A poorly drafted dispute resolution clause does not just create uncertainty — it can freeze an entire M&A transaction or commercial agreement for years, forcing parties to litigate about how to resolve their dispute before they even get to the dispute itself.
The Clause Nobody Reads Carefully — Until It’s Too Late
When businesses negotiate an M&A deal, a joint venture agreement, a shareholders’ agreement, or a major commercial contract, they spend hours on price, warranties, indemnities, and conditions precedent. The dispute resolution clause — usually tucked at the back of the agreement — gets a quick look, a standard template inserted, and a signature.
That is a mistake that can cost crores and years.
The Supreme Court of India put it bluntly in South Delhi Municipal Corporation v. SMS Limited (2025 INSC 693): arbitration clauses must be drafted with “piercing precision and clarity.” The Court called the practice of drafting unclear dispute resolution clauses a “criminal wastage of precious judicial time” — and warned that personal liability and harsh penalties for counsel who design misleading clauses may follow in future cases.
In that case, the parties spent nearly a decade litigating over whether their clause even required arbitration or merely mediation — while their underlying commercial dispute remained entirely unresolved.
This is not an isolated incident. It is a pattern.
What Is a “Pathological” Arbitration Clause?
The term “pathological arbitration clause” — coined by French jurist Frédéric Eisemann — refers to any dispute resolution clause that is defective or ambiguous enough to spark a preliminary fight about whether, how, or through what process the parties agreed to resolve disputes.
A pathological clause does not have to be gibberish. It can look perfectly normal on paper. The problem only surfaces when a real dispute arises — and the parties (or their lawyers) realise the clause is unworkable, contradictory, or not actually binding.
Indian courts have spent years cleaning up the mess that pathological clauses create. Here are the most common ways a dispute resolution clause goes wrong — and what the courts have said about each.
The 5 Most Dangerous Drafting Mistakes
Mistake 1: Using “May” Instead of “Shall” — No Binding Obligation to Arbitrate
A clause that says disputes “may be referred to arbitration” is not an arbitration agreement. It is an option — and an option that either party can decline to exercise.
In Wellington Associates v. Kirit Mehta, courts declined to read “may be referred to arbitration” as creating a mandatory obligation — particularly where the clause also contained an exclusive court jurisdiction provision. The parties ended up in civil court litigation anyway.
Similarly, in Jagdish Chander v. Ramesh Chander, a clause allowing arbitration “if the parties so determine” was held not to be an arbitration agreement — because it required fresh consent after the dispute arose, which is precisely when consent is hardest to obtain.
And in Nagreeka Indcon v. Cargocare Logistics (2026), a clause stating that disputes “can be settled by arbitration” was held not to create a mandatory obligation to arbitrate.
The fix: Use “shall” not “may.” “All disputes arising out of or in connection with this Agreement shall be referred to and finally resolved by arbitration.” No ambiguity. No escape route.
Mistake 2: Calling Mediation “Arbitration” — The Wrong Label on the Wrong Process
In South Delhi Municipal Corporation v. SMS Limited (2026), the concession agreements referred disputes to the MCD Commissioner under a process that was captioned “Mediation by Commissioner.” The Supreme Court found no arbitration agreement because:
- The process lacked neutrality — the Commissioner was an officer of one of the parties
- There was no independent decision-making
- There were no adversarial safeguards
- Finality of the decision alone was not enough to make it arbitration
The parties had spent nearly a decade in preliminary litigation before this was finally settled.
The fix: Understand the difference between mediation, conciliation, expert determination, and arbitration before choosing your mechanism. If you want arbitration, say arbitration — and ensure the process you describe is genuinely arbitral in character.
Mistake 3: Unilateral Appointment of Arbitrator — Violates Equal Treatment
One of the most common clauses in Indian commercial contracts — especially in infrastructure, government, and banking agreements — is one that gives one party (usually the stronger one) the unilateral right to appoint the sole arbitrator.
The Supreme Court has definitively buried this practice.
In TRF Ltd. v. Energo Engineering Projects Ltd. and Perkins Eastman Architects DPC v. HSCC (India) Ltd., the Court held that a person who has an interest in the outcome of a dispute cannot appoint a sole arbitrator. And in the Constitution Bench decision in Central Organisation for Railway Electrification v. ECI SPIC SMO MCML (JV), the Court held that unilateral appointment of a sole arbitrator is impermissible, and forcing a party to choose from a one-sided panel violates the fundamental principle of equal treatment.
Clauses with these defects are regularly challenged — adding months or years of preliminary litigation before the real dispute is even argued.
