Top 10 Mistakes in Arbitration Clauses

When is an arbitration clause defective?

A clause is defective in one of two ways. Either it doesn't show a clear, binding agreement to arbitrate, or it shows one but leaves out or garbles something the arbitration can't run without. The worst of these are called pathological clauses. They're so confused that a court has to rescue them, rewrite their effect or give up and call them unworkable. The term comes from international arbitration writing. Indian judgments now use it freely.

Section 7 of the Arbitration and Conciliation Act, 1996 doesn't ask for much. The agreement has to be in writing, and an exchange of letters or emails counts. It has to show that the parties meant to send present or future disputes to arbitration. Indian courts try hard to honour that intention wherever they can find it. So most defective clauses aren't void. They're expensive. They give the other side an excuse to run to court before the arbitration starts, again in the middle, and once more after the award.

The ten mistakes below cause most of that wasted time, in our experience. We've put them roughly in the order we come across them in contracts that land on our desks in Delhi.

When does a bad clause bite, and what does it cost you?

A bad clause almost never matters on the day you sign it. It shows up at four points. The first is when you send a Section 21 notice invoking arbitration, and the reply says the clause isn't binding or that you've skipped a step. The second is the Section 11 petition to appoint an arbitrator, or a Section 8 application if the other side has filed a civil suit instead. Third comes the tribunal itself, where jurisdiction objections are raised under Section 16. And fourth, the Section 34 petition to set aside the award. A defect in the agreement, or in how the tribunal was put together, can undo two years of work at that stage.

After In re Interplay (seven judges, 2023) and SBI General Insurance v. Krish Spinning (2024), the Section 11 court looks only at whether an arbitration agreement exists, prima facie. That's cut down the delay at the start. It hasn't removed it. Many clause defects are now simply argued before the tribunal instead, and then argued all over again under Section 34.

When Advocate B.K. Singh reads a client's contract after a dispute has begun, he never reads the dispute clause alone. He reads it with the jurisdiction, notices and termination clauses. Quite often the defect isn't in the arbitration clause at all. It's in some other clause that contradicts it. One careless line three pages later can undo a perfectly clean arbitration clause.

Mistake 1: does 'may be referred to arbitration' bind the other side?

Often, no. Optional wording does the most damage of all, because it goes to whether there's an arbitration agreement in the first place. In Jagdish Chander v. Ramesh Chander (2007), the clause said disputes 'may be referred to arbitration' if the parties agreed. The Supreme Court held that was only an agreement to think about arbitration later, not a binding arbitration agreement. And in Mahanadi Coalfields v. IVRCL AMR Joint Venture (2022), it repeated that the word 'arbitration' doesn't, on its own, turn a clause into an arbitration agreement.

We see variations all the time. 'Disputes shall be settled amicably, failing which the parties may approach arbitration or the courts.' Or 'the parties shall try to resolve disputes through arbitration'. Every one of them hands the reluctant party an argument that it never agreed to be bound.

The fix is easy. Use words that command. 'All disputes arising out of or in connection with this agreement shall be referred to and finally resolved by arbitration.' Two words in that sentence, 'shall' and 'finally', do a great deal of the work.

Mistake 2: can one party still appoint the sole arbitrator?

No. For years, infrastructure, supply and finance contracts let the company's MD, chairman or chief engineer name the sole arbitrator, or even decide the case himself. The law dismantled that in three stages. First, the 2015 amendment brought in Section 12(5) and the Seventh Schedule, which disqualify employees, directors and others closely linked to a party. Next, in TRF Ltd v. Energo Engineering (2017) and Perkins Eastman Architects v. HSCC (2019), the Supreme Court reasoned that someone barred from acting as arbitrator can't choose one either. One side alone can't install a sole arbitrator. Then in 2024 a Constitution Bench, in CORE v. ECI-SPIC-SMO-MCML, said one-sided appointment clauses breach equality between the parties.

The clause doesn't become void. The agreement to arbitrate survives. Only the appointment mechanism fails, and the arbitrator then has to be chosen by agreement or by the High Court under Section 11. But an award by an ineligible arbitrator can be set aside. Under the proviso to Section 12(5), you can waive the ineligibility only by an express written agreement made after the dispute has arisen. Turning up to hearings without objecting doesn't count.

