Introduction

The Supreme Court of India (“Supreme Court”) through its judgment dated May 15, 2025 in South Delhi Municipal Corporation v. SMS Limited, SLP (C) No. 16913 of 2017, has declined to treat the dispute resolution clauses in three concession agreements of the Municipal Corporation(s) of Delhi, as ‘arbitration agreements’ for the purposes of Section 7 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”). The Supreme Court emphasized that for a dispute resolution clause to be treated as an arbitration agreement, it should signify a clear intent of parties to arbitrate, entailing a binding adjudicatory process and should align with best practices of contemporary arbitration.

The Supreme Court, which was hearing three appeals together (i.e., South Delhi Municipal Corporation v. SMS Limited (“SMS Ltd.”), DSC Limited v. Municipal Corporation of Delhi, SLP (C) No. 21437 of 2022 (“DSC Ltd.”) and Municipal Corporation of Delhi v. Consolidated Construction Consortium Limited, SLP (C) No. 17510 of 2023 (“CCC Ltd.”)), highlighted the importance of ensuring precision in drafting dispute resolution clauses, especially in public-private contracts. These appeals had arisen from three judgments of the Delhi High Court in applications seeking appointment of an arbitrator under Section 11 of the Arbitration Act. The Supreme Court cautioned against using ambiguous wording in dispute resolution clauses, which in these cases had resulted in the parties litigating over the dispute resolution mechanism for nearly a decade, while their substantive claims remain unresolved.

This note analyzes the Supreme Court’s decision and discusses the accepted best practices in contemporary arbitration on the touchstone of model arbitration clauses recommended by leading arbitral institutions.

The Supreme Court’s Finding that the Dispute Resolution Clauses were Not Arbitration Agreements

The issue before the Supreme Court revolved around the interpretation of Article 20 of three concession agreements, which contained materially similar dispute resolution clauses. The relevant portion of Article 20 of each concession agreement was

“ARTICLE 20

In the event that any dispute, controversy or claim arises amongst the Parties in connection with or under this Agreement… any party shall refer the dispute, controversy or claim to the Commissioner, MCD [Municipal Corporation of Delhi].”

Section 20.1 Mediation by Commissioner

The Party that initially issued the notice of intention to refer the matter to the MCD and the MCD in Consultation with Consultant will appoint officer …who will look into the written documents; (a) description of dispute; ii) a statement of that party’s position; and (iii) copies of relevant documentary evidence in support of such position” (emphasis supplied)

In two of the three agreements, the dispute resolution clause also stated that “The decision of the MCD shall be final and binding on party…” Notably, however, none of the dispute resolution clauses contained any reference to the word, ‘arbitration’, ‘arbitrators’, or the ‘Arbitration Act’.

The Supreme Court examined Indian and foreign jurisprudence on what constitutes an agreement to arbitrate. It placed heavy reliance on its earlier decisions in K.K. Modi v. K.N. Modi (1998) 3 SCC 573 and Bihar State Mineral Development Corp. v. Encon Builders (2003) 7 SCC 418, which outlined the essential attributes of an arbitration agreement, with particular emphasis on a clear and mutual intent to arbitrate.

Based on its analysis, the Supreme Court laid down a conjunctive test wherein all the elements must co-exist to establish the existence of a valid arbitration agreement.

1. A clear and mutual intent to arbitrate;
2. A binding adjudicatory process which will result in a final decision, and not a non-binding recommendation or a mediated outcome;
3. Compliance with best practices of arbitration i.e., procedural safeguards consistent with arbitral norms, including party autonomy and an impartial adjudicatory body.

Applying the above test, the Supreme Court concluded that the terms of Article 20 of the concession agreements failed to meet the statutory threshold of an arbitration agreement for the purposes of Section 7 of the Arbitration Act, observing that:

1. the clause did not reveal any express intent to arbitrate and to the contrary, the clause referred to mediation indicating a non-adjudicatory conciliation process;
2. the words ‘arbitrator’ or ‘arbitration’ were conspicuously absent;
3. the clause contemplated a reference to the commissioner of the Delhi Municipal Corporation rather than to an impartial tribunal; and
4. the clause was also not consistent with well-established arbitral norms since it did not contemplate any involvement of the private contractor in appointment of the decision maker, and
5. the clause did not contemplate a neutral and independent decision maker.

The Supreme Court held that Article 20 therefore lacked the hallmarks of a genuine arbitration agreement. The mere use of terms like “final and binding” in two of the three clauses, did not automatically transform a dispute resolution clause into an arbitration agreement. In the overall context, it was held that the clause in question merely contemplated an internal administrative review mechanism, which lacked the essentials of a consensual, impartial, and enforceable arbitral process.

