Supreme Court of India: Necessary Ingredients of an Enforceable Arbitration Agreement
In South Delhi Municipal Corporation of Delhi v. SMS Limited 2025 INSC 693, the Supreme Court of India, while deciding upon the validity of a dispute resolution clause in question, analysed the necessary ingredients of a valid arbitration agreement under Indian law.
Factual Matrix
In this case, three petitions were decided together due to commonality of issues. In the facts of the case, Municipal Corporations in Delhi had provided certain construction contracts to the private contractors. Disputes arose between the parties majorly because Municipal Corporations failed to provide vacant possession of land to the contractors. This led contractors to invoke dispute resolution clauses provided in the EPC Contracts which were majorly common. At the heart of the controversy lies the interpretation of this dispute resolution clause where parties were at loggerhead. The two set of clauses in three different contracts reads as under:-
Type A Clause
“ARTICLE 20: DISPUTES
In the event that any dispute, controversy or claim arises among the Parties in connection with or under this Agreement or the interpretation of any of its provisions or upon the occurrence of an event of Default any party shall refer the dispute, controversy or claim to the Commissioner, MCD.
Section 20.1 Mediation by Commissioner
The Party that initially issue the notice of intention to refer the matter to the MCD and MCD in Consultation with Consultant will appoint a officer from within or outside MCD who will look into the written documents; (i) a description of dispute; ii) a statement of that party’s position; and (iii) copies of relevant documentary evidence in support of such position.
Section 20.2 Performance during Dispute Resolution
Pending the submission of a dispute, controversy or claim to the officer appointed by the MCD and thereafter until the final decision of the officer appointed by the MCD, as the case may be, the parties shall continue to perform all of their obligations under this Agreement, without prejudice to a final adjustment in accordance with such decision.
Section 20.3 Survival
The provisions relating to indemnification contained in Section 15.2, intellectual property contained in Section 18, confidentiality contained in Section 19.1 and the dispute resolution provisions contained in this Article 20 shall survive the termination of this Agreement.”
Type B Clause
“ARTICLE 20: DISPUTES
In the event that any dispute, controversy or claim arises among the Parties in connection with or under this Agreement or the interpretation of any of its provisions or upon the occurrence of an event of Default any party shall refer the dispute, controversy or claim to the Commissioner, MCD.
Section 20.1 Mediation by Commissioner
The Party that initially issued the notice of intention to refer the matter to the MCD and MCD in Consultation with Consultant will appoint a officer who will look into the written documents; (i) a description of dispute; (ii) a statement of that party’s position; and iii) copies of relevant documentary evidence in support of such position.
(a) Within 10 days of receipt of the above documents, the other parties shall submit; (i) a description of dispute; (ii) a statement of that party’s position; and iii) copies of relevant documentary evidence in support of such position.
(b) The officer appointed by MCD may call for such further documentary evidence and/or interview such persons, as it may deem necessary in order to reach a decision.
(c) The officer appointed by MCD shall give notice to the parties of its decision within 20 days of receipt of the documents provided by the parties pursuant to subsection (b) and (c) above. The decision of the officer appointed by MCD shall be binding.
(d) The officer appointed by the MCD should give decision in writing. The decision of the MCD shall be final and binding on party…”
The contractors treated the above clause(s) as arbitration clause and accordingly sought consent of Municipal Corporations for appointment of arbitrators. This request was declined by the Corporations which in turn led the contractors to file application(s) before the Court seeking appointment of arbitrators. In this regard, in two cases, High Court treated these clauses as arbitration clause while in one case, the High Court refused to read these as arbitration clause(s). The decisions of the High Courts where assailed before the Supreme Court in the present case.
Parties Contentions
As per the Municipal Corporations, the clause(s) can’t be read as mandating arbitration. As evident, under these clause(s) any party can refer the dispute to Commissioner of MCD. This according to contractors substantiates that these clause(s) are arbitration clause(s). According to Municipal Corporations, a reference to an officer of the authority, even if made by both parties, does not meet the essential attributes of an arbitration clause.
As per them, the clause(s) does not provide reference to a private tribunal or an independent adjudicator and instead, it envisages a process controlled by the MCD Commissioner or his appointee and thus lacks the neutrality and party autonomy inherent in arbitration.
The Municipal Corporations further argued that the clause(s) explicitly uses the word ‘mediation’ and therefore, the clause(s) must be read strictly as otherwise it would amount to rewriting of contract against the settled legal principles.
Per contra, the contractors inter alia argued that the above clause(s) are arbitration clause(s) as they provide mutual recourse, the adjudicator are independent / impartial as they may be appointed within / outside of MCD, the process envisaged is adjudicatory in nature which resembles arbitration process and the clause(s) provide finality to the decision of adjudicator. As per contractors, the clause(s) reflects intention of the parties to arbitrate which is paramount even in the absence of the words ‘arbitration’ / ‘arbitrator’ in the clause. It further contended that Municipal Corporations being government agencies are bound to the principles of fairness, transparency and reasonableness and it cannot rely on ambiguous or cleverly drafted provisions to evade its contractual commitments.