Lenders and NBFCs still send borrowers loan agreements with this clause in them. If you're the borrower, don't sign a separate consent to the lender's arbitrator after the dispute starts unless you really mean to give up the objection. Our note on why one-sided arbitrator appointment is invalid covers what to do when it happens anyway. For the challenge itself, see objecting to an arbitrator who isn't independent.

Mistake 3: why does a missing or confused seat cause so much grief?

The seat is the arbitration's legal home. It decides which court supervises the case, meaning which court hears Section 9 petitions for interim relief, Section 34 challenges and Section 37 appeals. Leave the seat out, or name a 'venue' in Delhi while another clause gives 'exclusive jurisdiction' to Mumbai courts, and you've practically booked a preliminary fight in at least one court before anything else can happen.

In BGS SGS Soma JV v. NHPC (2019), the Supreme Court held that where a clause names a 'venue' and nothing points the other way, that venue is really the seat. It also said that naming a seat works like an exclusive jurisdiction clause for the courts there. That's helpful when the clause names only one place. It's no help at all when the contract names two places and neither obviously wins. And that's exactly what you get when one office's template is stapled to another office's jurisdiction clause.

Name the seat in so many words ('The seat of arbitration shall be New Delhi'). If hearings may happen elsewhere for convenience, say those places are venues only. Then check the jurisdiction clause points to the courts at the seat. Our note on the seat of arbitration and why it decides the court goes further into seat and venue.

Mistake 4: what if the clause names the wrong institution, or mixes up rules?

You'd be surprised how often we see clauses naming 'the Delhi Arbitration Council', 'the Indian Arbitration Centre at New Delhi' or 'the Chamber of Commerce arbitration'. If the named body doesn't exist, or exists under some other name, the other side says the agreement is uncertain. Courts usually try to work out which body the parties meant. That takes a hearing. Sometimes several.

Then there's the hybrid clause. 'Arbitration under the ICC Rules, administered by DIAC.' Or 'SIAC Rules, with the arbitrator appointed by the Chief Justice of the Delhi High Court'. Institutions generally run only their own rules, and the pieces of a hybrid clause pull in opposite directions. A cousin of this mistake names an institution and then lays down its own appointment and fee procedure, which clashes with that institution's rules.

Copy the institution's exact name and its current model clause from its website. Add only the seat, the language and the number of arbitrators. For Delhi, the commercialcourtlawyer.com note on the DIAC arbitration clause sets out the wording DIAC expects. Whether to name an institution at all is a separate decision, discussed in our note on choosing ad hoc or institutional arbitration.

Mistake 5: are pre-arbitration steps with no time limit a problem?

Yes. They're one of the commonest ways a bad clause buys the other side time. Multi-tier clauses make sense in principle: senior managers meet, maybe there's a mediation, then arbitration. The trouble starts when no step has a deadline. 'The parties shall first attempt to resolve the dispute through mutual discussions' lets the reluctant party say, months down the line, that you never really tried. Construction contracts pile on more. An engineer's decision first, then a dispute review board, neither with any outer limit.

Indian courts have treated these steps sometimes as mandatory and sometimes as directory. It depends on the wording, and on whether insisting on them would achieve anything by the time the dispute reaches court. That uncertainty is the price. You may well win the point. You'll still spend a hearing or two winning it.

Give every step a fixed period running from a written notice. For example, 30 days of negotiation from the date of a notice of dispute, after which either side may invoke arbitration. Say too that a party can seek urgent interim relief under Section 9 without finishing the steps. And watch limitation. Time spent negotiating isn't automatically excluded, as our note on limitation in arbitration claims explains.

Mistake 6: is a clause making the engineer's or expert's decision 'final' an arbitration clause?

Not necessarily. Say the clause makes the decision of the engineer-in-charge, the architect or a chartered accountant 'final and binding' on a technical or valuation question. That may well be an expert determination clause rather than an arbitration agreement. The difference matters. An expert's decision isn't an arbitral award. You can't enforce it under Section 36, and it isn't challenged under Section 34. If it's enforced at all, it's through a suit on the contract.

Judges go by substance, not labels. Is the person hearing both sides, applying the law and deciding a dispute in a way both agreed would bind them? An officer of one party who merely certifies measurements does none of that. Lots of businesses think they've got arbitration because the clause says 'decision' and 'final'. The surprise comes at the execution stage.

