By Esha Potdar | CORD
A drafting note for general counsel and contract teams.
Why a clause that looks fine can fail :
Most arbitration clauses in commercial contracts are drafted in the last hour of a deal. They are copied from a template, lightly edited, and signed off without much scrutiny. By that point, everyone in the room is focused on the commercial terms: the price, the timelines, the warranties, the indemnities. The dispute resolution clause is treated as boilerplate. It is the last paragraph anyone reads, and often the only one no one challenges.
Then, sometimes years later, a dispute arises. The parties turn to the clause they signed and find that it does not quite work. The institution they named does not exist. The clause says disputes "may" be referred to arbitration when it should have said "shall." The seat of the arbitration is unclear. One side is empowered to pick the arbitrator on its own, which is no longer permitted under Indian law.
And so the parties end up in court, the very forum the clause was meant to keep them out of. They spend a year, sometimes two, fighting about what their own clause means before any tribunal is even constituted. Costs mount. Commercial relationships fray. The mechanism that was supposed to deliver speed and finality delivers neither.
Clauses of this kind have a name. In 1974, Frédéric Eisemann, then with the ICC International Court of Arbitration, described them as "pathological." The term has stuck because it captures something exactly right: these clauses are sick at the level of their drafting. The defect is not always visible on the page. It shows up when the clause is put to work.
Most disputes do not fail at the hearing. They fail in the contract, in a clause that was drafted quickly, borrowed from a precedent, or never tested against the case law that has quietly overtaken it.
The reassuring part is that most pathological clauses fail in a small number of recognisable ways.
Below are four of the most common pathologies, drawn from Supreme Court decisions. The fix for each is straightforward. The cost of ignoring it is not.
Mistake 1: Letting one party pick the sole arbitrator
The defective clause: "The sole arbitrator shall be appointed by the [Lender / Managing Director / Chairman]."
This clause appears in standard form contracts across Indian lending and procurement. It looks efficient. It is, however, unenforceable.
In Perkins Eastman Architects DPC v HSCC (India) Ltd., 2019 SCC OnLine SC 1517, the Supreme Court held that a party with an interest in the outcome of a dispute cannot hold the unilateral right to appoint the sole arbitrator. The reasoning is not complicated: a party with skin in the game should not get to choose the judge. Where a clause says otherwise, the appointment falls and the High Court steps in to appoint instead, adding months to a process the clause was meant to accelerate.
For NBFCs and lenders specifically, this is a live and immediate problem. A significant number of standard form contracts drafted before 2019 still carry this language. They are unenforceable on this point and need to be reviewed and reissued.
The fix: Appointment by an independent arbitral institution, or a panel-based mechanism where each party has a meaningful and equal selection right.
Mistake 2: Confusing the seat with the venue
The defective clause: "Arbitration proceedings shall be held in Mumbai. The courts of New Delhi shall have exclusive jurisdiction."
This clause contains two cities, one arbitration, and a question that will eventually be answered by a judge rather than the parties, because the parties never answered it themselves.
The seat of an arbitration is its legal home. It determines which courts supervise the proceedings, hear interim applications, and rule on any challenge to the award. The venue is simply where hearings physically take place. They are not the same concept, and clauses that treat them interchangeably create expensive ambiguity.
The seat-centric framework in Indian arbitration law was established by the Constitution Bench in Bharat Aluminium Co. v Kaiser Aluminium Technical Services Inc., (2012) 9 SCC 552, the foundational decision on how Indian courts approach questions of seat and supervisory jurisdiction. Building on that, a three-judge bench in BGS SGS Soma JV v NHPC Ltd., (2020) 4 SCC 234 held that the designation of a seat carries with it the exclusive jurisdiction of the courts at that seat. Where the clause names a place but says nothing about whether it is the seat, courts must reconstruct the parties' intention from whatever language is available. That reconstruction takes time and money that the parties have already spent.
The fix: Name the seat explicitly. "The seat of arbitration shall be [city]. The venue of hearings may be agreed by the tribunal." Two sentences. No ambiguity.
Mistake 3: Writing "may" instead of "shall"
The defective clause: "Any dispute arising under this Agreement may be referred to arbitration."
After the complexity of seat and venue, it can feel almost inconceivable that the most prevalent drafting pathology in Indian arbitration comes down to a single word. It does.
