Drafting an Arbitration Clause That Works

What makes an arbitration clause work?

A clause works if, on the day a dispute arises, either party can start the arbitration and get a tribunal in place without first fighting over what the clause means. That sounds simple, but the clause is usually written at the happy stage of a deal, often copied from an old contract, and read closely only when relations have broken down. At that point every ambiguity becomes an argument, and every argument goes to court.

In practice, the clauses that cause the most litigation are of three kinds: those that leave doubt about whether the parties agreed to arbitrate at all, those that name two different places or confuse venue with seat, and those that let one party control the appointment of the tribunal. Each is easy to avoid at the drafting stage and expensive to cure later.

Is 'may be referred to arbitration' enough?

Often it is not. The Supreme Court in Jagdish Chander v Ramesh Chander (2007) held that a clause which only contemplates the possibility of a future agreement to arbitrate, for example 'the parties may, if they so desire, refer their disputes to arbitration', is not an arbitration agreement. The words must show a present, binding intention that disputes will be decided by arbitration. Use 'shall be referred to and finally resolved by arbitration', not 'may be referred' or 'can be settled'.

Section 7 requires the agreement to be in writing. It can be a clause in the contract, a separate agreement, an exchange of letters or emails that records the agreement, or an exchange of statements of claim and defence in which one side alleges an arbitration agreement and the other does not deny it. A signed contract is the cleanest proof. Where the deal is done over email or through a purchase order system, make sure the arbitration terms are actually accepted in writing by both sides, not just printed on the back of one side's invoice.

Section 7(5) allows a contract to incorporate an arbitration clause from another document by reference, but only if the contract is in writing and the reference makes that clause part of the contract. A general line such as 'all terms of the tender apply' may not be enough to import a dispute clause from a different contract. If you want a clause from a master agreement or standard terms to govern purchase orders, say so expressly in each order.

The parts of an arbitration clause and what goes wrong with each

This table lists the elements a clause should cover, what to write, and the problems we most often see when contracts reach us after a dispute has begun.

Seat or venue: which one decides the court?

The seat is the legal home of the arbitration. It decides which court has supervisory jurisdiction: which court hears applications for interim relief once the arbitration has begun, appointments, and the challenge to the award under section 34. In BGS SGS Soma JV v NHPC Ltd (2019), the Supreme Court held that where a clause names a place as the 'venue' and there is no other contrary indication, that place is usually treated as the seat, and the courts at the seat have exclusive jurisdiction. That rule helps, but it does not save a clause that names a venue in one city and gives exclusive jurisdiction to courts in another.

Write it plainly: 'The seat of arbitration shall be New Delhi.' If you want hearings to happen elsewhere for convenience, add 'Hearings may be held at any other place the tribunal considers appropriate', which keeps the seat fixed. Then check the jurisdiction clause in the same contract. A common error is a line at the end saying 'courts at Mumbai shall have exclusive jurisdiction' in a contract whose arbitration clause names Delhi. The courts usually resolve this in favour of the seat, but the resolution costs a hearing or several.

For parties in Delhi NCR, the choice between New Delhi, Noida and Ghaziabad matters more than people expect. A Delhi seat puts the supervisory jurisdiction with the Delhi High Court for claims above its pecuniary limit, and with the commercial courts in the Delhi district complexes below it. A Noida or Ghaziabad seat sends matters to the courts in Uttar Pradesh. Choose the court you would want to appear before, not just the city where the contract happened to be signed.

Can one party appoint the sole arbitrator?

No, not in the way many older contracts still provide. Section 12(5), added in 2015, makes any person whose relationship with the parties, counsel or the subject matter falls under the Seventh Schedule ineligible to be appointed, whatever the contract says. Employees, consultants, directors and others closely connected with a party are covered. In TRF Ltd v Energo Engineering Projects Ltd (2017), the Supreme Court held that a managing director who was himself ineligible could not nominate someone else. In Perkins Eastern Architects DPC v HSCC (India) Ltd (2019), it went further: a party with an interest in the outcome cannot unilaterally appoint a sole arbitrator at all.

In Central Organisation for Railway Electrification v ECI SPIC SMO MCML (JV) (2024), a Constitution Bench held that clauses allowing one party to unilaterally appoint a sole arbitrator are invalid because they offend the principle of equal treatment of parties, and that a party cannot be compelled to choose its nominee from a narrow panel curated by the other side. The Court applied this to appointments made after its judgment. Banks, NBFCs, developers and government bodies whose standard contracts still give themselves the right to appoint should treat those clauses as unreliable.