If you want an expert to settle technical questions quickly, say so plainly. And make it clear that arbitration stays available for everything else, including challenges to the expert's decision where the contract allows them.

Mistake 7: can a clause demand a deposit, or cut short your time to claim?

Many tenders from government departments and PSUs say a contractor must first deposit part of its claim, often 10 percent, and only then may it invoke arbitration. Two Supreme Court judges struck such a clause down as arbitrary in ICOMM Tele Ltd v. Punjab State Water Supply and Sewerage Board (2019). Three judges, though, had earlier upheld something similar in S.K. Jain v. State of Haryana (2009). So the law pointed both ways. On 17 August 2026 the Supreme Court sent the issue to a larger bench, in Santosh Associate v. Haryana State Industrial and Infrastructure Development Corporation. Until that bench speaks, these clauses remain open to argument. Look up where things stand before you either pay the deposit or fight it.

A clause that shortens your time for bringing a claim is weaker, and that's good news if you're the claimant. Under Section 28 of the Indian Contract Act, 1872 (amended in 1997), an agreement is void if it extinguishes a party's rights, or cuts the time to enforce them through legal proceedings below the period the law gives. The Supreme Court has used this against clauses insisting that arbitration be invoked within something like 90 days of the final bill. The usual three-year limitation applies instead.

Drafting? Leave both out. If you're a contractor facing one of these in a tender, make a note, raise it in pre-bid queries if you can, and keep proof of when each claim arose.

Mistake 8: what goes wrong with 'excepted matters' and carve-outs?

Some contracts take certain matters out of arbitration altogether: rates, penalties, deductions, decisions of a named officer. Carve-outs are allowed. But wide or vague ones split a single dispute across two forums. Picture a supplier whose unpaid invoices go to arbitration, while the buyer's deduction for late delivery is an 'excepted matter' for its general manager to decide. Neither forum ever sees the whole picture.

The opposite mistake is trying to arbitrate what the law won't let you. A clause in a flat-buyer agreement doesn't stop a homebuyer from going to the consumer commission. A bank recovering a loan of Rs 20 lakh or more belongs before the Debts Recovery Tribunal. Our note on disputes that can't go to arbitration in India lists these categories.

Keep carve-outs narrow and specific, and say which forum decides them. If an excepted matter is bound to affect the money claim, ask yourself whether the carve-out is worth having.

Mistake 9: is the arbitration clause really part of your contract?

A surprising number of disputes turn on whether the clause was ever part of the deal. Think of purchase orders 'subject to our general terms and conditions', with the clause buried in those terms. Work orders that point back to a tender document. Invoices with an arbitration line printed on the back. Section 7(5) says that a reference in a contract to a document containing an arbitration clause makes the clause part of the contract, if the reference is such as to make it so.

The Supreme Court drew a distinction in M.R. Engineers and Contractors v. Som Datt Builders (2009). A general reference to another document may not carry that document's arbitration clause into your contract. A specific reference to the clause will. Courts since then have relaxed a little where the other document is a standard form common to the trade. But don't bank on incorporation. Put the clause into the signed document itself, or cite it by clause number.

Stamping used to be a trap of its own. After In re Interplay (2023), an unstamped or understamped agreement isn't void for arbitration purposes. The stamp objection goes to the tribunal, and it can be cured by paying the duty and penalty. Pay the right stamp duty anyway. It's far cheaper than arguing about it.

Mistake 10: can wording that's too specific, or too sure of itself, break a clause?

Yes. Name a particular person as arbitrator and you have a problem the day that person dies, stops taking arbitrations or simply says no. Section 15(2) of the Act provides for a substitute appointed under the same rules as the original. But if the clause makes that one individual indispensable, the other side will argue the whole agreement has failed. Qualifications drawn too tightly cause the same trouble. Try finding a retired Supreme Court judge who's also a chartered engineer.

The number of arbitrators is another trap. Section 10 lets the parties fix the number, but it can't be even. In Narayan Prasad Lohia v. Nikunj Kumar Lohia (2002), the Supreme Court held that a two-member tribunal isn't invalid for that reason alone. Still, two arbitrators who disagree produce no award. Pick one or three.

