A contract clause missing 'final and binding' — still valid arbitration?

The builder argued their agreement had no arbitration clause because it didn't say 'final and binding.' The Supreme Court disagreed — and appointed an arbitrator anyway.

An agreement, a delay, and a clause under scrutiny

In 2015, a landowner in Aurangabad signed a Development Agreement with a builder. The deal was straightforward: the builder would construct 'Amay Apartments' on the landowner's plot, finish the work within 15 months, and hand over 45% of the built area to the landowner. The builder would keep 55% for himself. It was the kind of arrangement that thousands of landowners across Maharashtra enter into every year — a handshake dressed up as a contract, typed out on legal paper.

But the builder did not finish on time. The months slipped past. The landowner waited, then waited some more. Finally, he terminated the agreement with a handwritten letter, its ink smudged from the pressure of his pen. When the builder refused to walk away quietly, the landowner did what any party to a contract would do: he looked for the dispute resolution clause.

He found Clause 18. And that is where the trouble began.

What Clause 18 actually said

Clause 18 of the Development Agreement stated that disputes between the parties would be referred to arbitration. The language was simple, almost casual — it did not contain what lawyers call the 'magic words.' It never said the arbitrator's decision would be 'final and binding' on both parties.

The landowner first approached the District Court in Aurangabad. In September 2016, he obtained an injunction — a court order restraining the builder from selling any of the tenements in the unfinished complex — under Section 9 of the Arbitration and Conciliation Act, 1996. That provision allows a party to seek emergency protection before the arbitration even begins. The court granted it, and the builder was stopped in his tracks.

Then the landowner filed an application under Section 11 of the same Act, asking the court to formally appoint an arbitrator to resolve the dispute. He cited Clause 18. He argued that the parties had clearly agreed to settle their differences through arbitration.

The builder fought back. His argument was simple and devastating: Clause 18 was not an arbitration clause at all. It did not say the decision would be final. It did not say the decision would be binding. Without those words, the builder claimed, there was no valid arbitration agreement under Section 7 of the Arbitration and Conciliation Act, 1996 — the section that defines what counts as a valid arbitration agreement. The builder's lawyers pointed to the clause, their fingers tracing the lines, insisting that the absence of those two phrases was fatal.

When the High Court said no

The Bombay High Court, sitting at its Aurangabad bench, agreed with the builder. On July 7, 2021, the courtroom fell into a heavy silence as the judge read out the order dismissing the landowner's application. The High Court held that Clause 18 lacked the essential ingredients of an arbitration clause — specifically, the stipulation that the arbitrator's award would be 'final and binding.' Without those words, the court said, the clause was not enforceable under Section 7.

The landowner was left with no arbitrator, no remedy, and a builder who could walk away from the agreement scot-free. He appealed to the Supreme Court. The file, thin and worn from travel, made its way to the highest court in the land.

What the Supreme Court saw differently

The bench of Justice Surya Kant and Justice Abhay S. Oka took a fundamentally different view. They asked a question the High Court had not asked: what did the parties actually intend when they wrote Clause 18?

The Supreme Court examined Section 7 of the Arbitration and Conciliation Act, 1996. That section requires an arbitration agreement to be in writing. It can be a separate agreement or a clause inside a larger contract. But the section does not — and this was the key — prescribe any particular form of words. It does not say the clause must contain the phrase 'final and binding.' The court also looked at Section 2(1)(b) of the same Act, which defines an arbitration agreement, and at Section 2(a) of the old 1940 Act for comparative context.

The court then turned to the substance of Clause 18. The clause clearly said that disputes would be referred to arbitration. It clearly said the parties would abide by the decision. The only thing missing was the phrase 'final and binding.'

The Supreme Court held that this was not enough to kill the clause. In its reasoning, the court stated a principle that would echo through every commercial contract in India: "The deficiency of words in an agreement which otherwise fortifies the intention to arbitrate cannot legitimise the annulment of the arbitration clause." Where the parties have shown a clear intention to resolve disputes through arbitration, and where the clause creates an obligation to submit to arbitration, the absence of 'magic words' cannot invalidate the agreement.

The court anchored this reasoning in its own precedents. It cited Bihar State Mineral Development Corporation and Anr. v. Encon Builders (I) (P) Ltd. (2003) 7 SCC 418, which established that courts must look at the substance of the agreement rather than its form. It relied on Jagdish Chander v. Ramesh Chander & Ors. (2007) 5 SCC 719, which held that the intention of the parties is paramount. It also drew support from Karnataka Power Transmission Corporation Ltd. and Anr. v. Deepak Cables (India) Ltd. (2014) 11 SCC 148 and Enercon (India) Ltd. and Ors. v. Enercon GmbH and Anr. (2014) 5 SCC 1, both of which reinforced the principle that party autonomy — the freedom of parties to design their own dispute resolution mechanism — must be protected.

Why the 'final and binding' argument failed

The builder's argument had a surface logic: if a clause does not say the decision is final and binding, how do you know the parties agreed to be bound by it? The Supreme Court answered by reading the clause as a whole. If the parties agreed to refer disputes to arbitration, and agreed to abide by the decision, then the decision is necessarily final and binding — even if those exact words are missing. The court noted that the deficiency of words cannot legitimise the annulment of the clause when the intention to arbitrate is clear.

The court also emphasised a deeper principle: party autonomy must be protected. If two commercial parties clearly intended arbitration, the court should not defeat that intention by demanding a specific vocabulary. The judge's gavel fell, and the silence in the Supreme Court courtroom was one of finality.

The order that changed the game

On September 7, 2022, the Supreme Court delivered its judgment in Civil Appeal No. 6272 of 2022, arising out of SLP (Civil) No. 15989 of 2021. The case was Babanrao Rajaram Pund v. M/s. Samarth Builders & Developers & Anr., and it would be cited as 2022 LiveLaw (SC) 747.

The court set aside the High Court's order. It held that Clause 18 was a valid arbitration agreement. And it appointed Justice P.V. Hardas, a former judge of the Bombay High Court, as the sole arbitrator to resolve the dispute between the landowner and the builder. The arbitrator would be entitled to fees as per the Fourth Schedule of the Arbitration Act — the standard fee structure prescribed by law.

What this means for every contract in India

For lawyers drafting commercial agreements, the message is clear: do not rely on the absence of 'magic words' to escape arbitration. For parties locked in disputes, the message is equally clear: if your contract shows an intention to arbitrate, the court will enforce it — even if the clause is clumsily drafted.

The judgment also has a practical effect on Section 11 applications — applications to the court for the appointment of an arbitrator. Courts must now examine the substance of the dispute resolution clause, not just its form. A clause that says 'disputes shall be referred to arbitration' is enough. You do not need to add 'and the decision shall be final and binding.' The physical copy of the agreement, with Clause 18 underlined in the landowner's own hand, now stands as a testament to that principle.

THE PLAY: When drafting or reviewing a dispute resolution clause, focus on whether the clause creates an obligation to submit disputes to arbitration — not on whether it uses the phrase 'final and binding.'

The apartment in Aurangabad is still unfinished. But the landowner finally has a forum to argue his case — and a judgment that will be cited in courtrooms across the country for years to come. The smell of old paper and the weight of the file have given way to a new beginning.