Supreme Court Deprecates 'Deliberate, Ambiguous' Drafting Of Arbitration Clauses; Calls For Suo Motu Action In Malafide Cases

Delivering a significant judgment on arbitration law, the Supreme Court today deprecated the practice of arbitration clauses being deliberately phrased "ambiguously" by members of legal fraternity and urged judicial forums across the country to throw out cases involving "shoddily drafted arbitration clauses" at the threshold.

The Court said that such "malafide cases" are a "criminal wastage of judicial time" and have been allowed to go on for long. It called on the judicial forums to take stringent actions in this regard by invoking their suo motu powers. 

A bench of Justices Surya Kant and N Kotiswar Singh delivered the judgment.

It was observed that India has made considerable strides in the field of arbitration, but challenges, chiefly in terms of poor drafting of arbitration clauses, remain. Calling for arbitration clauses to be framed with precision, the Court stated,

"This willful and wanton wastage of judicial time is a practice that is highly deplorable. It is high time that arbitration clauses are phrased with precision and not couched in ambiguous phraseology...We take this opportunity to advise, if not caution and warn, legal fraternity against engaging in practices which result in a criminal wastage of judicial time. Equally, judicial fora of our country must show unwavering tendency towards rejecting shoddily drafted clauses."

It further opined that the time is not far when personal liability would need to be attached to such "unscrupulous acts".

"Such cases which prima facie disclose malafide [...] into the very agreement must be thrown out of the Court as they have been indulged for far too long. We urge the Courts to invoke their suo motu powers in appropriate cases where clauses are found to be designed deliberately to mislead and misguide. The time is not far when personal liability must be [attached] to such unscrupulous acts, alongwith sanctioning of the harshest punishments and measures against the actors."

The Court made the observations in disputes arising between the South Delhi Municipal Corporation on one hand, and private contractors on the other, for the development of parking and commercial complexes.

The question was whether the dispute resolution clauses between the parties constituted arbitration clauses (thus making the disputes arbitrable). While the SMCD contended that the clauses be construed as prescribing mediation, the private contractors asserted that they be understood as mandating arbitration.

After perusing the material, the Court concluded that Article 20 in the Concession Agreements between the parties did not constitute an arbitration agreement under the Arbitration Act. "Article 20 lacks the judicial element that lends arbitration its distinct credibility as an adjudicatory mechanism. It is not an arbitration clause either in letter, or in spirit and effect. Its ambiguity and lack of procedural integrity have, if anything, resulted in greater litigation rather than expeditious resolution, thereby undermining the very purpose of arbitration."

On an analysis of the Article, it was observed,

"While certain textual elements—such as the use of the phrase 'final and binding' in the cases of DSC Ltd. and CCC Ltd.—may superficially resemble arbitration, a deeper examination reveals that the clause is procedurally and structurally deficient in ways that render it incapable of operating as an arbitration clause in law."

Accordingly, impugned judgments of the High Court in cases of two private contractors, which held Article 20 to be an arbitration clause, were set aside and the view taken in case of the third contractor, rejecting arbitration, affirmed.

Appearance: Senior Advocate Sanjiv Sen, AoR Umesh Kumar Khaitan (for appellant-South MCD); Senior Advocate Ritin Rai, AoRs Sandeep Devashish Das and Farrukh Rasheed (for respondent) 

Case Title: South Delhi Municipal Corporation v. SMS Limited, SLP (C) No. 16913/2017

Citation : 2025 LiveLaw (SC) 568

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