The section 12(5) bar can be waived only by an express agreement in writing made after the dispute has arisen. The Supreme Court in Bharat Broadband Network Ltd v United Telecoms Ltd (2019) held that participating in the arbitration without objection is not a waiver. So an award from a unilaterally appointed arbitrator is exposed to challenge, and the party that wrote the clause gains nothing from it. The safer clause provides for joint appointment, or appointment by a named institution, with section 11 as the fallback.

Institutional or ad hoc arbitration: which should you choose?

In ad hoc arbitration the parties and the tribunal run the process themselves under the Act. In institutional arbitration a body such as the Delhi International Arbitration Centre (DIAC) at the Delhi High Court, the Indian Council of Arbitration, the Mumbai Centre for International Arbitration, or, for cross-border deals, the Singapore International Arbitration Centre, administers the case under its own rules: it appoints the arbitrator if the parties do not agree, fixes fees on a published schedule, handles deposits and keeps the timetable moving.

Institutional arbitration costs a registration fee and administrative charges, but it removes the two most common causes of delay at the start: the fight over appointment and the fight over fees. An institutional clause also means that if the other side refuses to cooperate, you go to the institution, not to the High Court under section 11. For contracts of moderate or high value, that alone usually justifies the cost.

Ad hoc arbitration can suit small, simple disputes between parties who can agree on an arbitrator quickly. If you choose it, write the appointment mechanism in full and say how fees will be fixed; for court-appointed arbitrators, the Fourth Schedule to the Act gives a model fee scale. Whichever route you pick, name the institution exactly. A clause referring to 'the arbitration council of Delhi', which does not exist, invites an argument about whether the clause can operate at all.

How many arbitrators, and with what qualifications?

Section 10 lets the parties choose the number, provided it is not even. For most commercial contracts the real choice is between one arbitrator and three. A sole arbitrator is quicker and cheaper, and hearings are easier to schedule. A tribunal of three suits high-value or technical disputes where each side wants a member who understands its industry, but it roughly triples the arbitrators' fees and makes it harder to find common dates. A practical compromise is a value threshold: a sole arbitrator for claims below a stated amount, three above it.

You can require qualifications, such as a retired judge, a chartered engineer for construction disputes or a chartered accountant for valuation disputes. Keep them general enough that suitable people exist. A clause requiring 'a retired Supreme Court judge with experience in maritime law and fluency in Korean' will be satisfied by almost nobody, and an unworkable qualification gives the other side a ground to resist every name you propose.

Should the clause require negotiation or mediation first?

A multi-tier clause, which requires the parties to negotiate or mediate before going to arbitration, can settle disputes cheaply. It can also become a trap if it is vague. If the clause says 'the parties shall first try to resolve the dispute amicably', the other side may later argue that you skipped this step and the arbitration is premature. Courts have taken different views on whether such steps are mandatory, and you do not want that argument at all.

Make each step time-bound and self-executing: 'If the dispute is not resolved by negotiation between senior representatives within 30 days of a written notice of dispute, either party may refer it to arbitration.' Then the step ends automatically, and a party that refuses to negotiate cannot stall the process. If you want mediation, name the mediation body and give it a fixed window, for example 60 days. Our post on the Mediation Act 2023 explains how statutory mediation now fits in.

Whatever the pre-steps, keep a carve-out for urgent relief. Write that nothing in the clause prevents a party from seeking interim measures from a court under section 9 or from the tribunal under section 17. Without that line, the other side may argue that you cannot go to court for an injunction until negotiation and mediation are exhausted, which is exactly when you need the injunction most.

Governing law, language and contracts with foreign parties

Where both parties are Indian and the contract is performed in India, Indian law will govern and the clause need only say so. Where one party is foreign, the arbitration becomes an international commercial arbitration under section 2(1)(f), and three separate laws can be in play: the law of the main contract, the law of the arbitration agreement, and the law of the seat. Say expressly which law governs the contract and, if you choose a foreign seat, which law governs the arbitration agreement itself.

