The Right Kind of Arbitration Clause: A Practical Guide for Every Business Professional
- Ronika Tater
- Nov 18
- 7 min read
How One Paragraph Can Decide the Fate of Your Dispute
Why This Question Matters
Imagine signing a contract today that turns into a disagreement tomorrow. You expect a fast solution, but the first fight is not about who is right or wrong. It is about where the dispute should be resolved and how the process should begin.
That one short sentence near the end of your contract that says, “Any disputes shall be settled by arbitration,” decides far more than you think:
Who will hear your case?
What types of disputes are covered?
Where will the hearing take place?
When does arbitration begin, and what are the steps/timelines?
Why is arbitration chosen over court litigation?
When these points are clear, you save time, money, stress and even business relationships. If they are vague, you risk delays, confusion and unnecessary disputes.
In today’s commercial world, every business, from start-ups to large enterprises, enters into agreements. Understanding the basics of arbitration helps you make informed decisions and protect your interests.
India’s Deep Roots in Arbitration
Long before modern courts, Indian communities used local bodies like kulas, srenis, and pugas to resolve disputes. Parties chose neutral individuals whom they trusted.
This idea still exists today.
The Arbitration and Conciliation Act, 1996 (hereinafter referred to as the “Act”), inspired by the UNCITRAL Model Law, 1985, gives parties the freedom to design their own dispute- resolution process. When used wisely, an arbitration clause keeps disputes efficient, private, enforceable, and commercially sensible.
The Essentials of a Good Arbitration Clause:
Simplified Through the 5W Framework
A strong arbitration clause answers these key questions:
3.1. WHO will resolve your dispute?
Parties should decide:
A sole arbitrator
A panel of arbitrators
An institution like ICC (International Chamber of Commerce), SIAC (Singapore International Arbitration Centre), or MCIA (Mumbai Centre for International Arbitration).
If the parties cannot agree, courts may step in as per the procedure provided in law.
3.2. WHAT types of disputes are covered (scope)?
A broad clause prevents unnecessary arguments.
Illustration: “All disputes arising out of or relating to this agreement shall be referred to arbitration.”
3.3. WHERE will the arbitration happen?
Seat of Arbitration: Also known as “the legal home”. It decides which country’s courts will supervise the arbitration.
Venue: The physical or virtual places for hearings. A clear statement prevents jurisdictional battles.
3.4. WHEN and how does arbitration start?
Arbitration usually begins after the parties have tried resolving the issue themselves. A clear clause should set out simple steps:
Parties’ first attempt at negotiation for a short period (often 30 days).
If it fails, one party sends a written notice of arbitration.
The parties then appoint the arbitrator. If they cannot agree within 30 days, the court can step in as per the procedure provided in law.
This avoids delays and keeps the process moving.
3.5. WHY choose arbitration?
Businesses choose arbitration because it is private, faster, flexible, and cost-efficient than court litigation. You pick your arbitrator, you set the process, and the final award (binding decisions) is enforceable in India and internationally. It protects relationships, reduces conflict and offers a predictable, business-friendly way to resolve disputes.
Key Components of a Strong Arbitration Clause & Practical Illustrations
4.1. Seat of Arbitration
The seat of arbitration is the ‘legal home’ of an arbitration. It determines which country’s courts have jurisdiction and control over the arbitration process.
Illustration:
If the clause reads, “The seat of arbitration shall be New Delhi, India,” any court interventions (like appointment of an arbitrator, interim relief or challenging an award) must go to Indian courts in New Delhi and not courts in another city or country.
4.2. Venue
The venue is the place where hearings take place. This may be physical or online. It affects convenience and travel, but does not decide which court has legal power. That always depends on the seat.
Illustration:
“The venue of hearings shall be Mumbai, India, and may be conducted virtually.”
4.3. Governing Law
This clarifies which country’s laws interpret the contract.
To simply put:
The governing law decides which country’s rules apply when reading and interpreting your contract.
It answers: “If there’s a question about what this contract means, which country’s laws are used to find the answer?”
Example: If your contract says “governed by the laws of India,” then Indian law will be used, no matter where the arbitration happens.
Illustration:
“This agreement is governed by the laws of India.”
How is this different from Seat and Venue?
Understanding the difference between seat, venue, and governing law can be confusing even for professionals at times. These terms are often used together, but they serve very distinct purposes in arbitration. To make this convenient, let's look at a simple cricket game analogy:
Seat: This is about which country’s cricket authority (like BCCI in India or ECB in England) has the official control over the game’s rules for that match.
Example: Even if a match is held in Dubai (venue), if it’s an ICC event, ICC’s rules and authority apply (seat).
In arbitration, the seat means which country’s courts have the power to supervise and resolve issues about the arbitration.
Venue: This is the actual stadium where the cricket game is played.
Example: Eden Gardens in Kolkata or Melbourne Cricket Ground in Melbourne, Victoria, Australia.
In contracts, venue means where arbitration hearings physically take place.
Governing Law: This is the rulebook the umpire uses to make decisions during the match.
Example: “MCC Laws of Cricket” or specific local playing conditions.
For contracts, governing law means which country’s legal rules are used to interpret what the contract’s words mean and what the parties must do.
A simple table:
Cricket Game | Arbitration Term | What it Decides |
BCCI/ICC Authority | Seat | Which court supervises legal issues |
Stadium | Venue | Where hearings physically take place |
MCC Laws/Rulebook | Governing Law | Which law interprets the contract |
Note: If you are not a cricket fan, just remember that the authority/board sets the rules, the stadium is where you play, and the rulebook is how the game is judged.