The fix: Specify a neutral institutional appointment mechanism — ICC, SIAC, DIAC, or MCIA — or provide for appointment by the Supreme Court or High Court under Section 11 of the Arbitration and Conciliation Act, 1996.
Mistake 4: Conflicting Seat, Venue, and Jurisdiction Clauses
This is perhaps the most common source of M&A and commercial agreement litigation in India. A contract names one city as the “venue” for arbitration, another as the “seat,” and yet another court as having exclusive jurisdiction over disputes. The parties sign and move on.
When a dispute arises, the entire first year of proceedings is spent fighting about which court has supervisory jurisdiction over the arbitration — before the arbitrator has even been appointed.
In BGS SGS Soma JV v. NHPC, the Supreme Court introduced the “contrary indicia” test — courts examine all terms of the agreement to determine the intended juridical seat. A geographic reference may or may not designate the seat depending on context.
The fix: Be explicit. “The seat of arbitration shall be New Delhi, India. The courts of New Delhi shall have exclusive supervisory jurisdiction over the arbitration proceedings.” One sentence. One city. No conflict.
Mistake 5: Referring Disputes to a Non-Existent or Wrong Institution
Contracts sometimes name an arbitral institution that does not exist, has been dissolved, or has changed its name. Others name a foreign institution whose rules conflict with the Indian law governing the contract.
In Pricol Ltd. v. Johnson Controls Enterprise Ltd., the Court salvaged a clause by reading a reference to a non-arbitral body as a reference to SIAC — but this required judicial intervention and additional proceedings.
Courts will try to repair a clearly defective clause where the intent to arbitrate is evident — but they will not invent an agreement the parties never made. As the SCC Online Blog noted in its 2026 analysis of pathological clauses: “The question is whether the court is repairing the parties’ chosen means — or selecting new ones for them.”
The fix: Name a recognised institution that actually exists — ICC, SIAC, LCIA, MCIA, or DIAC — and verify that its current rules are compatible with your governing law and seat.
Why This Matters Specifically in M&A Transactions
In an M&A context, a defective dispute resolution clause carries consequences that go far beyond ordinary commercial litigation:
- Earn-out disputes freeze — if the earn-out mechanism is linked to post-closing performance and the dispute resolution clause is unworkable, the seller cannot enforce their earn-out rights and the buyer cannot contest a disputed calculation
- Warranty claims get stuck — a defective clause means warranty and indemnity claims under the Share Purchase Agreement (SPA) cannot be efficiently resolved, tying up post-closing adjustments indefinitely
- Representations and warranties insurance claims are complicated — insurers may raise the unworkable dispute clause as a coverage defence
- Injunction applications are delayed — where urgent interim relief under Section 9 of the Arbitration Act is needed to protect assets post-closing, a disputed arbitration clause creates a jurisdictional challenge that delays that relief
- The deal value erodes — every month spent in preliminary litigation over the dispute mechanism is a month that post-closing integration is frozen, value is lost, and management bandwidth is consumed
What a Good Dispute Resolution Clause Looks Like
A robust, enforceable arbitration clause for an Indian M&A or commercial agreement should cover:
- Scope — “all disputes arising out of or in connection with this Agreement, including disputes as to its existence, validity, or termination”
- Mechanism — arbitration (not “may be referred to”)
- Institution and Rules — name a recognised institution with its current rules
- Number of arbitrators — sole arbitrator or tribunal of three
- Appointment mechanism — institutional appointment (not unilateral)
- Seat — one city, clearly designated as the juridical seat
- Language — English (or the agreed language)
- Governing law — the law governing the arbitration agreement itself
- Interim relief — preservation of rights under Section 9 of the Arbitration Act
- Confidentiality — especially important in M&A and joint venture disputes
How Global Vision Law Firm Can Help
At Global Vision Law Firm, our advocates have over 13 years of experience in arbitration, commercial dispute resolution, and M&A transaction support. We assist clients in:
- Drafting and vetting dispute resolution clauses in M&A agreements, SHA, JVA, and commercial contracts
- Challenging or defending defective arbitration clauses before the Delhi High Court and Supreme Court
- Section 9 applications for urgent interim relief in arbitration proceedings
- Arbitrator appointment proceedings under Section 11 of the Arbitration Act
- Domestic and international arbitration representation — ICC, SIAC, DIAC, MCIA
A dispute resolution clause takes five minutes to draft correctly. It can take five years to undo when drafted wrong.
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📧 globalvisionlawoffice@gmail.com
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Disclaimer: This article is for general legal information purposes only and does not constitute legal advice. For advice specific to your situation, please consult a qualified advocate.
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