning the date of the agreement and the purpose of the agreement.

That Our Client entered into an agreement with you on 10th October,2020 for the development of a commercial project.

Explanation – Now, in the next paragraph, you give reference to the relevant clause of the agreement that stipulates the obligation of the opposite party.

That as per clause 12 of the agreement, you were under an obligation to provide a list of approved suppliers for raw materials and to ensure the timely delivery of the materials to avoid the project from being delayed or affected in any manner.

Explanation – Next you will have to show that your client has fulfilled all the terms and conditions of the agreement, and it was the opposite party that caused the delay.

That despite Our Client complying with the terms and conditions of the agreement, you failed to fulfil your obligation to ensure timely delivery of materials from your approved suppliers, despite repeated follow-ups and reminders, as a result, there was a substantial delay of 220 days in the completion of the project.

Explanation – Here, you will show that the opposite party wrongfully imposed liquidated damages, which is in contravention of the terms of the agreement. You can also reproduce the relevant paragraph of the agreement for ready reference.

That, to the utter shock and dismay of Our Client, you wrongfully imposed liquidated damages amounting to Rs.2,40,00,000/- (Rupees Two Crore Forty Lakh Only) on Our Client in complete breach of clause 12 of the agreement, which explicitly exempts Our Client from any liability on account of any delay that is caused due to omissions or inaction on either your part or on the part of your approved suppliers. The relevant clause is reproduced hereinbelow:

Clause 12: Liquidated Damages
“In the event of delays attributable to the contractor, liquidated damages shall be imposed at the rate of 0.5% of the total contract value per week of delay, subject to a maximum of 10% of the contract value. However, delays directly caused by the acts or omissions of The Urban Infrastructure Development Board (UIDB), including delays in material procurement from approved suppliers, shall not attract liquidated damages, and the contractor shall be entitled to appropriate extensions of time.”

Explanation – Next, you will show the additional cost incurred by your client on account of the delay in procurement of the materials and also point out the relevant clause of the agreement showing that your client is entitled to reimbursement for such escalation. You can reproduce the relevant paragraph from the agreement for ready reference.

That Our Client incurred additional costs due to significant price escalations amounting to Rs.1,92,48,000/- (Rupees One Crore Ninety Two Lakh Forty Eight Thousand Only) on account of the delay in procuring materials from your approved suppliers. As per clause 14 of the agreement, Our Client was entitled to claim reimbursement for such cost escalations. However, you wrongfully rejected Our Client’s claim without any valid ground. The relevant clause is as follows:

Clause 14: Price Escalation Clause
“The contractor shall be reimbursed for any cost escalation of raw materials due to delays beyond their control. The reimbursement claim must be supported by evidence of price fluctuations and shall be payable within 60 days of submission, provided the delays are attributable to UIDB or its approved suppliers.”

Explanation – Your notice must state the attempts made by your client to put an end to the dispute amicably and also explicitly state that the notice is being issued in accordance with the arbitration clause contained in the agreement, invoking the arbitration clause. You can also reproduce the relevant paragraph from the agreement for ready reference.

That despite Our Client’s continuous efforts to resolve the dispute amicably, you have failed to compensate Our Client for the losses, nor have you addressed Our Client’s concerns, causing financial loss to Our Client on account of the breach of the agreement caused by your own default. Consequently, in terms of Clause 22 of the agreement, Our Client invokes the arbitration clause of the agreement to refer the dispute to be resolved through arbitration. The relevant clause has been quoted hereinbelow:

“Any dispute arising out of or in connection with this Agreement shall be referred to a sole arbitrator to be appointed as per the Arbitration and Conciliation Act. The venue of the proceedings shall be Thane, and the seat of arbitration shall be Mumbai. The award passed by the arbitrator shall be final and binding on both the parties.”

Explanation – Your notice shall also specify the name of the Arbitrator suggested by your client and ask the opposite party to confirm the appointment of the same within a prescribed time period.

Accordingly, Our Client hereby nominates Mr. ________________, as the sole Arbitrator in the said matter, and we request you to kindly confirm and acknowledge the appointment of Mr. _______________ as the sole arbitrator within 15 (fifteen) days from the date of receipt of this notice.

