What Good Arbitration Clause Drafting Looks Like

Arbitration clause drafting is usually done in the last hour before signature, and this is what that hour produces. The clause below appears in thousands of Indian contracts and is close to useless:

“Any dispute arising out of this agreement shall be settled amicably, failing which the same may be referred to arbitration in accordance with law.”

It fails at almost every level. “May be referred” makes the reference optional, which is the opposite of what an arbitration agreement has to do. There is no seat, so nobody knows which court supervises the process. There is no appointment mechanism, so the first step in any dispute is a petition under Section 11 to get an arbitrator appointed.

The purpose of the clause is not to look serious. It is to get a tribunal constituted quickly when relations have broken down and the other side has every reason to obstruct. Everything below serves that one test.

What Section 7 requires, and what it does not

Section 7 of the Arbitration and Conciliation Act 1996 defines an arbitration agreement as an agreement to submit to arbitration all or certain disputes in respect of a defined legal relationship. It must be in writing. Section 7(4) treats that requirement as satisfied by a signed document, by an exchange of letters or electronic communications recording the agreement, or by an exchange of pleadings in which one party asserts the agreement and the other does not deny it.

That is the whole statutory minimum. Everything else in a good clause is there because of what goes wrong in practice.

One consequence of Section 7 is worth stating early. The arbitration clause is treated as separable from the contract it sits in. Section 16 lets the tribunal rule on its own jurisdiction, and an arbitration clause survives a finding that the main contract was terminated or is voidable. So a clause drafted for a contract that turns out to be badly performed still works.

Insufficient stamping used to derail references entirely. The Supreme Court has since settled that failure to stamp is a curable defect that makes the instrument inadmissible until cured, and does not make the arbitration agreement void. Cure it anyway. Nobody wants that argument.

Seat and venue are not the same word

This is the single most valuable thing to get right, and the most commonly confused.

The seat is the legal home of the arbitration. It fixes which court exercises supervisory jurisdiction over the arbitration: which court hears a Section 9 application, a Section 11 petition, and a Section 34 challenge to the award. The venue is simply the physical place where the hearings are convened, and it can be changed for convenience without changing anything legal.

If a clause names a place without saying which of the two it is, courts look at the rest of the clause to decide whether that place was intended as the seat. That inquiry is avoidable, and it is the argument we most often have to run first in arbitration and related court work. Write “the seat of arbitration shall be Jabalpur” and, if you want flexibility on logistics, add “hearings may be held at any place the tribunal considers convenient”.

Section 42 then does useful work. Once an application under Part I is made to a competent court, that court alone has jurisdiction over the arbitration and all subsequent applications. A clearly stated seat plus Section 42 keeps the entire dispute in one court.

The appointment mechanism is where clauses die

A clause that does not say how the tribunal is constituted forces a Section 11 petition before the High Court at the outset. That is months lost before the dispute has even been stated.

Three rules constrain what you can write.

• Section 10. The number of arbitrators must not be an even number. A clause providing for two arbitrators is defective. Courts have salvaged such clauses in various ways, but the exercise takes time and nobody should be relying on it.
• Section 12(5) and the Seventh Schedule. A person whose relationship with the parties or the subject matter falls in the Seventh Schedule is ineligible to act, whatever the contract says. This includes an employee, consultant or adviser of a party. The ineligibility can be waived only by an express agreement in writing after the dispute has arisen. A waiver written into the contract in advance is no waiver.
• Unilateral appointment. A party that is itself ineligible cannot appoint the sole arbitrator. The Supreme Court has extended this reasoning to clauses in public sector contracts that let one side curate a panel from which the other must choose. Clauses giving a managing director or a chief engineer the power to appoint are, in that class of contract, no longer safe.

Good arbitration clause drafting works around all three rather than testing them. The workable mechanisms are simple. For most commercial contracts, a sole arbitrator appointed by written agreement between the parties within 30 days of a Section 21 notice, failing which by an arbitral institution or by the High Court under Section 11. For higher value contracts, three arbitrators, one nominated by each side and the presiding arbitrator chosen by the two nominees.

The elements, and what happens if you skip one

Use the table below as an arbitration clause drafting checklist. Each row is a line we have seen argued over.