4.4. Scope
This decides how broadly the arbitration clause applies. A wide clause prevents arguments about whether the issue can go to arbitration.
Illustration:
“All disputes arising out of or in connection with this agreement, including questions regarding its existence, validity or termination, shall be referred to arbitration.”
4.5. Institutional or Ad-Hoc Arbitration
When drafting an arbitration clause, it’s essential to determine whether disputes will be resolved through institutional arbitration or ad-hoc arbitration. The Act recognise both frameworks, empowering parties to choose either method.
Institutional Arbitration
This method involves recognised institutions such as the ICC, SIAC, or MCIA, which provide established rules, administrative support, and a panel of experienced arbitrators. Institutional arbitration is generally more reliable and efficient, making it ideal for cross-border or complex, high-value contracts where structure, neutrality, and enforceability are paramount.
Ad-hoc Arbitration
Here, the process is managed entirely by the parties themselves, without institutional oversight. Ad-hoc arbitration can be more cost-effective and flexible, particularly for simple domestic matters. However, it requires a well-drafted contract to avoid procedural uncertainty or delays, as all aspects, such as rules, fees, and appointment of arbitrators, are decided by the parties.
Practical Guidance:
For international or complex commercial contracts, opt for institutional arbitration to ensure clarity, predictability, and administrative efficiency.
For simple domestic contracts where parties seek cost savings and greater control, ad- hoc arbitration may suffice, provided the arbitration clause is precise and comprehensive.
Illustration:
“Arbitration administered under SIAC rules.”
4.6. Number and Appointment of Arbitrators
Parties decide the number of arbitrators and the manner of their appointment. If the parties cannot agree mutually, then either party can seek the appointment of the appropriate Hon’ble High Court or Hon’ble Supreme Court.
Illustration:
“A sole arbitrator shall be appointed by mutual consent within thirty days. If the parties do not agree, the arbitrator shall be appointed by the Delhi High Court as per Section 11 of the Act.”
4.7. Language
Specify the language of the proceedings to avoid confusion.
Illustration:
“The proceedings shall be conducted in English.”
4.8. Interim Protection and Emergency Relief
In many disputes, parties may need urgent relief (such as preserving assets, moving money, or preventing further harm) before, during, or after the arbitral proceedings but before the
enforcement of the award. If the agreement is silent or unclear about interim relief, parties may face procedural hurdles or delays in obtaining such protection.
Who can help you?
Both arbitrators (once appointed) and the appropriate courts (linked to the seat of arbitration) have legal power to grant temporary orders called interim measures. For example, a court can freeze an account or an arbitral tribunal can order someone to stop a particular action.
Make it clear in your contract
Your agreement should state that either party can seek interim relief from the arbitral tribunal or the courts at the chosen seat of arbitration. The explicit mention in the clause helps avoid ambiguity and gives both parties a clear path for quick protection.
Illustration:
“Either party may seek interim relief from the arbitral tribunal (after it is formed) or from the courts at the seat of arbitration before the tribunal is appointed.”
4.9. Confidentiality
The law requires confidentiality of arbitration proceedings unless disclosure is legally necessary.
Illustration:
“All arbitration proceedings, documents and awards shall remain confidential except where disclosure is required by law.”
4.10. Costs and Interest
The law gives the tribunal power to award costs and interest.
Illustration:
“The tribunal may award costs and interest in accordance with Section 31A of the Act.”
Sample Arbitration Clause:
Here is a balanced clause suitable for most commercial agreements:
“This Agreement shall be governed by and construed in accordance with the laws of India. All disputes arising out of or in connection with this agreement, including disputes relating to its existence, validity or termination, shall be referred to and finally resolved by arbitration in accordance with the Arbitration and Conciliation Act, 1996 (hereinafter referred to as the “Act”). The seat shall be New Delhi, India. The venue for hearings shall be Mumbai, unless otherwise agreed, and hearings may be held virtually. The arbitration shall be conducted in English before a sole arbitrator mutually appointed within thirty days, failing which the arbitrator shall be appointed under Section 11 of the Act. The tribunal may grant interim relief, maintain confidentiality under Section 42A of the Act, and award costs and interest under Section 31A of the Act.”
Practical Takeaway
Before signing, use this 5W checklist:
Who resolves a dispute? Is the person/institution identified?
What is covered? Is the language clear and broad enough?
Where (seat & venue) are set? Is there a risk of jurisdictional conflict?
When can you start? Are procedures/timelines practical?
Why is arbitration chosen, and does the clause highlight the benefits? If the answers are unclear, the clause is not ready.
Having a lawyer review the clause protects you before trouble begins.
Closing Thought
Disagreements are inevitable. Confusion is not.
A clear, well-drafted arbitration clause gives you privacy, predictability and control. Understanding the basics helps you ask the right questions and make informed decisions; professional guidance ensures that your rights are protected when it matters most.
In business, clarity is power. And that power begins with understanding one vital paragraph in your contract.
References:
Law Commission of India, 76th Report, Arbitration Act, 1940 (Nov. 1978).
The Arbitration and Conciliation Act, No. 26 of 1996, Acts of Parliament, 1996 (India).
UNCITRAL Model Law on International Commercial Arbitration, U.N. Doc. A/40/17, Annex I (June 21, 1985).
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