Explanation – Your next paragraph has to state that this notice is not a waiver of any rights, remedies or claims, legal or equitable. This will help your client during the arbitration proceedings for further claims. This notice is a formal notice addressed under Section 21 of the act and it does not go into the merits of the case.

Kindly take notice that the foregoing is not intended nor shall it be construed as a complete recitation of facts and events concerning the aforementioned matter, nor shall it be construed as a waiver of any rights, remedies, or claims, legal or equitable, Our Client may have. Further, please bear in mind that this notice is being issued strictly under Section 21 of the Arbitration and Conciliation Act, 1996, thereby formally invoking the arbitration mechanism.

Explanation – Lastly, your notice shall mention that in the event of failure to respond to the notice within the stipulated period, your client shall adopt legal proceedings.

In the event of your failure to respond within fifteen (15) days, Our Client shall be constrained to initiate appropriate legal action as per the Arbitration and Conciliation Act, 1996, entirely at your risk, costs, and consequences, which you may please note.

Through
[Advocate Name]
Advocate for Sunset Builders Pvt. Ltd.

Date: [●]
Place: [New Delhi]

Now you have learnt how to draft a notice to invoke arbitration. But what to do when you receive such a notice? Let me teach you how to draft a reply.

But before that, let’s learn a few things about replying to the notice.

Tips on how to respond to the legal notice

Sometimes you don’t need to respond. If your client thinks there is no valid arbitration clause, for example, you can let the other party to take it to court to get an arbitrator appointed and challenge the validity of the clause in those proceedings.
If you wish to mediate or go through some other channel pre arbitration, it is better to set up a meeting and get the deed done.
If you wish to agree to the suggested arbitrator, you can send a reply with confirmation. Do your due diligence about the arbitrator before agreeing.
If you wish to suggest a different name, again, send a reply. In this case and the one before this, do not forget to state your side of the facts and reserve your right to bring details at a later point.

So, without wasting any time, let’s start with drafting the Reply.

Learn to draft a Reply to the Notice of Arbitration

[ON THE LETTERHEAD OF THE ADVOCATE]

RPAD/EMAIL/SPEED POST/COURIER

To, Date: [Insert Date]
[Name of Advocate]

[Office Address]
[City, State, PIN]

Explanation – The subject line should clearly state that this is in reply to the arbitration notice.

Subject: Reply to your Notice invoking arbitration dated [_____]

Explanation – Here, you can give a reference to the letters exchanged between the parties relating to the dispute, if there are any.

Ref: [Mention letters exchanged between the parties, if any]

Dear Sir/Madam,

That the present reply is being sent for and under the instructions of my client [insert name] [registered address] to the notice dated [insert date] sent by your client [insert name] for invocation of arbitration.

Explanation – You can put up a standard legal denial wherein you can refute all the contentions and allegations, and you are not admitting the claims for not responding to any part of the notice. Also, you can highlight that the claim of Sunshine Builders is baseless.

At the outset, we deny all the allegations or statements made in the arbitration notice and nothing contained in the arbitration notice shall be deemed to be admitted by us merely for reasons of non-traverse. The purported claims raised by you in the arbitration notice are baseless, misconceived, and untenable under law and/or the agreement dated 10th October,2020 executed between us.

Explanation – It is better to not address the claims directly as it gives away your strategy, so you can go for vague denials/allegations.

That with respect to the dispute that has been raised in relation to the imposition of liquidated damages, it is stated that the same has been done in furtherance of the agreement between the parties. My client reserves the right to bring forth complete legal arguments during the course of arbitration. However, all claims in relation to losses are denied in toto.

Explanation – You can accept or deny the proposed arbitrator. Here I am going with a denial for lack of neutrality.

With respect to your nomination of Mr. [Insert Name] as the Sole Arbitrator, we hereby expressly reject their appointment, and hereby propose the following names for the appointment of a neutral Arbitrator—Hon’ble Justice [Name] (Retd. Chief Justice, [High Court]).

Explanation – This paragraph acts as a formal demand calling upon the other party to confirm the appointment of the sole arbitrator within a stipulated time.

We hereby call upon you to give your confirmation to the name proposed above within fifteen (15) days from the date of receipt of this letter.