Element	What to write	Cost of leaving it out
Binding reference	”shall be referred to and finally resolved by arbitration”	An optional clause may not be an arbitration agreement at all
Scope	”any dispute arising out of or in connection with this agreement, including its existence, validity or termination”	Fights over whether a tort or a pre-contract claim is covered
Seat	”the seat of arbitration shall be Jabalpur”	Uncertainty over which court supervises the arbitration
Number of arbitrators	One, or three	Section 10 problems, or a cost that dwarfs the claim
Appointment mechanism	Agreement within a stated period, then institution or court	A Section 11 petition before the arbitration even starts
Rules	Institutional rules, or ad hoc under the 1996 Act	Procedural argument at every step
Governing law and language	The substantive law and the language of the proceedings	Avoidable disputes in cross border contracts

Time limits you can shape, and those you cannot

Section 21 sets the commencement date: arbitration begins on the date the request for reference is received by the respondent. This is the date that stops limitation. Section 43 applies the Limitation Act 1963 to arbitrations exactly as it applies to court proceedings, so for most contractual claims the three year period runs from when the cause of action arose to the day the Section 21 notice reaches the other side. Sending the notice a week late is fatal in a way that no clause can fix.

Once the tribunal is in place, Section 23(4) requires the statement of claim and defence to be completed within six months from the date the arbitrators received written notice of their appointment. Section 29A then requires the award in a domestic arbitration within 12 months of the completion of pleadings. The parties may extend that by six months by consent. Beyond that, only a court can extend, and it may reduce the arbitrator’s fees for the delay.

A clause can shorten these periods but cannot sensibly compress them past the point of workability. A better use of drafting effort is a notice of dispute step with a hard deadline: a written notice, a stated period of, say, 30 days for the parties to meet, and an automatic right to issue the Section 21 notice when that period expires. Pre-arbitration steps that are open ended, or that require a meeting nobody is obliged to attend, become a jurisdictional objection instead of a settlement opportunity.

A clause you can adapt

Any dispute or difference arising out of or in connection with this
Agreement, including any question as to its existence, validity or
termination, shall be finally resolved by arbitration under the
Arbitration and Conciliation Act, 1996.

The tribunal shall consist of a sole arbitrator appointed by written
agreement of the parties within 30 days of a request for arbitration
under Section 21. Failing agreement, the arbitrator shall be appointed
by the High Court of Madhya Pradesh under Section 11.

The seat of arbitration shall be Jabalpur. Hearings may be held at any
place the tribunal considers convenient. The language of the arbitration
shall be English. This Agreement shall be governed by the laws of India.

Adjust the seat, the number of arbitrators and the appointing authority to the contract. Do not adjust the structure. Most of what passes for arbitration clause drafting is decoration added to those three paragraphs.

Clauses that do not work

• “May refer to arbitration.” Permissive language leaves it open to argue there was never a binding agreement to arbitrate.
• Two arbitrators, or “each party shall appoint an arbitrator” with nothing about a presiding arbitrator. Section 10 again.
• Naming an individual by name. People retire, die and become ineligible. Name an office only if that office is independent of both parties.
• A clause that also confers exclusive jurisdiction on a civil court for the same disputes. Say instead that the courts of the seat have jurisdiction over applications under the Act.
• Excepted matters lists in works contracts that carve out the very heads of claim likely to arise. Read them before you sign, not after.
• Silence on confidentiality. Section 42A imposes confidentiality on the parties, the tribunal and the institution, subject to disclosure needed to enforce the award, but a contract handling sensitive commercial data should say more.

After the award

An award is challenged under Section 34 within three months of receipt, with a further 30 days available on sufficient cause and no more. Since the 2015 amendment, filing a challenge no longer stays enforcement automatically. The award holder can move to enforce it as a decree under Section 36, and the challenger must apply separately for a stay, which is usually granted only on conditions such as a deposit.

Interim protection before and during the arbitration comes from the court under Section 9 and from the tribunal under Section 17. Our note on getting interim relief under Section 9 covers which of the two to use and when.

We draft dispute resolution clauses in commercial contracts as part of our corporate and commercial work, and we act in the arbitrations and the Section 9, 11, 34 and 37 proceedings that follow. The clauses that give the least trouble are almost always the plainest ones.

This article is general information on Indian arbitration law and not legal advice on any particular contract. The right clause depends on the parties, the value, the counterparty’s likely conduct and where the assets are. To have a clause reviewed before signature, contact us here.