An arbitration clause is the provision by which parties agree to resolve disputes through arbitration rather than in court. Section 7 of the Arbitration and Conciliation Act, 1996 requires an arbitration agreement to be in writing and to relate to disputes arising out of a defined legal relationship. A workable clause must also specify the seat of arbitration, the number of arbitrators, the mechanism for appointing them, the governing law and the language. Following the Supreme Court’s Constitution Bench decision in November 2024, clauses allowing one party to appoint the sole arbitrator, or to compel the other to choose from a panel it curated, are no longer valid.
That last point deserves emphasis. If your standard contract says the company shall appoint the sole arbitrator, the appointment mechanism in every copy of that contract is now defective.
What Section 7 Requires for a Valid Arbitration Agreement
The statutory threshold is low, which is why so many clauses are valid but useless.
An arbitration agreement must be in writing, must relate to disputes arising out of a defined legal relationship whether contractual or not, and must record an intention to refer those disputes to arbitration. It is satisfied by a clause in a contract, an exchange of letters or electronic communication, or an exchange of pleadings in which the existence of the agreement is alleged and not denied.
Two doctrines follow from this and both matter when drafting:
- Separability. The arbitration clause is treated as an agreement independent of the contract containing it, so the invalidity or termination of the main contract does not automatically destroy the arbitration clause. This is why a clause should be drafted to survive termination expressly, alongside the termination clauses in Indian contracts that govern the rest of the agreement.
- Competence-competence. The tribunal may rule on its own jurisdiction, including on objections to the existence or validity of the arbitration agreement, which limits how far a court will examine the question at the reference stage.
Section 28 of the Indian Contract Act, 1872 renders agreements in restraint of legal proceedings void, but the exception preserves agreements to refer disputes to arbitration. So an arbitration clause is one of the few provisions that can lawfully take a dispute away from the courts, and it sits outside the categories of void agreements in contract law for that reason. The wider essentials of an arbitration agreement turn on that intention to be bound by the outcome, rather than merely to discuss.
Why Unilateral Appointment Clauses Are Now Invalid
This is the most significant change to Indian arbitration drafting in years, and a great many contracts have not caught up.
What CORE-II decided
On 8 November 2024, a five-judge Constitution Bench of the Supreme Court decided Central Organisation for Railway Electrification v M/s ECI SPIC SMO MCML (JV), commonly called CORE-II. It held that:
- A clause requiring one party to unilaterally appoint the sole arbitrator is invalid.
- A clause requiring one party to select its nominee from a panel curated by the other party is equally invalid, even where the panel is broad.
- Such clauses offend the principle of equal treatment of parties under Section 18 of the Act, and raise justifiable doubts as to independence and impartiality connected with Section 12(5) and the Seventh Schedule.
- In public sector and government contracts, unilateral appointment additionally violates Article 14 of the Constitution.
The Bench overruled the earlier three-judge decision in the same litigation, resolving a divergence that had run through TRF Limited v Energo Engineering Projects, Perkins Eastman Architects DPC v HSCC (India) Limited and Voestalpine Schienen GmbH v Delhi Metro Rail Corporation. Because a Constitution Bench has now spoken, the doctrine of stare decisis leaves High Courts no room to take the earlier view.
What a public sector body may still do
A public sector undertaking may maintain a panel of arbitrators. What it cannot do is compel the counterparty to choose only from that panel. The distinction is between offering a resource and controlling the composition of the tribunal.
What this means for your existing contracts
Any template containing wording of the following kind needs revision:
- “The dispute shall be referred to a sole arbitrator appointed by the Company.”
- “The Purchaser shall nominate its arbitrator from the panel maintained by the Seller.”
- “The arbitrator shall be an officer of the Employer nominated by the Managing Director.”
The safest replacements are institutional appointment, appointment by mutual agreement with a fallback to the court under Section 11, or each side nominating one arbitrator with the two nominees selecting the presiding arbitrator.
