Consider a mid-size manufacturing company supplying components to a public sector undertaking under a three-year contract. The contract has a “may refer to arbitration” clause, names a defunct institutional body, and was executed on insufficiently stamped paper before December 2023. The PSU defaults on payment. The supplier waits eight months before raising a formal dispute. When arbitration is finally invoked, the counterparty challenges the clause as permissive, disputes the appointment mechanism, and the supplier spends fourteen months in court before a tribunal is even constituted. The supplier had a legitimate claim on the merits from day one. What it did not have was a contract that performed when called upon. That is where the money went.
This is not an unusual case. It is a representative one.
Arbitration law in India has been rebuilt, root and branch, over the last decade. The contracts sitting in most companies’ filing systems have not. That gap, between what the law now permits and what legacy drafting actually delivers, is where disputes turn into write-offs, increasing dispute risks. Think of it as a balance sheet exercise. An arbitration clause is a financial instrument. It either performs when called upon or it does not, and the difference between the two outcomes has nothing to do with the merits of your underlying claim and everything to do with decisions made, usually carelessly, at the contracting table.
Why the enforcement picture has changed
Here is what most risk teams are not pricing in: a company with a properly structured arbitration clause today holds a materially stronger recovery position than the same company held before 2015. The mechanism behind this is Section 36 of the Arbitration and Conciliation Act, as amended. Before 2015, a losing party could park an award in procedural limbo for the better part of a decade. File a challenge, collect an automatic stay, and watch the clock run while the award sat unenforceable. No deposit required. No security. Just delay. The 2015 Amendment killed this. The filing of a challenge no longer freezes the award. The Supreme Court reinforced this as recently as November 2025, in Popular Caterers v. Ameet Mehta, where it set aside a Bombay High Court order granting an unconditional stay and directed the losing party to deposit the full principal as a condition of any stay continuing.
The leverage has moved. Completely.
Courts will set aside an award for fraud, corruption, a violation of natural justice, or an error so obvious it goes to the root of the matter, not for a legal disagreement, not for a finding a party dislikes. In my experience, and from what colleagues across the bar consistently report, the overwhelming majority of challenges fail. The grounds are narrow by design, and courts have held that line. The strategic investment belongs in getting the right tribunal, not in planning the appeal.
The stamping trap is gone, but most contracts were drafted when it was not
For roughly two years, between April 2023 and December 2023, Indian arbitration had a procedural vulnerability so severe it embarrassed the legal community. A five-judge bench held that an unstamped or insufficiently stamped contract was void from the very beginning, as though it had never existed, and that courts must refuse to even appoint an arbitrator until the defect was cured. A counterparty with a losing case on the merits could invoke this at the stage where a party approaches the court to formally appoint an arbitrator, freeze the entire proceeding, and buy months of delay at virtually no cost.
A Constitution Bench overruled this unanimously in December 2023. Non-stamping renders a contract inadmissible in evidence, which is a curable defect, and the question of stamping does not arise at the appointment stage at all. If your contracts were drafted to guard against stamping objections at that stage, that protection is now solving a problem that no longer exists. Stamp duty compliance still matters, because curing a defect mid-proceedings is disruptive and expensive, but the jurisdictional lockout is over.
What bad drafting actually costs:
Three failure modes that give rise to legal risks appear most often in Indian arbitration clauses. First, naming an institution that has dissolved or changed its rules. Second, an appointment mechanism requiring mutual agreement between parties who are, by the time it matters, actively hostile. Third, permissive language. A clause that says disputes “may be referred to arbitration” is fundamentally different from one that says they “shall be referred to arbitration.” May gives the other side a choice. Shall removes it. When a counterparty wants to avoid arbitration, and they will, a single word is all they need.
Name a functioning institution. MCIA and DIAC are the cleaner choices currently. Use mandatory language. Specify the seat, the number of arbitrators, the governing rules. Write the clause as though you expect the counterparty to be uncooperative at every step, because when a real dispute arises, that is precisely what you will encounter.
On seats, CFOs consistently underestimate this.
Judicial Precedents have established that the courts at the chosen seat have exclusive supervisory jurisdiction over the arbitration. No concurrent jurisdiction, no forum shopping, no second bite. Choosing a seat is choosing a court system. Delhi and Mumbai have dedicated Commercial Divisions with judges who have handled hundreds of arbitration applications involving infrastructure claims, financial disputes, complex damages. For any claim above Rs 5 crore, the choice deserves the same rigour as governing law selection.
Arbitrator selection: where most companies make their first mistake
The instinct to appoint a retired Supreme Court judge is understandable. Judicial authority feels like a guarantor of legitimacy. It is not a guarantor of expertise. A technically complex dispute requires a tribunal that understands dispute resolution and the industry. A retired judge learning the subject matter during hearings is delay built into the process from day one.
The Supreme Court recently ruled that one party cannot prepare the list from which the other must choose their arbitrator, even where the tribunal has three members. Contracts with public sector undertakings are full of exactly these structures. They were standard drafting for decades. They are now grounds to challenge the entire proceedings, which means an award that took years to obtain can be attacked at the enforcement stage on the basis of how the tribunal was put together in the first place. Institutional appointment substantially reduces this exposure.
Two clocks. Most companies are not watching either.
