A clause titled 'Arbitration' that isn't arbitration

The contract said 'Arbitration' in big letters. But when the contractor tried to use it, the Supreme Court said: that's not what you think it is.

Mahanadi Coalfields Ltd had terminated a road construction contract with IVRCL AMR Joint Venture in May 2014. The contractor, staring at rejected claims worth over Rs. 128 crores, turned to the clause titled 'Settlement of Disputes/Arbitration' and asked the Orissa High Court to appoint an arbitrator. The High Court agreed. The Supreme Court did not.

When the contractor reached for the clause

In December 2011, Mahanadi Coalfields—a subsidiary of Coal India Limited—awarded IVRCL AMR Joint Venture a contract to widen a coal transportation road in Orissa. The work stalled. Despite repeated warnings, the contractor could not keep up with the schedule. By May 2014, the employer had enough: the contract was terminated. The termination letter, dated 15 May 2014, was the final word on a project that had been faltering for years.

The contractor did not walk away quietly. It raised claims exceeding Rs. 128 crores. Mahanadi Coalfields rejected them by a letter dated 18 December 2017—a crisp, final response that left the contractor with no internal remedy. That is when the contractor opened the contract agreement and pointed to clause 15, a section carrying the promising title 'Settlement of Disputes/Arbitration'. The contractor then filed an application under Section 11(6) of the Arbitration and Conciliation Act, 1996—the provision that allows a court to appoint an arbitrator when one party refuses to cooperate—before the Orissa High Court at Cuttack.

The High Court, on 29 November 2019, allowed the application and appointed a sole arbitrator. The courtroom that day would have seen the judge signing the order, the file stamped, the arbitrator named. Mahanadi Coalfields appealed to the Supreme Court.

What the clause actually said

The Supreme Court bench—Justice Dr. Dhananjaya Y. Chandrachud and Justice A.S. Bopanna—read the clause closely. What they found was not an arbitration agreement. It was something else entirely. The bench examined the text of clause 15, its pages perhaps worn from handling, and found no trace of a binding arbitration mechanism.

Clause 15 set up an internal dispute resolution mechanism. It required disputes to be first examined by a designated company officer. If the officer's decision did not satisfy the contractor, the clause directed the contractor to approach a court of law. There was no mention of an arbitrator. There was no written agreement to refer disputes to arbitration. There was no binding obligation on either party to submit to arbitration. The clause lacked every essential attribute that Section 7 of the Arbitration and Conciliation Act, 1996—the section that defines what counts as a valid arbitration agreement—requires: a written agreement to refer present or future disputes to arbitration, a clear intention to make arbitration the binding mode of settlement, and the designation of an arbitrator or a method to appoint one.

The contractor argued that a 2017 policy letter from Coal India Limited, the parent company, expressed a desire for arbitration in disputes involving its subsidiaries. The court rejected this argument too. A policy letter that merely contemplates the possibility of future arbitration—and requires both parties to reach a separate agreement before proceeding—cannot substitute for an actual arbitration clause under Section 7. The letter was, at best, an expression of hope, not a binding obligation.

The court held, in its own words, that clause 15 "lacked the essential attributes" of an arbitration agreement: no written agreement to refer disputes to arbitration, no reference to arbitration as a mode of settlement, and no binding obligation to arbitrate. The title 'Settlement of Disputes/Arbitration' was a label, not a legal reality.

Why the label did not matter

The Supreme Court applied the principles from Jagdish Chander v. Ramesh Chander (2007) 5 SCC 719, a precedent that laid down the essential attributes of an arbitration agreement. That judgment held that a clause must contain an unequivocal intention to submit disputes to arbitration, a mechanism for appointing an arbitrator, and a binding obligation on both parties. Clause 15 had none of these. A clause that merely provides for internal talks and then directs parties to go to court does not meet the test—no matter what its title says.

The court also referred to K.K. Modi v. K.N. Modi (1998) 3 SCC 573, which held that a dispute resolution clause must contain an unequivocal intention to arbitrate, and that a clause providing for internal discussion followed by court proceedings does not qualify. The court cited Bihar State Mineral Development Corpn v. Encon Builders (I) (P) Ltd. (2003) 7 SCC 418, which reinforced the same principle: the substantive text, not the title, determines whether a clause is an arbitration agreement. Clause 15 had none of it.

Other precedents were also examined. In Bharat Bhushan Bansal v. U.P. Small Industries Corpn. Ltd (1999) 2 SCC 166, the court had held that a clause requiring disputes to be referred to a named officer for decision, with no provision for arbitration, does not constitute an arbitration agreement. In State of Orissa v. Damodar Das (1996) 2 SCC 216, the court similarly found that a clause providing for internal review followed by court access was not arbitration. The Supreme Court also referred to IB Valley Transport, Vijay Laxmi (P) Ltd. v. Mahanadi Coalfields Ltd (2014) 10 SCC 630, a case involving the same employer, which had already established that Mahanadi Coalfields' standard dispute clauses did not create arbitration agreements. The court also cited Mayavati Trading Private Limited v. Pradyuat Deb Burman (2019) 8 SCC 714, which reaffirmed the limited scope of judicial intervention at the stage of appointment under Section 11(6)—but only where a valid arbitration agreement exists.

The court made one more point: an understanding of counsel recorded in a court order about the existence of an arbitration agreement does not bind the court. The question of whether a valid arbitration agreement exists is a question of law, not a matter of consent between lawyers. A court order cannot create an arbitration agreement where the contract itself has none.

What the court decided

The Supreme Court allowed the appeal and set aside the impugned judgment and order of the Orissa High Court dated 29 November 2019. The arbitrator appointed by the High Court lost jurisdiction. The contractor was left free to "seek recourse to the remedy available in law to pursue the redressal of its grievances"—but not through arbitration. The court's operative order was clear: the appeal is allowed, the High Court order is set aside, and the respondent is at liberty to pursue other remedies. Pending applications, if any, stand disposed of.

Why this matters for every contract drafter

This judgment is a warning to anyone who drafts or relies on dispute resolution clauses. A title that says 'Arbitration' does not make it arbitration. If the substantive text of the clause does not contain the essential elements of Section 7—a written agreement, a binding obligation, a designated arbitrator or method—the clause is dead on arrival. The Supreme Court's reasoning in Mahanadi Coalfields Ltd & Anr. v. M/s IVRCL AMR Joint Venture is a masterclass in reading the substance, not the label.

For contractors, the lesson is equally stark: before you invoke a dispute resolution clause, read its substantive provisions—not its title—and ask: does this clause create a binding obligation to arbitrate, or does it just send me to court? The answer could save you years of litigation and crores in legal fees.

THE PLAY: Before you invoke a dispute resolution clause, read its substantive provisions—not its title—and ask: does this clause create a binding obligation to arbitrate, or does it just send me to court?

The clause said 'Arbitration' in big letters. The court read the small ones.