Seat and Venue: The Distinction That Decides Which Court Supervises
More arbitration clauses are litigated over this than over anything else in them, and the confusion is almost always caused by loose drafting.
| Basis | Seat | Venue |
|---|---|---|
| What it fixes | The legal home of the arbitration | The physical location of hearings |
| Determines | The supervisory jurisdiction and the curial law | Nothing legally, unless it is the seat by another name |
| Which courts can intervene | Courts at the seat, exclusively | None by virtue of the venue alone |
| Can it change | No, once fixed | Yes, hearings may be held anywhere |
| Drafting word to use | “The seat of arbitration shall be …” | “Hearings may be conducted at …” |
| Consequence of getting it wrong | Two sets of courts claim jurisdiction | Usually none, if the seat is clear |
The practical rule is to use the word seat explicitly, name one city, and say nothing that contradicts it elsewhere in the contract. A clause that names a seat in one sentence and confers exclusive jurisdiction on the courts of a different city in the next has created the exact dispute the clause was meant to avoid.
Where hearings need flexibility, say so separately: the seat shall be Mumbai, and hearings may be held at any place the tribunal considers convenient. That gives you certainty on supervision and freedom on logistics.
Institutional or Ad Hoc: Choosing the Framework
The choice affects almost every other decision in the clause.
- Institutional arbitration proceeds under the rules of a body such as the Mumbai Centre for International Arbitration, the Delhi International Arbitration Centre, the Indian Council of Arbitration, or for cross-border matters the SIAC or the ICC. The institution appoints arbitrators where parties fail to, administers timelines, and scrutinises awards in some cases. It costs more and it removes most of the ways a clause can fail.
- Ad hoc arbitration proceeds under the Act alone, with the parties and the tribunal running the process. It is cheaper and more flexible, and it places the entire burden of a workable procedure on the drafting.
For most commercial contracts of any value, institutional arbitration is the better default, precisely because the institution’s rules supply everything the clause forgot. Ad hoc suits parties with an established relationship and a clear appointment mechanism.
If you choose an institution, adopt its model clause and resist the temptation to improve it. Model clauses are drafted to work with the rules they reference, and edits routinely create inconsistencies.
What an Arbitration Clause Must Contain
Ten components. The first four are where clauses fail.
- Scope. Which disputes go to arbitration. Use wide wording such as any dispute arising out of or in connection with this Agreement, including any question regarding its existence, validity or termination. Narrow wording invites arguments about whether a particular claim falls inside the clause.
- Seat. One named city, using the word seat.
- Number of arbitrators. One or three. Three costs roughly three times as much and is rarely justified below a substantial claim value. Say expressly, because the statutory default where the clause is silent creates its own complications.
- Appointment mechanism. Compliant with CORE-II. Either institutional appointment, or mutual agreement with a Section 11 fallback, or party-nominated arbitrators selecting a presiding arbitrator.
- Governing law of the contract. Distinct from the seat, though usually the same country.
- Language. English, unless there is a reason otherwise. Omitting it can produce a genuine dispute in multilingual contracts.
- Rules. The institutional rules, or a statement that the arbitration is ad hoc under the Act.
- Interim relief. Confirmation that a party may approach a court under Section 9 for interim measures without breaching the clause.
- Costs. How the costs of the arbitration and the parties’ legal costs are to be borne or allocated.
- Finality and confidentiality. That the award is final and binding, and that the proceedings are confidential.
Along with notices, severability and governing law, the arbitration clause sits among the boilerplate clauses that are copied without thought and then decide how a dispute is actually fought, which is why it belongs on any list of essential clauses every commercial contract must contain.
Sample Arbitration Clause
A structure to adapt rather than copy. The bracketed choices are the negotiation.
Dispute Resolution and Arbitration
- Any dispute, controversy or claim arising out of or in connection with this Agreement, including any question regarding its existence, breach, validity or termination, shall be referred to and finally resolved by arbitration.