Comparing Model Clauses of Leading Institutions with the Dispute Resolution Clause in the Instant Case

While Section 7 of the Arbitration Act, requires that an arbitration agreement must be in writing, it neither prescribes any specific language which is to be used in an arbitration agreement, nor does it mandate incorporating specifics such as seat, venue or any procedural rules. However, as observed by the Supreme Court in this case, “If a clause does not sufficiently align with the accepted best practices of contemporary arbitration, it will generally be unworkable and essentially dead letter.”

In this context, it is worthwhile to examine the model clauses prescribed by leading arbitral institutions such as the Singapore International Arbitration Centre (“SIAC”), International Chamber of Commerce (“ICC”), London Court of International Arbitration (“LCIA”) and the Mumbai Centre for International Arbitration (“MCIA”). These clearly worded clauses follow international best practices and help guide the drafting of an effective arbitration clause.

What is borne out from the model clauses of these institutions is that international best practices recommend specifying: (i) that the disputes are to be resolved by arbitration, (ii) the seat and venue of the arbitration, (iii) the law governing the arbitration agreement, especially in cross-border disputes, (iv) the number of arbitrators and the manner of their appointment, (v) the applicable rules (which, in the case of model clauses, would be the rules of the specific institution recommending the clause), and (vi) in some cases, that the decision would be final and binding on the parties. For instance, the model clause by SIAC serves as a template for arbitration under the SIAC Rules, covering key procedural aspects such as the seat, composition of arbitrators, language, and governing law. Similarly, the ICC model clause mandates that disputes be settled through binding arbitration under its institutional framework. The LCIA model clause places particular emphasis on finality and includes detailed provisions on impartiality, confidentiality, and enforceability.

The dispute resolution clauses in the subject concession agreements did not meet these standards. Not only did they fail to mention arbitration as a mode of dispute resolution, but they also omitted any provision for adjudication by an independent or impartial tribunal. The Supreme Court, in its assessment, held that such a mechanism was legally inadequate and procedurally deficient, as it did not satisfy the essential requirements of a valid arbitration agreement under Indian law. This included the absence of mutual consent and the lack of an independent adjudicatory forum, which are the elements that are fundamental to the legitimacy of any arbitration clause.

Concluding Remarks

The Supreme Court’s decision in South Delhi Municipal Corporation v. SMS Limited serves as a cautionary tale when negotiating public contracts. While the intent behind internal dispute resolution mechanisms may have been administrative efficiency, parties should be aware that the absence of clarity regarding such mechanism, can result in years of preliminary litigation over jurisdiction, as evidenced by the decade-long dispute in the present case.

The dispute resolution clauses in the concession agreement did appear to have some trappings of a final adjudicatory process, and perhaps, could have been considered as ‘arbitration agreements’ had the parties clearly indicated their preference. In fact, the clauses were in writing, mandated reference of existing disputes by either party, required the procedure to take evidence from both sides and determine substantive rights. Moreover, in DSC Ltd. and CCC Ltd., the clauses provided that the decision would be final and binding and in SMS Ltd., the clause contemplated a final decision by the decision maker. These features, i.e., recording evidence, adjudicating rights, and binding enforceability are the hallmarks of an adjudication process, even if the clause was labeled as “mediation”. Even the fact that proposed decision maker was to be an officer of the Corporation and therefore lacked neutrality, could have been viewed in light of the jurisprudence at the time when the agreements were entered into (prior to the 2015 amendment to the Arbitration Act), when such appointment were valid and were in fact very common, especially in public contracts. Such an anomaly could have been resolved by appointing a neutral arbitrator, as the Delhi High Court in the impugned judgments in SMS Ltd. and CCC Ltd. had done.

The Supreme Court, however, highlighted that on a holistic analysis the clauses did not reveal any intent to arbitrate. The Supreme Court expressed serious concern about the ambiguity in the clauses such as the masked absence of the terms, ‘arbitration’, or ‘arbitrator’, and the lack of procedural integrity (unilateral appointment of the mediator) in the clauses.

This decision of the Supreme Court sounds a note of caution to parties and counsel to ensure sufficient precision and clarity in arbitration clauses, to avoid prolonged delays in identifying the dispute resolution mechanism itself.

While public authorities may prefer internal mechanisms for dispute resolution, such mechanisms must be clearly distinguished from arbitration if they are not intended to be binding or enforceable under the Arbitration Act. Internal mechanisms, or mediation can perhaps be a starting point for the resolution of disputes (e.g., in a multi-tiered dispute resolution clause), however they cannot replace a binding adjudicatory process either by arbitration or by court.

This insight has been authored by Savani Gupte and Utkarsh Trivedi from S&R Associates. They can be reached at [email protected] and [email protected], respectively, for any questions. This insight is intended only as a general discussion of issues and is not intended for any solicitation of work. It should not be regarded as legal advice and no legal or business decision should be based on its content.