Indian parties dealing with a foreign party can choose a foreign seat such as Singapore or London. If they do, Part I of the Act largely does not apply, but section 2(2) keeps sections 9, 27 and 37 available unless the parties agree otherwise, so you can still get interim relief from an Indian court against assets in India. In PASL Wind Solutions Pvt Ltd v GE Power Conversion India Pvt Ltd (2021), the Supreme Court held that even two Indian parties may choose a foreign seat. Whether they should is a different question: costs rise sharply, and the resulting award must then be enforced in India as a foreign award, which our post on enforcing foreign arbitral awards in India explains.

Which disputes cannot go to arbitration, whatever the clause says?

Some disputes are not arbitrable. In Vidya Drolia v Durga Trading Corporation (2020), the Supreme Court explained that disputes involving rights against the world at large, sovereign functions, matters that a statute reserves for a public forum, and matters affecting third parties are generally outside arbitration. Examples are criminal cases, matrimonial and guardianship matters, testamentary matters, insolvency once proceedings under the Insolvency and Bankruptcy Code have begun, and eviction under rent control laws that give special protection to tenants.

Consumers keep their right to the consumer commission despite an arbitration clause in a builder-buyer agreement or similar standard contract, as the Supreme Court held in Emaar MGF Land Ltd v Aftab Singh (2018). Where a micro or small enterprise is the supplier, the Micro, Small and Medium Enterprises Development Act 2006 gives it the option of the Facilitation Council's conciliation and arbitration under section 18, and courts have held that this statutory route prevails over a private arbitration clause. Drafting cannot exclude these rights, so if your counterparty is a consumer or an MSME supplier, plan for those forums too.

Allegations of fraud are no longer an automatic bar. After Vidya Drolia, a civil dispute does not become non-arbitrable merely because one side alleges fraud, unless the fraud goes to the arbitration agreement itself or has public law consequences. This is one reason to keep the scope wording broad: if the clause covers only 'disputes about performance', a claim for rescission on the ground of fraud may fall outside it.

Group companies, guarantors and people who did not sign

An arbitration agreement binds the parties to it. Whether it binds a parent company, a sister concern or a promoter who did not sign is a frequent fight. In Cox and Kings Ltd v SAP India Pvt Ltd (2023), a Constitution Bench accepted that non-signatories can be bound in some cases, based on their conduct and the mutual intention of the parties, but it is a question of evidence and it is decided case by case.

Do not rely on that doctrine if you can avoid it. If a promoter is giving a personal guarantee, put the arbitration clause in the guarantee deed as well, or have the guarantor sign the main contract as a confirming party. If a group company will receive the goods or make the payments, make it a party. If an affiliate may assign the contract, say whether the assignee takes the arbitration clause with it.

Stamp duty, signatures and contracts signed online

An unstamped or insufficiently stamped agreement is not void. In In re: Interplay between Arbitration Agreements under the Arbitration and Conciliation Act 1996 and the Indian Stamp Act 1899 (2023), a seven-judge bench held that stamping is a curable defect, that the arbitration clause is not invalid because the main contract is unstamped, and that the court at the section 11 stage need not examine stamping. The tribunal can impound the document and require the duty and penalty to be paid. Even so, the penalty under state stamp law can be several times the duty, so pay the correct duty, usually by e-stamping, when you sign.

Contracts signed by electronic signature under the Information Technology Act 2000, or concluded by exchange of emails, can contain valid arbitration agreements, since section 7(4)(b) expressly covers electronic communications. Click-wrap terms on a website are more open to challenge where the user was never shown the clause. Our post on e-signatures and click-wrap contracts explains what courts look for.

A sample clause, and why each line is there

For a domestic commercial contract of moderate value between two Indian businesses, a clause along these lines usually works: '1. Any dispute, controversy or claim arising out of or in connection with this Agreement, including its existence, validity, interpretation, performance, breach or termination, shall first be notified in writing by one party to the other. 2. If the dispute is not resolved by discussion between senior representatives within 30 days of that notice, it shall be referred to and finally resolved by arbitration under the Arbitration and Conciliation Act 1996. 3. The tribunal shall consist of a sole arbitrator appointed jointly by the parties within 30 days of a request by either party, failing which the arbitrator shall be appointed in accordance with the Act. 4. The seat of arbitration shall be New Delhi. The language shall be English. 5. Nothing in this clause prevents a party from seeking interim measures from a competent court. 6. This Agreement is governed by the laws of India.'