- The arbitration shall be conducted under the [Arbitration and Conciliation Act, 1996 / the Rules of …………, which Rules are deemed incorporated by reference into this clause].
- The tribunal shall consist of [a sole arbitrator / three arbitrators].
- [For a sole arbitrator:] The sole arbitrator shall be appointed by mutual written agreement of the Parties within thirty days of a written request to arbitrate. Failing agreement, the arbitrator shall be appointed by [the institution / the competent court under Section 11 of the Arbitration and Conciliation Act, 1996].
- [For three arbitrators:] Each Party shall nominate one arbitrator, and the two arbitrators so nominated shall appoint the third, who shall act as presiding arbitrator. Neither Party shall have the right to appoint the sole or presiding arbitrator unilaterally, nor to require the other Party to select from a panel curated by it.
- Every arbitrator shall be, and shall remain, independent and impartial, and shall not fall within any of the categories in the Seventh Schedule to the Act.
- The seat of arbitration shall be …………, India. The courts at ………… shall have exclusive supervisory jurisdiction.
- Hearings may be held at any place the tribunal considers convenient, and the conduct of hearings at any such place shall not alter the seat.
- The language of the arbitration shall be English.
- This Agreement, and any dispute arising from it, shall be governed by the laws of India.
- Nothing in this clause prevents either Party from applying to a court for interim measures of protection under Section 9 of the Act.
- The costs of the arbitration shall be [borne equally / borne as the tribunal directs].
- The award shall be final and binding on the Parties. The Parties shall keep the arbitration and the award confidential, save as required by law or for enforcement.
- This clause shall survive the termination or expiry of this Agreement.
Clause 5 is the one that changed in November 2024. Clause 7 is the one most often litigated.
Pathological Clauses: Seven Drafting Failures
A pathological clause is one that expresses an intention to arbitrate but cannot function. Each of these appears regularly.
- Unilateral appointment. Now invalid, and the most widespread defect in Indian contracts today.
- Naming a non-existent institution. Referring to rules or a body that does not exist, or misnaming one, which is common with abbreviations.
- Seat and jurisdiction in conflict. A seat in one city and exclusive jurisdiction conferred on the courts of another.
- Optional wording. “The parties may refer disputes to arbitration” creates a possibility, not an agreement. Use shall.
- Both arbitration and litigation. A clause providing for arbitration and then conferring jurisdiction on a court to decide disputes, without making the court’s role supervisory only.
- An impossible qualification. Requiring the arbitrator to hold a qualification almost nobody holds, which stalls appointment.
- No survival provision. A clause that dies with the contract, just as the dispute over termination arises.
These are failures of omission and inconsistency rather than of expression, the same pattern that runs through common mistakes made while drafting business contracts.
Stamping an Arbitration Agreement
The position was contested for years and is now settled.
In December 2023 a seven-judge bench of the Supreme Court held that non-stamping or insufficient stamping of the underlying contract does not render an arbitration agreement void or unenforceable. It renders the instrument inadmissible in evidence, which is a curable defect, and objections on stamping fall to be decided by the arbitral tribunal rather than by the court at the referral stage.
The practical consequence is that an unstamped agreement no longer blocks the reference. The duty still has to be paid, and the general stamp duty position on agreements applies under the framework of the Indian Stamp Act, 1899. Pay it at execution rather than discovering it before the tribunal.
When Arbitration Is Not the Right Choice
An arbitration clause is not automatically the right answer, and inserting one reflexively is its own drafting failure.
- Small value contracts. Arbitration costs more than the claim in many low value disputes, where a jurisdiction clause and a civil suit or summary procedure serves better.
- Where a statutory forum exists. In real estate, the question whether parties can still choose private dispute resolution under RERA has its own answer, and consumer and employment forums cannot be contracted out of.