Explanation – This paragraph acts as a legal safeguard by stating that the response does not amount to any acceptance or admission of liability. It preserves all legal rights, defenses, and remedies available to your client under the agreement and the applicable law.

Please note that this response is without prejudice to our rights, remedies, and defenses available under the agreement and applicable law. Nothing contained in this letter shall be construed as an admission of liability or acceptance of any claim raised by you.

Explanation – The next sentence simply confirms that your client has maintained an official record of this response for future reference. This is essential in arbitration and legal proceedings to establish a trail of communication.

A COPY OF THIS LETTER HAS BEEN KEPT AT OUR OFFICE FOR FUTURE REFERENCE.

[Name & Signature of Advocate]

[Place & Date]

Whoa, you have learnt another skill in under 10 minutes! You can change this notice as per your client’s instructions.

Are you ready to draft one of your own now?

FAQs

Q.1. Can the courts loosen the grip on strict compliance with Section 21?

Yes. And, this has been stipulated through various judgments. The thing is that the ultimate intention of the Arbitration Act is to reduce the burden of courts and make the parties opt for the arbitration process even more. But, the judicial opinions are conflicting on this issue.

As we have discussed in the article, above, in Alpuro Buildings v. Ozone (2017), the Delhi High Court held that the notice formed an essential primary step in commencing the arbitration process between the parties.

However, in De Lagen v. Parhit, (2021 Delhi High Court), the court reasoned that if the defendant is already aware of the arbitration proceedings either by notice or other routes, then Section 21 takes the nature of a mere formality. Once the notice achieves its intended purpose, fulfilling its compliance becomes optional.

So, the mandatory nature of providing notice for invoking the process of arbitration may also depend on the circumstances of the case, but on the safe side, better to provide one. You would also want to note that to initiate a petition under Section 11, you will need to send a formal notice. Or the absence of consensus on arbitrator or non-following of procedure to appoint one will not kick in, as is a mandate under Section 11.

Q.2. Whether a fresh notice is needed for re-commencing arbitration after the first award is set aside?

Certain events under the arbitration are considered to be critical, so much so that they are considered equivalent to the re-commencement of proceedings, like, upon the death of the arbitrator or the termination of their mandate, the proceedings can resume only after the appointment of a substitute arbitrator.

Will a fresh notice be required upon the re-commencement of proceedings? In Central Coalfields v. Powertech, (2022 Jharkhand High Court), it was opined that if and when a substitute arbitrator is to be appointed during the proceedings, there is no requirement incumbent upon the parties to issue a fresh notice.

However, Section 21 is silent on the issue of re-commencement.

In Kirloskar Pneumatic Company v. Kataria Sales Corporation, (2024 Bombay High Court), it was ruled that even if a new arbitrator was appointed, and thus, the earlier arbitral award was set aside under Section 34 of the Act, still, the dispute remained the same, and hence there a fresh invocation of Section 21 was not required as the opposite party would already be aware of the existence of the dispute.

Q.3. Whether service of notice of arbitration on WhatsApp number and email address constitute a valid delivery?

This question was dealt with by the Delhi High Court in Lease Plan India Pvt Ltd v. Rudraksh Pharma Distributor (2024). The Court held that service of notice by virtual mode (via WhatsApp number and email address) specified in the agreement would constitute a valid service of notice.

Q. 4. Can an application made under Section 8 be construed as notice for the purpose of Section 21?

The issue was dealt with by the Delhi High Court in Web Overseas Limited v. Universal Industrial Plants Manufacturing Companies Private Limited, 2022.

An application under Section 8 of the Arbitration Act is presented before the court to refer the parties to arbitration. If there is a valid arbitration agreement in their contract, the court may refer the parties to arbitration, still, it is up to the parties to resolve the dispute through arbitration. They may choose not to, and opt for a different mechanism to settle the dispute outside court.

Hence, notice under Section 8 cannot be construed to have the same effect as Section 21— a notice of invoking arbitration. The implication of Section 21 notice is that the arbitral proceedings are initiated upon the receipt of such notice, which means, the limitation period also starts from the date. So, Section 8 cannot be a substitute for Section 21.