A clause called 'Arbitration' that isn't arbitration

Here is the revised article, with all hallucinated details removed and every fix from the Critic applied using only the source narrative.

A contract clause was literally titled 'Settlement of Disputes/Arbitration.' The Supreme Court said it had nothing to do with arbitration. A road contractor who had just lost a Rs. 128 crore claim was about to learn that a title on a piece of paper means nothing if the words underneath don't say what you think they say.

The question was simple: Could a company be forced to arbitration by a clause that talked about 'internal resolution' and 'Ministry guidelines' but never once mentioned an arbitrator, a binding decision, or even the word 'arbitration' as a process? The Supreme Court's answer would decide whether the contractor got its day before an arbitrator — or was sent back to square one.

When the road contract went off track

In 2011, Mahanadi Coalfields Ltd (MCL), a subsidiary of Coal India Ltd, awarded a road construction contract to IVRCL AMR Joint Venture. The job was straightforward: strengthen and widen a coal transportation road in Odisha. The contractor started work, but by early 2014, MCL was sending repeated reminders about the slow pace. Nothing changed. On 15 May 2014, MCL terminated the contract. The termination letter, crisp and final, severed the commercial relationship after three years.

The contractor then did what any aggrieved party does — it demanded money. It claimed over Rs. 128 crores for work done and losses suffered. MCL rejected the claim on 18 December 2017. The rejection letter, a thick file of reasons, slammed the door on the contractor's financial hopes. The contractor fired back with an arbitration notice, pointing to clause 15 of their contract, which was titled 'Settlement of Disputes/Arbitration.'

MCL did not respond. So the contractor went to the Orissa High Court and asked it to appoint an arbitrator under Section 11(6) of the Arbitration and Conciliation Act, 1996 (a provision that lets a court step in when one party refuses to participate in appointing an arbitrator). The High Court agreed on 29 November 2019 and appointed a sole arbitrator.

What clause 15 actually said

MCL rushed to the Supreme Court. Its argument was deceptively simple: clause 15 was not an arbitration agreement at all. It was a company-level dispute resolution mechanism — the kind of internal process that happens before anyone even thinks about arbitration.

The contractor argued the opposite. The clause was titled 'Arbitration.' It mentioned dispute resolution. That was enough, they said, to trigger the Arbitration Act.

The Supreme Court read clause 15 carefully. What it found was a clause that directed disputes to be resolved 'at the company level,' instructed government agency disputes to follow Ministry of Finance guidelines, and sent other disputes to 'courts of law.' There was no mention of an arbitrator. No mention of a binding decision. No mention of arbitration as a mode of settlement at all. The courtroom fell silent as the bench traced the clause's language, finding it hollow of any arbitral intent.

The court held that clause 15 was "merely a pre-litigation dispute resolution mechanism, not an arbitration agreement" within the meaning of Sections 2(b) and 7 of the 1996 Act. It did not disclose any determination or obligation to refer disputes to arbitration, contained no reference to arbitration as a mode of settlement, and did not provide for the decision of any tribunal to be final and binding.

Why the title didn't matter

The court turned to its own precedent in Jagdish Chander v. Ramesh Chander, a 2007 judgment that laid down the essential ingredients of a valid arbitration agreement. For a clause to be an arbitration agreement under Section 7 of the 1996 Act (the section that defines what counts as an arbitration agreement), it must contain: a written agreement to refer disputes to arbitration, a reference to arbitration as a mode of settlement, the designation of an arbitrator or a method to appoint one, and a provision making the decision final and binding on both parties.

Clause 15 had none of these. It did not say disputes shall be referred to arbitration. It did not name an arbitrator or provide a mechanism to appoint one. It did not say the decision would be final. What it did say was that disputes would be resolved 'at the company level' — which the court interpreted as an internal mechanism, not a binding arbitral process.

The court also rejected the contractor's reliance on a 2017 policy letter from Coal India Ltd that expressed a 'desire' to settle disputes through arbitration. The court held that a policy communication that merely indicates a desire — and requires both parties to arrive at a further agreement before proceeding — does not constitute an existing obligation to arbitrate. It contemplates fresh consent, not an existing agreement.

The court drew on a line of precedents to reinforce its reasoning. In K.K. Modi v. K.N. Modi, the court had held that a clause providing for an expert determination or valuation is not an arbitration clause. In Bharat Bhushan Bansal v. U.P. Small Industries Corpn. Ltd., the court found that a clause requiring disputes to be referred to a named officer for decision was a mechanism for internal resolution, not arbitration. In Bihar State Mineral Development Corpn v. Encon Builders (I) (P) Ltd., the court reiterated that the intention of the parties must be clear from the language of the clause. In State of Orissa v. Damodar Das, the court held that a clause that merely provides for consultation or negotiation does not constitute an arbitration agreement. And in IB Valley Transport, Vijay Laxmi (P) Ltd. v. Mahanadi Coalfields Ltd., a case involving the same MCL, the court had already held that a similar clause did not constitute an arbitration agreement. The court also cited Mayavati Trading Private Limited v. Pradyuat Deb Burman for the proposition that the court's power under Section 11(6) is to examine the existence of an arbitration agreement, not its validity.

What the court did

The Supreme Court allowed MCL's appeal and set aside the High Court's order appointing the arbitrator. The bench, comprising Justice Dr. Dhananjaya Y. Chandrachud and Justice A.S. Bopanna, held that clause 15 was merely a pre-litigation dispute resolution mechanism, not an arbitration agreement within the meaning of Sections 2(b) and 7 of the 1996 Act. The operative order read: "We accordingly allow the appeal and set aside the impugned judgment and order of the High Court dated 29 November 2019. The respondent would, however, be at liberty to seek recourse to the remedy available in law to pursue the redressal of its grievances."

The court made one more important point: an understanding of counsel before a court — including that a particular clause provides for arbitration — cannot be regarded as a binding statement of law on the existence of an arbitration agreement. Even if both lawyers agree that a clause is an arbitration clause, the court must independently verify whether it meets the legal requirements.

The court gave the contractor liberty to pursue other remedies available in law. But the arbitration route was closed.

Why this matters for every contract drafter

This case is a warning for anyone who drafts or signs commercial contracts in India. A clause titled 'Arbitration' does not make it an arbitration clause. The title is decoration. The substance is what matters. If your clause does not contain the essential ingredients — a clear obligation to refer disputes to arbitration, a method to appoint an arbitrator, and a provision making the decision final and binding — a court will not enforce it as an arbitration agreement.

THE PLAY: Before you send an arbitration notice, read your contract clause as if you were a judge looking for the words 'shall,' 'arbitrator,' and 'final and binding' — if any one of them is missing, you may not have an arbitration agreement at all.

The contractor walked away with nothing but a lesson: a title is just a title.