- Non-arbitrable subject matter. Criminal offences, insolvency, matrimonial matters, testamentary questions and certain tenancy disputes generally cannot be arbitrated.
- Where the relationship should survive. Mediation and arbitration differ in that mediation produces an agreed outcome rather than an imposed one, and the Mediation Act, 2023 has given institutional mediation a statutory footing. A tiered clause requiring mediation before arbitration suits long-term commercial relationships, including many joint venture agreements.
- Enforcement against an asset-light counterparty. An award is worth what the respondent can pay, and arbitration adds cost before you find out.
Where a tiered clause is used, set clear time limits for each stage, or the mediation step becomes a delay tactic.
Learning to Draft Arbitration Clauses Properly
The arbitration clause is drafted last, negotiated least and litigated first. It sits at the end of the contract with the notices and severability provisions, it is copied from the previous deal, and it is the first thing anyone reads when the relationship fails.
CORE-II is a useful illustration of why that habit is expensive. Thousands of contracts contain an appointment mechanism that was perfectly standard in 2023 and is unenforceable now. Nobody will notice until a dispute arises, at which point the parties will litigate about how to arbitrate before arbitrating about the actual disagreement.
Getting it right requires knowing the law rather than the precedent, which is where drafting and negotiating a contract separate, and it rests on the basic principles of legal drafting applied to a clause most people skim. The broader arbitration framework, including appointment, challenge and enforcement, is set out across the Arbitration and Conciliation Act notes for anyone building the subject from the ground up, and the practice side is covered in building a career in arbitration.
LawMento’s Practical Training in Drafting of Contracts covers dispute resolution and arbitration clauses alongside 30 or more contract types, across 26 hours and 230 pages of reading material. It builds on the foundation in contract drafting as a discipline, where the recurring lesson is that the clause nobody negotiates is the clause that decides the outcome, and improving drafting skills is largely a matter of learning which clauses those are.
Use code SAVE10 at checkout for 10% off any LawMento course.
FAQs
What makes an arbitration clause valid in India?
It must be in writing, relate to disputes arising from a defined legal relationship, and record an intention that those disputes be resolved by arbitration with a binding outcome. Section 7 of the Arbitration and Conciliation Act, 1996 sets out the requirement.
Can one party appoint the sole arbitrator?
No. Following the Constitution Bench decision of November 2024, a clause permitting unilateral appointment of the sole arbitrator, or requiring one party to choose from a panel curated by the other, is invalid.
What is the difference between seat and venue in arbitration?
The seat is the legal home of the arbitration and determines which courts have supervisory jurisdiction. The venue is merely where hearings physically take place and has no legal effect on supervision. Always use the word seat and name one city.
Is an unstamped arbitration agreement enforceable?
The agreement is not void. Insufficient stamping makes the instrument inadmissible in evidence, which is curable on payment of duty and penalty, and the objection is for the tribunal rather than the referral court.
How many arbitrators should a clause specify?
One for most commercial contracts, since three arbitrators roughly triples the cost. Three is appropriate for high value or technically complex disputes. State the number expressly rather than leaving it to the statutory default.
Should the clause name an arbitral institution?
For most contracts, yes. Institutional rules supply the appointment mechanism, timelines and procedure that an ad hoc clause has to spell out, and they remove most ways a clause can fail. Adopt the institution’s model clause without editing it.
Does an arbitration clause survive termination of the contract?
Under the doctrine of separability it generally does, since the arbitration agreement is treated as independent of the contract containing it. Include an express survival provision so that the point is not argued.
Can we agree to mediate before arbitrating?
Yes, and tiered clauses are common. Set a defined period for the mediation stage and a clear trigger for moving to arbitration, or the first tier becomes a means of delay.
This guide explains the general position and is not legal advice on any specific contract or dispute. Arbitration law and institutional rules change, and the effect of a clause depends on its precise wording and the surrounding agreement. Verify the current position before drafting or relying on an arbitration clause.