Line 1 makes the scope broad enough to include questions about whether the contract was validly formed or ended, so a party cannot avoid arbitration by claiming the contract was void. Line 2 sets a time-bound negotiation step that ends by itself. Line 3 provides a neutral appointment process with an automatic fallback. Line 4 fixes the seat, and with it the supervising court. Line 5 keeps the door to section 9 open. Line 6 settles the law.

For an institutional clause, replace line 3 with the model clause published by the chosen institution, which will name its rules and its appointment process. For contracts with foreign parties, add the law of the arbitration agreement and consider a three-member tribunal. Treat the sample as a starting point to adapt, not a form to paste: the right clause depends on the value, the parties and where the assets are.

How to fix a bad clause in a contract you have already signed

If you find a defective clause in a live contract, it can usually be repaired without reopening the commercial terms.

1. Read the whole contract, not only the clause

   Check the jurisdiction clause, the notices clause, any guarantee and any later amendments. A conflict elsewhere in the document may matter as much as the arbitration clause itself.

2. Decide what actually needs to change

   Often it is only the appointment method or the seat. List the specific defects so the amendment is short and the other side can see that you are not reopening the deal.

3. Propose a short amendment or side letter

   A one-page amendment agreement replacing the dispute clause, signed by both parties and stamped as required, is the cleanest fix. Where relations are good, most counterparties agree because the change protects both sides.

4. If a dispute has already arisen, use a submission agreement

   Once a dispute exists, the parties can sign a fresh agreement referring that dispute to a named arbitrator or institution. This is also the only way to waive the section 12(5) bar, by express writing after the dispute.

5. Fix the template for future contracts

   If the clause came from your own standard form, correct the template so that every new contract does not repeat the problem. Review purchase orders and online terms too.

When arbitration is the wrong choice

Arbitration is not automatically faster or cheaper than court. The parties pay the arbitrators' fees, the venue and often an institution, and a challenge under section 34 and an appeal under section 37 can follow the award. For small claims, those costs can exceed the amount in dispute. For a plain debt backed by a written acknowledgment or a cheque, a summary suit under Order 37 of the Code of Civil Procedure may get a decree faster, as our post on summary suits for recovery of money explains.

Arbitration also narrows your remedies against the award. Under section 34 the court cannot review the merits; it can set aside an award only on limited grounds. That suits parties who value finality. Parties expecting a technical, high-value dispute sometimes prefer the commercial courts for exactly that reason, accepting a slower route in exchange for a full appeal.

When Advocate B.K. Singh reviews a contract before signing, the question he asks first is where the client's money will be if things go wrong: who is likely to sue whom, for roughly how much, and where the assets sit. A clause chosen with those answers in mind is usually the right one, whether it points to arbitration, to the commercial courts in Delhi, or to a mix of both.

Checklist: read your arbitration clause before you sign

Run through these points on every contract with a dispute clause. If any answer is 'no' or 'not sure', fix the clause before signing.

• The clause uses mandatory words: 'shall be referred to arbitration'.
• The scope covers all disputes arising out of or in connection with the contract, including validity and termination.
• One city is named as the seat, and the jurisdiction clause does not point to a different city.
• The number of arbitrators is one or three, or a clear method decides it.
• No party, director or employee of a party can appoint the sole arbitrator alone.
• The appointment steps have time limits and a fallback to an institution or section 11.
• Any institution is named exactly, and its current rules are referred to.
• Pre-arbitration negotiation or mediation, if any, ends automatically after a fixed period.
• The right to seek interim relief from a court is expressly preserved.
• Governing law and language are stated, especially where a party is foreign.
• Guarantors and group companies who matter have signed the clause or a matching one.
• The contract is correctly stamped under the applicable state stamp law.

Before you sign, or before you invoke the clause

If the contract is already signed and a dispute is coming, read the clause before you send any notice, because the notice of arbitration under section 21 must follow what the clause says. Our posts on appointment of an arbitrator under section 11 and challenging an arbitral award under section 34 cover the later stages, and the page on arbitration lawyers in Delhi covers practice before the Delhi High Court and DIAC.

If you want an advocate to read the clause in your contract and tell you whether it will hold, the team of Advocate B.K. Singh can look at the papers and point out what needs to change. You can send the contract through the online enquiry page.