Last, some clauses try to shut the courts out entirely, with lines like 'the award shall be final and no party shall challenge it in any court'. You can't contract away the right to apply under Section 34. All that wording does is tell a judge the drafting was careless. Smaller faults in the same family include silence on language, silence on the law governing the arbitration agreement in cross-border deals, and no fee basis in ad hoc cases.

All ten mistakes on one page: what happens and how to fix it

Repairing a bad clause in a contract you've already signed

Any clause can be corrected at any time by a written agreement both sides sign. The time to do it is before a dispute, while you're still on good terms.

1. Sort contracts by what's at stake

   Begin with the contracts where you're owed (or might owe) the most, and those with the longest left to run. A three-year supply contract matters more than a one-off order.

2. Read the clause alongside everything else

   Look at the arbitration, jurisdiction, notices, governing law and termination clauses together. Include any document the contract refers to, like general terms or a tender.

3. Check each defect against the list

   Mark which ones are fatal (optional wording, one-sided appointment). Mark which are merely a nuisance, like a missing language or fee basis.

4. Draft a short amendment

   A one-page addendum replacing the dispute clause usually does the job. It should identify the original contract by date and parties, and say the new clause covers all disputes, including ones that have already arisen.

5. Slip it into a routine renewal

   People sign amendments far more readily at a rate revision or renewal than after a payment default. Present it as bringing the clause up to date with current law. That's true.

6. Keep the signed originals and the email trail

   Section 7 accepts an exchange of emails. Even so, a signed, properly stamped addendum avoids arguments later.

7. If they say no

   Put the refusal on record. It tells you how this counterparty will behave in a dispute, and you can plan security (tighter payment terms, say) around it.

Advocate B.K. Singh's practical advice on amendments is to fix the appointment mechanism and the seat first, even if the counterparty won't accept anything else. Those two cause the longest delays once a dispute starts. A perfect clause the other side never signs is worth less than a half-improved one it does.

A quick audit of your own arbitration clauses

• Does it say disputes 'shall' go to arbitration, rather than 'may'?
• Is the arbitrator chosen by agreement or by a neutral institution, and not by one party or its officer?
• Is there a named seat? And does the jurisdiction clause point to courts in that same city?
• If an institution is named, is the name exactly right, and have you picked its own rules?
• Do the pre-arbitration steps have fixed time limits, plus a way out for urgent relief?
• Is any engineer's or expert's 'final decision' kept clearly apart from arbitration?
• Is there a pre-deposit condition, or a time bar shorter than the law allows?
• Are the excepted matters narrow enough that the main money claim stays in one forum?
• Is the clause in the document you actually signed, or referred to specifically by its number?
• One arbitrator or three? No named individual, and nothing trying to shut out the courts?

The dispute's already started and the clause is bad. Now what?

Don't write the clause off. Most defects can be worked around. If the appointment mechanism fails, the High Court can appoint under Section 11, and our note on going to court under Section 11 walks through the steps. If the seat is unclear, get advice on which court is likeliest to be treated as the seat before you file anything. Filing in the wrong court wastes time. It can also hurt you in later challenges.

Send a proper Section 21 notice straight away. For limitation, the arbitration begins when the other side receives it. See how to invoke an arbitration clause. In the notice, propose something workable, like a named institution, and invite them to agree. If they refuse, that refusal on record helps your Section 11 petition.

If the clause is optional and the other side refuses to arbitrate, going to a civil court may actually be quicker. Where the commercial dispute is worth Rs 3 lakh or more, you'd file a commercial suit, but only after pre-institution mediation under Section 12A of the Commercial Courts Act (the exception being cases that need urgent interim relief). That route is explained in the commercialcourtlawyer.com guide on money recovery suits.

What you can do this week

Pick the five contracts worth most to you and test each dispute clause against the checklist above. Write down what's wrong, decide which defects hurt most, and keep a one-page addendum ready for whichever contract renews next. If a dispute is already under way, then before you send or reply to any notice, put together the whole contract, every document it mentions and all the letters and emails about the dispute. For new contracts, read this alongside our guide on drafting an arbitration clause for Indian contracts.

If you'd like your contracts, or a notice you've received, checked for these mistakes, or want to hear when the law on pre-deposits or appointments changes, send them to Advocate B.K. Singh's team through the contact page.