In Jagdish Chander v Ramesh Chander Aneja, (2007) 5 SCC 719, the Supreme Court held that an arbitration clause must reflect a present, binding decision to arbitrate. A clause that uses "may", "if the parties so determine", or "if the parties so desire" is not an arbitration agreement. It is, at best, an agreement to agree and Indian courts will not enforce it as a basis for constituting a tribunal.
This is not merely a matter of drafting preference. Article 7 of the UNCITRAL Model Law defines an arbitration agreement as one by which the parties undertake to submit their disputes to arbitration. Section 7 of the Indian Arbitration and Conciliation Act, 1996 mirrors that language. A clause using permissive language does not meet that threshold.
The fix: Replace "may" with "shall." The clause must impose an obligation, not preserve an option.
Mistake 4: Naming an institution that does not exist
The defective clause: "Disputes shall be referred to arbitration administered by the Singapore Chamber of Commerce."
The Singapore Chamber of Commerce is not an arbitral institution. It never has been. And yet this clause, or variations of it, has found its way into contracts, been signed by parties, and eventually been argued before courts.
The same risk arises wherever a clause names an institution that has since been renamed, references institutional rules without naming the administering institution, or misnames an institution by a single word.
The fix: Name the institution and its rules with precision. "Administered by [institution] in accordance with the [institution] Arbitration Rules in force at the time of reference." If there is any doubt about the institution's current name or the title of its rules, check before signing, not after.
A Recent Illustration: Letting One Party Curate the Pool of Institutions
The four mistakes above have been recurring features of Indian arbitration litigation for years. A judgment delivered by the Bombay High Court on May 7, 2026, in Ajazul Haque Khan v. ICICI Bank Limited (Commercial Arbitration Petition (L) No. 16052 of 2026, per Justice Somasekhar Sundaresan) illustrates a variant that is particularly relevant to institutional and financial services contracts: a clause that appears to offer a choice of ODR platform, but where the list of platforms from which that choice may be made is curated solely by one of the parties.
The arbitration clause in that case permitted either party to appoint any ODR institution from a list published on the bank’s website. The Court found this mechanism, where the initiating party’s chosen platform became the appointing institution, selected from a list curated entirely at one party’s discretion to be fundamentally incompatible with the foundational principle of party autonomy.
As the Court held, a choice made from a list curated by the other party, especially when that list had only one ODR institution to proceed with is not, in substance, a choice at all.
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Conclusion
A well-drafted arbitration clause is not a procedural formality; it is a critical risk-allocation mechanism that determines how disputes will be resolved once the commercial relationship breaks down. Yet, Indian courts continue to encounter recurring drafting failures in high-value disputes, where ambiguity in the clause often results in avoidable litigation, delay, and increased costs.
These errors are neither technical nor inevitable. They arise from a lack of precision in expressing party intent: the use of optional rather than mandatory language, failure to clearly designate the seat of arbitration, unilateral or structurally biased appointment mechanisms, and incorrect identification of arbitral institutions. Each of these defects undermines the efficiency and enforceability of the arbitral process, despite being entirely preventable through careful drafting.
The lesson for contract drafters is straightforward. It is not enough for an arbitration clause to merely reference arbitration or provide a nominal choice of institution. The clause must reflect a clear, enforceable, and genuinely balanced agreement between the parties. Precision in drafting is what ultimately preserves party autonomy, minimizes judicial intervention, and ensures that disputes are resolved in the forum the parties actually intended
References:
Statute and instruments
- The Arbitration and Conciliation Act, 1996
- UNCITRAL Model Law on International Commercial Arbitration, 1985 (with amendments adopted in 2006)
- Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958 (the New York Convention)
Cases
- Jagdish Chander v Ramesh Chander Aneja, (2007) 5 SCC 719
- Bharat Aluminium Co. v Kaiser Aluminium Technical Services Inc., (2012) 9 SCC 552
- Pricol Ltd. v Johnson Controls Enterprise Ltd., (2015) 4 SCC 177
- Perkins Eastman Architects DPC v HSCC (India) Ltd., 2019 SCC OnLine SC 1517
- BGS SGS Soma JV v NHPC Ltd., (2020) 4 SCC 234
- Ajazul Haque Khan v. ICICI Bank Limited, Commercial Arbitration Petition (L) No. 16052 of 2026