Can an Arbitration Clause in an Incomplete MoU Be the Basic for Arbitration Proceedings

Introduction

In the context of business dealings, parties appear to depend on Memorandum of Understanding (MoUs) to capture initial intentions before moving ahead to the formal final agreement. The MoUs, although capturing intent, often have non-operative clauses, which include arbitration clauses. A legal problem arises when there is a dispute: is it possible to assert arbitration solely based on an unsigned or incomplete MoU and an arbitration clause within it? This is determined in the connection of the law of contract and law of arbitration in India, especially the Arbitration and Conciliation Act, 1996.

Understanding the Arbitration Clause

An arbitration clause is a provision in a contract or agreement wherein the parties agree to resolve disputes through arbitration instead of litigation. It reflects a consensual decision to waive the right to go to court and instead submit the matter to a neutral third party—the arbitrator.

For such a clause to be legally enforceable, it must meet the standards set under Section 7 of the Arbitration and Conciliation Act, 1996, which defines an arbitration agreement as follows:

“An arbitration agreement means an agreement by the parties to submit to arbitration all or certain disputes… in respect of a defined legal relationship, whether contractual or not.”

Sub-section (4) of Section 7 further clarifies that an arbitration agreement must be in writing, and can be:

• A document signed by the parties,
• An exchange of letters, emails, or other forms of communication,
• An exchange of statements of claim and defence where one party alleges the existence of an arbitration agreement and the other does not deny it.

Thus, consent and intention to be bound are key.

What is an Incomplete MoU?

A Memorandum of Understanding is typically a non-binding document expressing the willingness of parties to proceed with a future agreement. While it may contain detailed terms, it is not enforceable unless it demonstrates intent to create legal relations and has been executed with full consent by both sides.

An incomplete MoU may have:

• Blank spaces for critical information (such as names, consideration, jurisdiction, etc.),
• Absence of signatures,
• Language that suggests non-finalization or that the document is “subject to further agreement”,
• Ongoing negotiations on key terms, or
• Discrepancies in exchanged drafts.

When such an MoU contains an arbitration clause, can that clause stand on its own if the MoU is never completed or signed?

Legal Position: Arbitration Clause in an Incomplete or Non-Finalized Agreement

Indian courts have consistently held that for an arbitration clause to be enforceable, there must be:

• A valid and binding agreement that reflects mutual consent,
• A clear and concluded contract, and
• Certainty of terms, including the arbitration clause.

An arbitration clause cannot survive if the parent agreement—whether an MoU, contract, or understanding—is itself inchoate, uncertain, or never executed.

• The arbitration clause is ancillary to the contract. If the contract never comes into existence, then the clause has no legal bedrock.
• The parties must agree to the arbitration process as a means of dispute resolution. If the MoU wasn’t finalized or mutually accepted, no consent can be inferred.
• Arbitration is a matter of contractual autonomy; you cannot compel arbitration without proof of a valid arbitration agreement.

The Principle of Separability—Is It an Exception?

A common argument is that the doctrine of separability allows an arbitration clause to be treated as a separate agreement from the contract. While this is true in many contexts (e.g., if the main contract is voidable but not void), it does not apply when the main agreement never came into legal existence at all.

Courts distinguish between:

• A disputed contract (where the contract exists but is challenged on grounds like fraud, misrepresentation),
• And a non-existent or incomplete contract, where no agreement was ever concluded.
• In the latter case, separability cannot rescue the arbitration clause.

Emails and Exchanges: When Can They Help?

Section 7(4)(b) of the Arbitration Act permits email exchanges or other forms of communication to constitute an arbitration agreement if they clearly show mutual consent. However, a trail of emails that merely negotiates terms or shares drafts is insufficient.

To rely on such exchanges as proof of an arbitration agreement, they must:

• Explicitly confirm that both parties agree to arbitrate,
• Reflect acceptance of the terms without conditions, and
• Not be contingent on further documentation or approval.

Key Judicial Principles

While not citing specific cases here, Indian courts have developed the following guiding principles:

• Intent and consensus are the cornerstones of any arbitration agreement.
• Draft MoUs or contracts, which are not concluded, cannot form the basis of arbitration.
• Blank clauses, missing parties, or absence of consideration signal that the contract (and hence the arbitration clause) is still under negotiation.
• Silence or non-response to a shared draft does not amount to acceptance.

Practical Implications for Businesses and Lawyers

• Finalize Contracts: Do not rely on drafts. Ensure all material terms are filled, and the document is signed by all parties.
• Explicit Arbitration Clause: If arbitration is desired, include a standalone arbitration agreement or make sure the clause is part of a finalized contract.
• Document Consent Clearly: Use clear language in emails or letters to show both parties have agreed to arbitrate.
• Avoid Ambiguity in MoUs: If the MoU is intended to be binding, explicitly state so and ensure all blanks are filled before signing.

Conclusion

An arbitration clause cannot exist independently. It “lives” only when the agreement is structured, crystallized, and consented to by all parties. To attempt to trigger arbitration on the basis of a document which is not completed is akin to the impractical effort of trying to erect a building on an unconstructed foundation. For arbitration to be an effective alternative to court litigation, there needs to be an arrangement validated by a legal instrument that outlines consent. While useful for outlining business strategies, incomplete Memorandums of Understanding should never serve as instruments of dispute manipulation. Certainty, completeness, and clarity are mandatory legal formalities but also form the basis of arbitration which can be enforced.

King Stubb & Kasiva,
Advocates & Attorneys

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