Drafting an Arbitration Clause for an Indian SME: Seat, Rules, Arbitrators and the Mediation Step, With a Model Clause

"Disputes shall be referred to arbitration" is the shortest and most expensive arbitration clause in India. It leaves the seat, the rules, the number of arbitrators and the appointment method to be fought over before the dispute itself is heard. This guide explains each choice for a small or mid-sized company and gives a model clause. Position as of October 2026.

Why arbitrate at all

For commercial contracts between Indian businesses, arbitration under the Arbitration and Conciliation Act, 1996 offers a private, specialist decision-maker and an award enforceable as a decree. Section 28 of the Indian Contract Act, 1872 voids clauses that bar legal proceedings altogether but expressly saves agreements to arbitrate. Section 7 of the Arbitration Act requires the arbitration agreement to be in writing, which includes an exchange of letters or electronic communications; a signed clause is best.

The five choices

1. Seat. The seat determines which courts supervise the arbitration and the law governing the arbitration itself. Choose a city with commercial courts and arbitration practitioners, usually where you are based. Say "seat", not just "venue"; hearings can be held elsewhere.

2. Rules and institution. Ad hoc arbitration (parties and the tribunal run the process) or institutional (an institution administers under its rules). For an SME, institutional arbitration under an Indian institution's rules provides appointment mechanics, fee schedules and timelines without court applications. Name the institution and its rules "as in force on the date of the request".

3. Number of arbitrators. One for most SME disputes; three for high-value or technical disputes. A sole arbitrator is cheaper and faster.

4. Appointment. Under institutional rules, the institution appoints if the parties cannot agree. Under ad hoc, provide a method and a fallback (application to the court under section 11 of the Act).

5. Language and timelines. English (or the language of the contract). The Act's section 29A requires an award within twelve months of completion of pleadings, extendable by six months by agreement and further by court order; the clause need not repeat this but can set shorter procedural timelines under institutional rules.

The mediation step

A tiered clause (negotiation, then mediation, then arbitration) resolves many disputes before arbitration. The Mediation Act, 2023 provides in section 5 that parties "may voluntarily and with mutual consent" take steps to settle by pre-litigation mediation, so a contractual mediation step is enforceable as agreed. For commercial disputes of the specified value before the commercial courts, the proviso to section 5 requires pre-litigation mediation under section 12A of the Commercial Courts Act, 2015, which the Supreme Court has held mandatory where urgent relief is not sought; an arbitration clause takes the dispute out of the court track, but a mediation step still saves cost. Keep the mediation step time-bound (30 to 45 days) so it cannot be used to stall. ****

A model clause

"Dispute resolution. (a) The parties will first attempt to resolve any dispute arising out of or in connection with this Agreement by discussion between senior representatives within 15 days of a written notice of dispute. (b) If unresolved, the parties will refer the dispute to mediation administered by [institution] under its mediation rules, to be completed within 45 days of the referral unless extended by agreement. (c) Any dispute not resolved by mediation will be finally resolved by arbitration administered by [institution] under its arbitration rules in force on the date of the request for arbitration. The seat of arbitration will be [city], India. The tribunal will consist of a sole arbitrator appointed under those rules. The language of the arbitration will be English. The Arbitration and Conciliation Act, 1996 applies. (d) Nothing in this clause prevents a party from seeking interim relief from a court of competent jurisdiction under section 9 of the Act. (e) This Agreement is governed by the laws of India."

Mistakes to avoid

• Naming a venue without a seat, or two seats.
• Naming an institution that does not exist or rules that have been replaced.
• "Arbitration or courts at the claimant's option", which invites jurisdictional litigation.
• Open-ended mediation with no deadline.
• Forgetting stamp duty on the main agreement; under section 35 of the Indian Stamp Act, 1899 an unstamped instrument cannot be acted upon, and the Supreme Court has addressed how this interacts with arbitration clauses; stamp before signing and the question does not arise. ****

Consumer and employment caveats

Consumer disputes can be taken to consumer forums regardless of an arbitration clause; employment disputes for workmen are governed by the Industrial Relations Code, 2020 and industrial adjudication. Use arbitration clauses for business-to-business contracts.

Where Legatio fits. Legatio's clause library carries the model clause as the default for commercial templates, with the seat and institution pre-filled, and records the stamped, signed agreement so the clause is enforceable when needed. The choices of seat and institution are yours.

Position stated as of October 2026. General information, not legal advice.