Mediation Is Not Arbitration Merely Because It's Final and Binding: Supreme Court Rules Article 20 Clauses Legally Inadequate for Arbitration

“Clause Drafted for Mediation Can't Morph into Arbitration by Magic of Language” – Supreme Court of India delivered a decisive judgment rejecting the classification of Article 20 in Concession Agreements between the Municipal Corporations of Delhi and private contractors as a valid arbitration clause. Holding that these clauses “lack the judicial element that lends arbitration its distinct credibility,” the Court ruled that Article 20 neither satisfies the statutory requirements under Section 7 of the Arbitration and Conciliation Act, 1996, nor reflects the intent of an arbitration agreement.

The judgment marked the culmination of nearly a decade of litigation that had remained mired not in resolving the substantive disputes, but in determining the mode of their resolution. The Supreme Court's ruling sends a sharp message to drafters of dispute resolution clauses and affirms the critical importance of clarity and procedural integrity in arbitration frameworks.

The appeals arose out of Concession Agreements entered between Delhi’s municipal bodies and private contractors — SMS Ltd., DSC Ltd., and CCC Ltd. — for developing parking infrastructure in the city. Disputes emerged over project delays, site allotments, and contract terminations. In each instance, the contractors sought to invoke Article 20 of their respective agreements as an arbitration clause. The Municipal Corporations, however, contended that the clause was intended solely to prescribe mediation, not arbitration.

Article 20 referred disputes to the Commissioner, MCD, or an officer appointed by him, and described a fact-finding process involving written submissions, review of documents, and a decision termed "final and binding."

Divergent rulings by the Delhi High Court led to confusion. While the High Court in SMS Ltd. and CCC Ltd. accepted Article 20 as arbitral in nature, it took the opposite view in DSC Ltd. The Supreme Court was therefore called upon to settle the inconsistency.

The Supreme Court framed the central legal issue as:

"Whether Article 20 of the subject-Concession Agreements constitutes a valid arbitration agreement under the Arbitration and Conciliation Act, 1996?"

The Court held that the determination of this question required a conjunctive test encompassing three essential ingredients:

1. A clear and mutual intent to arbitrate, excluding civil court jurisdiction

2. A binding adjudicatory process, culminating in an enforceable decision

3. Compliance with arbitral norms, such as neutrality, adversarial structure, and party autonomy

“All these elements must co-exist,” the Court said. “A clause which is vague, one-sided, and procedurally infirm cannot pass muster as an arbitration clause under Indian law.”

“An Officer Chosen Solely by One Party Cannot Be an Arbitrator” – Court on Lack of Neutrality

The Court found that Article 20 failed the test at every level. It observed:

“The decision-maker is appointed exclusively by MCD or SDMC, with no input from the other contracting party. This offends the core principle of party autonomy and neutrality that undergirds the concept of arbitration.”

In the case of SMS Ltd., while there was a faint mention that the appointed officer could be from "within or without MCD," this was absent in the DSC and CCC agreements. The Court found the supposed process to be internal and administrative, not adjudicatory.

“What is envisaged under Article 20 is an elaborate administrative fact-finding exercise, not an adjudication of rights by an impartial tribunal.”

“Mere Words Like ‘Final and Binding’ Cannot Make Mediation Arbitration” – Supreme Court Clarifies the Law

One of the main arguments from the private contractors was that the language of the clause, including terms like “final and binding”, implied an intention to arbitrate.

But the Supreme Court rejected this claim emphatically:

“Finality alone does not transform a process into arbitration... Expert determinations, departmental decisions, and administrative orders may also be final — that does not make them arbitration awards.”

Referring to the clause’s title — “Mediation by Commissioner” — the Court observed:

“It is inconceivable that two parties who are ad idem in wanting to settle their disputes through arbitration would label the dispute resolution clause in such a befuddling manner.”

The absence of any reference to the Arbitration Act, the word “arbitration”, or an “arbitral tribunal” was held to be fatal.

“Justice Delayed by Clause Drafted to Confuse, Not Clarify” – Sharp Criticism of Legal Draftsmanship

In a particularly searing part of the judgment, the Supreme Court went beyond the specific dispute to express anguish over how poor drafting wastes precious judicial time.

“What is most shocking to our judicial conscience is the incontrovertible reality that the parties in the present cases have spent nigh a decade acrimoniously litigating over the method of dispute resolution itself, while their actual qualms... remain deeply buried under the surface.”

The Court rebuked both state authorities and high-profile private contractors:

“The parties are neither paupers nor indigent individuals... one is a statutory civil body with its own legal department, the other consists of affluent contractors represented by elite legal counsel.”

It warned legal professionals directly: “Legal counsel will not earn any professional stripes if they indulge in such juggling of words... The time is not far when personal liability must be assigned for such unscrupulous acts.”

Courts too were urged to show “unwavering tendency towards rejecting shoddily drafted clauses at the very threshold.”

The Court held: “Article 20 lacks the judicial element that lends arbitration its unique credibility... It is not an arbitration clause either in letter, or in spirit and effect.”

It set aside the High Court rulings in SMS Ltd. and CCC Ltd., upheld the ruling in DSC Ltd., and clarified that all parties were free to pursue civil remedies.

This decision reaffirms the strict scrutiny required to qualify a dispute resolution clause as an arbitration agreement, especially in contracts involving public bodies. It draws a hard line between “mediation masquerading as arbitration” and true arbitral processes. The Supreme Court has sent an unambiguous message — ambiguity, unilateralism, and internal procedures cloaked in legalese will not be treated as arbitration under law.

As the Court reminded, justice is not served by confusion in drafting. If anything, it only delays the path to the real dispute being addressed — and in this case, for ten years, the real issues still await their day in court.

Date of Decision: 15 May 2025