Domestic arbitrations operate under a twelve-month award deadline from the date pleadings are completed, with a six-month consensual extension available. Beyond eighteen months a court application is needed. Getting there requires a separate application that becomes a dispute of its own. Both sides file arguments, dates are taken, orders are challenged. The original arbitration runs alongside a parallel court fight about whether it is even allowed to continue. It costs money, it costs time, and it is entirely unnecessary if someone tracks the deadline from the day the pleadings close.
The Bharatiya Sakshya Adhiniyam, 2023, which replaced the Indian Evidence Act from July 2024, requires a certificate authenticating any electronic record offered as secondary evidence. Emails, WhatsApp messages, digital contracts: none of it is admissible without the certificate. Build the process to generate these as a matter of course, not as a crisis response when a hearing date is three weeks away.
The two overrides that contract drafters routinely ignore
First, The MSME Act entitles any registered MSME supplier to take their payment dispute to a statutory council, regardless of the arbitration clause in your contract. The interest rate is punishing. Three times the RBI bank rate, compounded every month, and no one can negotiate it down or write it out of the agreement. The clock runs from the date of supply. By the time the exposure surfaces, the interest frequently exceeds the principal.
Second, Once a counterparty enters formal insolvency proceedings, a legal freeze kicks in that stops all enforcement actions against the company. An arbitral award you have already obtained becomes one creditor claim among many. Recovery depends on the repayment arrangement that the insolvency professional negotiates with creditors, not on the merits of your original claim. The risk professional should price this risk at the contracting stage.
The Cox and Kings exposure most group companies have not addressed
Cox and Kings, decided in December 2023, established one thing plainly: signing the contract is not the only way to become a party to the arbitration. If the parent negotiated the deal, managed the relationship, and handled performance while a subsidiary held the pen, the tribunal can draw the parent in. The test is mutual intention, inferred from conduct. Group membership alone is not enough, but a parent that runs the commercial relationship while a shell subsidiary signs the paper is exposed. Audit the gap between the contracting entity and the operating entity. It is either closed or it is not.
Three things worth doing before the next dispute notice arrives
The following risk mitigation strategies are worth implementing before the next dispute notice arrives:
Audit the arbitration clauses in high-value active contracts against the failure modes above. Review supplier payment terms against MSME registration status and model the interest exposure under delayed payment scenarios. Build the certificate process for electronic records into standard document management before it becomes urgent.
The law has done its part. The architecture is sound. What remains is the contract on your desk, probably drafted under a different legal regime, probably not reviewed since, and the decision of whether to fix it now or explain it later. This is, fundamentally, an exercise in risk management fundamentals.
The author of this article is Tushar Nair, Advocate, Supreme Court of India and various High Courts.
FAQS
1.What are the risks in arbitration?
Indian arbitration law has been rebuilt, root and branch, over the last decade. The contracts sitting in most companies’ filing systems have not. That gap, between what the law now permits and what legacy drafting actually delivers, is where disputes turn into write-offs. Herein lies the risks in arbitration. An arbitration clause is a financial instrument. It either performs when called upon or it does not, and the difference between the two outcomes has nothing to do with the merits of your underlying claim and everything to do with decisions made, usually carelessly, at the contracting table.
2. How does arbitration impact enterprise risk management (ERM)?
Here is how arbitration impacts enterprise risk management (ERM):
- Most risk teams are not pricing in the fact that a company with a properly structured arbitration clause today holds a materially stronger recovery position than the same company held before 2015. The mechanism behind this is Section 36 of the Arbitration and Conciliation Act, as amended.
- Before 2015, a losing party could park an award in procedural limbo for the better part of a decade. File a challenge, collect an automatic stay, and watch the clock run while the award sat unenforceable. The 2015 Amendment killed this.
- The filing of a challenge no longer freezes the award. The leverage has moved. Completely.
- Courts will set aside an award for fraud, corruption, a violation of natural justice, or an error so obvious it goes to the root of the matter, not for a legal disagreement, not for a finding a party dislikes.
- The grounds are narrow by design, and courts have held that line. The strategic investment belongs in getting the right tribunal, not in planning the appeal.
3. What are common mistakes in arbitration contracts?
The common mistakes in arbitration contracts are as follows –
- First, naming an institution that has dissolved or changed its rules.
- Second, an appointment mechanism requiring mutual agreement between parties who are, by the time it matters, actively hostile.
- Third, permissive language. A clause that says disputes “may be referred to arbitration” is fundamentally different from one that says they “shall be referred to arbitration”. May gives the other side a choice. Shall removes it. When a counterparty wants to avoid arbitration, and they will, a single word is all they need.
Additionally, the two overrides that contract drafters routinely ignore –
- First, the MSME Act entitles any registered MSME supplier to take their payment dispute to a statutory council, regardless of the arbitration clause in your contract. The interest rate is punishing. The clock runs from the date of supply. By the time the exposure surfaces, the interest frequently exceeds the principal.
- Second, once a counterparty enters formal insolvency proceedings, a legal freeze kicks in that stops all enforcement actions against the company. An arbitral award you have already obtained becomes one creditor claim among many. Recovery depends on the repayment arrangement that the insolvency professional negotiates with creditors, not on the merits of your original claim. This risk should be priced at the contracting stage.