Court’s Observation
In light of the rival contentions, the Supreme Court was called upon to decide whether the dispute resolution clauses viz. Article 20 constitute a valid arbitration agreement between the parties. While deciding this issue, the court conducted two-pronged inquiry i.e., what are the necessary ingredients of an enforceable arbitration agreement; and whether Article 20 contain those ingredients.
Essential ingredients of an arbitration agreement
The Court observed that the existence of an arbitration agreement necessarily postulates the presence of the following ingredients:-
Clear Intent to Arbitrate
- The agreement must reflect a definitive and mutual intention to refer disputes to arbitration, excluding the jurisdiction of civil courts in respect of such matters.
- Consensus ad-idem or ‘meeting of the minds’ of the respective parties towards settling any disputes that may arise between them through the process of arbitration must be made out from the form and substance of the legal agreement or contract.
- This ideally entails the parties reducing their intention of entering into an arbitration agreement into some tangible medium.
Binding Adjudicatory Process
- The arbitration agreement must contemplate a binding and enforceable resolution of disputes.
- The process must culminate in a final and conclusive award, not a non-binding recommendation or mediation outcome.
- In essence, the result of the arbitral process should be final and binding on both the parties.
Compliance with Arbitration Norms
- While the statutory minimums do not universally require specification of seat, venue, or applicable procedural rules, best practices and several foreign jurisdictions encourage clarity in these respects to ensure legal certainty.
- The agreement should allow for party autonomy in the appointment of arbitrators and procedural conduct, subject to statutory safeguards.
- The adversarial process, which inheres in the institution of arbitration, must also be given due credence via provision for an impartial adjudicatory body, whose decisions involve deference to the principles of natural justice.
The Court added that all the elements identified hereinabove must co-exist, apart from being duly proven by the party which seeks to assert that an arbitration agreement subsists.
Accordingly, the court clarified that a dispute resolution clause may only rise to the level of a valid arbitration clause or agreement when it signifies a clear intent to arbitrate, entails a binding adjudicatory process, and contemplates compliance with general arbitral norms
Decision of the Supreme Court
Applying the above position of law on the facts of the case, the Court held as under:-
- Article 20 does not reveal any express intent to arbitrate because:-
(1) The clause is titled as ‘Mediation by Commissioner’, which immediately raises a conundrum as to the mode of dispute resolution. While as per the settled principles, there is no need to have express reference to arbitration, such principles cannot be stretched so far so as to make them wholly unworkable.
(2) The conspicuous absence of the words ‘arbitration’ or ‘arbitrator’ from the dispute resolution clauses adds fuel to the fire.
(3) Moreover, the reference is to the ‘Commissioner, MCD,’ rather than to an arbitral tribunal or an independent third-party adjudicator. This suggests an internal dispute resolution mechanism rather than an external arbitration forum.
(4) Clause B type introduce further procedural details, such as the officer calling for additional documents and conducting interviews. However, none of these procedural steps alter the fundamental nature of the process which at best is an elaborate administrative fact-finding exercise, rather than an arbitral adjudication.
(5) Additionally, the appointment of the decision-maker is entirely within the control of MCD, with no role for the other contracting party in selecting or influencing the selection of the officer. This further undermines the claim that the clause was intended to establish an arbitration framework.
- On a textual and surface-level analysis, Article 20 in both types prima facie seems to satisfy the ingredient of “final and binding nature”. However, it does not impact the outcome of these cases because other forms of decision-making—such as expert determinations, departmental adjudications, and administrative reviews—even when found to be final and binding, do not ipso facto constitute arbitration.
- While the arbitral norms cannot be delineated from stem to stern, we have short-listed some of these norms for the purposes of these appeals, which unfortunately do not find any explicit or implicit mention in Article 20. These are:-
(1) Party autonomy in appointment of arbitrator – Under Article 20, the officer who decides the
dispute(s) is appointed exclusively by MCD, with no input from the contractors.
(2) Adversarial process – Arbitration must be a structured adjudicatory process, where parties are afforded the opportunity to argue their case before a neutral and independent decision-maker. In our considered opinion, Article 20 lacks such an inquiry. It is admitted that there are no provisions for (i) oral hearings; (ii) examination and cross-examination of witnesses; and (iii) application of formal rules of evidence or procedure in the impugned clauses. The appointed officer merely reviews written submissions and, at most, may seek additional documents or conduct interviews.
(3) Neutrality and independence of Arbitrator – Under Article 20, the decision-maker is an officer of MCD, making the process inherently biased in favour of the Municipal Corporation(s).
In view thereof, the court concluded that a holistic analysis of Article 20 in both Type A and B reveal that they do not constitute arbitration agreement under the Indian Arbitration Act.