An arbitration clause is an arbitration agreement within a contract, valid under Section 7 of the Arbitration and Conciliation Act, 1996 if it is in writing (including exchange of letters, emails or an unsigned document referred to in a signed one). When a dispute arises, either party can invoke it by notice under Section 21; if a party sues in court instead, the other can have the dispute referred to arbitration under Section 8. The arbitrator's award is enforceable as a decree under Section 36.
How an arbitration clause works in India
The clause names the seat (which determines the supervising court), the number of arbitrators and the appointment method, and often an institution. To recover dues, the supplier sends a notice invoking arbitration and proposing an arbitrator; if the buyer does not agree within 30 days, the supplier applies to the High Court (or Supreme Court for international cases) under Section 11 for appointment. The arbitrator hears the claim with pleadings, documents and witnesses and passes a reasoned award with interest and costs. The buyer may challenge it under Section 34 within three months, but must usually deposit the amount to get a stay.
Why it matters for getting paid
If the PO has an arbitration clause, a civil suit will be referred to arbitration anyway, so it is better to invoke the clause directly. Arbitration can be faster than court, awards carry interest, and the seat clause often lets a supplier choose a convenient city. Note that a micro or small enterprise can still use the Facilitation Council despite an arbitration clause; the MSMED Act prevails. Read about arbitral award enforcement and the Section 18 reference.
How FundRaksha uses it
FundRaksha's advocates read every contract and PO for an arbitration clause at the free assessment. Where one exists and the client is not an MSME, the legal notice doubles as a Section 21 notice invoking arbitration, saving months. The dedicated advocate conducts the arbitration and enforcement; the fee is 30% of what is recovered, with arbitrator and institutional fees disclosed upfront.
Worked example (hypothetical)
A Pune engineering firm (medium enterprise) has a vendor agreement with a Mumbai OEM providing for sole arbitrator, seat Mumbai, and 15% interest on delayed payment. ₹30,00,000 is unpaid for a year. The firm sends a notice invoking arbitration on 1 April; the OEM does not agree to an arbitrator; a Section 11 application is filed and an arbitrator appointed by 1 September. Pleadings close by 1 December; the award is due within 12 months, by 1 December of the following year. The award grants ₹30,00,000 plus interest at 15%: about ₹4,50,000 for the first year and further interest until payment, plus costs.
Last reviewed: 2026-10-08. Information for Indian businesses; not legal advice.