Glossary

What is an arbitration clause?

An arbitration clause is a term in a contract under which the parties agree that disputes will be decided by an arbitrator rather than a court. Many Indian purchase orders and vendor agreements contain one, and it decides how and where a supplier can pursue unpaid dues.

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Short answer

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.

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Talk to a FundRaksha recovery expert for free. In one call we assess your unpaid invoices and tell you honestly what can be recovered, how, and in roughly how long. No fee for the call, no obligation, and no upfront cost if you go ahead: our fee is a percentage of what we actually recover.

  • A review of your invoices, purchase orders, delivery proof and the buyer’s replies
  • An honest assessment of recovery chances and the right route: reminders, legal notice, MSME Samadhaan, Section 138 or a civil suit
  • A realistic timeline and the exact cost: nothing upfront, a success fee only on recovery
  • A dedicated advocate assigned within 24 hours if you decide to proceed
Keep these ready
  • The unpaid invoice(s) and payment terms
  • Purchase order, delivery challan, e-way bill or proof of service
  • Messages, emails or letters about the payment
  • For a bounced cheque: the cheque and the bank return memo

No recovery, no fee. Court fees, if any, are borne by the client and told upfront.

FAQ

Questions, answered

No. The Supreme Court has held that the MSMED Act overrides a private arbitration clause; a micro or small supplier can go to the Facilitation Council under Section 18.

This page is general information for Indian businesses, not legal advice for your specific case. Laws, rates and procedures change; speak to an advocate before acting. FundRaksha LegalTech Pvt Ltd is a technology company; legal work is carried out by enrolled advocates.