Arbitration Clauses in Contracts: What Businesses Should Check

Most commercial contracts contain an arbitration clause, but a poorly drafted clause can lead to years of litigation about the arbitration itself. Recent Supreme Court decisions have changed the position on two common issues.

1. One party cannot appoint the sole arbitrator

• TRF Ltd. v. Energo Engineering Projects Ltd., (2017) 8 SCC 377: a person who is ineligible to act as an arbitrator cannot nominate one.
• Perkins Eastman Architects DPC v. HSCC (India) Ltd., (2020) 20 SCC 760: a party with an interest in the outcome cannot unilaterally appoint a sole arbitrator.
• Central Organisation for Railway Electrification v. ECI-SPIC-SMO-MCML (JV), 2024 SCC OnLine SC 3219 (Constitution Bench, decided 8 November 2024): unilateral appointment clauses in public–private contracts violate the principle of equal treatment of parties. A party cannot be compelled to choose its arbitrator from a panel curated by the other side. The ruling applies prospectively to appointments made after the judgment.

2. Unstamped agreements

In In Re: Interplay between Arbitration Agreements under the Arbitration and Conciliation Act, 1996 and the Indian Stamp Act, 1899, 2023 SCC OnLine SC 1666 (seven-judge Bench, decided 13 December 2023), the Court held that an unstamped or insufficiently stamped agreement is inadmissible in evidence but not void. The defect is curable, and the question of stamping is to be decided by the arbitral tribunal, not by the court at the stage of appointing an arbitrator.

Drafting checklist

• Provide for a neutral appointment mechanism, such as appointment by an arbitral institution or by agreement of both parties.
• Specify the seat of arbitration, the number of arbitrators, the language and the governing law.
• Consider a pre-arbitration negotiation or mediation step with clear timelines.
• Pay the appropriate stamp duty on the main contract at the time of execution.

Key judgments

• Central Organisation for Railway Electrification v. ECI-SPIC-SMO-MCML (JV), 2024 SCC OnLine SC 3219.
• Perkins Eastman Architects DPC v. HSCC (India) Ltd., (2020) 20 SCC 760.
• TRF Ltd. v. Energo Engineering Projects Ltd., (2017) 8 SCC 377.
• In Re: Interplay between Arbitration Agreements and the Indian Stamp Act, 2023 SCC OnLine SC 1666.