Reaffirming the Essentials of an Arbitration Agreement: Supreme Court Outlaws “In-House Commissioner Clauses” as Arbitration

1. Introduction

On 15 May 2025, a two-judge Bench of the Supreme Court of India in South Delhi Municipal Corporation v. SMS Limited & connected appeals (2025 INSC 693) resolved conflicting Delhi High Court views on whether Article 20 of several identical Concession Agreements amounted to an arbitration clause or merely provided for mediation / internal determination.

Three sets of parties were before the Court:

• South Delhi Municipal Corporation (SDMC) v. SMS Limited – High Court had treated Art. 20 as arbitration.
• M/s DSC Limited v. MCD – High Court held there was no arbitration clause.
• MCD v. Consolidated Construction Consortium Ltd. (CCC Ltd.) – High Court again treated Art. 20 as arbitration.

The Supreme Court clubbed the matters, framed a single question—does Article 20 constitute a valid arbitration agreement under Section 7 of the Arbitration and Conciliation Act, 1996?—and delivered a unanimous ruling that it does not.

2. Summary of the Judgment

• Article 20 only sets up an internal reference to the Commissioner or an officer appointed by the Municipal Corporation; it is not an agreement to arbitrate before a neutral tribunal.
• The clause fails the three-pronged “ingredients test” articulated by the Court: (i) clear intent to arbitrate; (ii) binding adjudicatory process recognisable as an “award”; and (iii) compliance with core arbitral norms (neutrality, party autonomy, adversarial procedure).
• Judgments of the Delhi High Court in SMS Ltd. (2017) and CCC Ltd. (2022) that had appointed arbitrators are set aside; the 2022 decision in DSC Ltd. which refused arbitration is affirmed.
• The Court echoes South Delhi Municipal Corporation v. SMS AAMW Tollways (P) Ltd., 2019 (11) SCC 776, and warns against “drafting ambiguity” in public contracts.
• A strongly worded epilogue condemns wasting judicial time on threshold skirmishes and hints at future personal liability / costs on counsel or drafters who embed deceptive clauses.

3. Detailed Analysis

3.1 Precedents Cited & Their Influence

1. South Delhi Municipal Corporation v. SMS AAMW Tollways (P) Ltd. (2019) 11 SCC 776
   Held that reference to an internal officer is not arbitration. The present Bench calls this judgment “broadly similar” and applies it without deviation.
2. Food Corporation of India v. National Collateral Management Services Ltd., 2020 (19) SCC 464
   Clarified that mere internal decision-making, even if open to both parties, lacks neutrality.
3. Bihar State Mineral Development Corp. v. Encon Builders (I) P Ltd. (2003) 7 SCC 418
   Provided the classic two essentials of arbitration—consensus to refer and binding private tribunal. The Court borrows this formulation.
4. K.K. Modi v. K.N. Modi (1998) 3 SCC 573
   Enumerated six attributes of an arbitration agreement; these become the scaffold for the Court’s “ingredients test”.
5. Comparative citations—from UK, USA, Singapore, France—are surveyed to demonstrate international uniformity on neutrality and writing requirements.

3.2 Legal Reasoning Adopted

1. No clear intent. The clause is expressly captioned “Mediation by Commissioner”, nowhere uses the words “arbitrate/arbitrator” or references the Arbitration Act. Intent cannot be invented by skilled advocacy.
2. Lack of neutral, party-chosen tribunal. Only the Commissioner/MCD appoints the decision-maker; the private contractor has no say—violative of the equal-treatment principle (Section 18, A&C Act).
3. Absence of adversarial safeguards. Article 20 contemplates a file-based review, not hearings, pleadings, or evidence under procedural rules; thus it is closer to conciliation / expert determination.
4. “Final & binding” insufficiency. Even though DSC/CCC versions deem the officer’s decision final, many non-arbitral procedures (e.g., departmental appeals) are also final; finality alone cannot transform the process.
5. Statutory lens. Under Section 7 an agreement must be in writing and intend to submit disputes to arbitration. The Court stresses a conjunctive reading—not met here.
6. Public Law Consideration. For a municipal corporation—answerable to Article 14 standards—unilateral control over dispute resolution is presumptively arbitrary.

3.3 Impact of the Decision

• Drafting of Concession Agreements. Government bodies can no longer rely on “commissioner clauses” to resist true arbitration or thwart neutral adjudication; future PPP and infrastructure contracts will have to insert bona fide arbitration (or clearly label mediation/conciliation).
• Pending & future litigation. Numerous similar MCD/NDMC contracts are extant; this judgment will likely invalidate a host of Section 11 petitions and compel parties to civil suits or fresh, expressly worded arbitration pacts.
• Institutional Arbitration Strengthened. By ruling out in-house processes, the Court indirectly boosts institutional or independent ad-hoc arbitration where neutrality is assured.
• Professional Accountability. The Court’s warning about “personal liability” for lawyers drafting ambiguous clauses could accelerate a culture of precision and risk-based vetting in legal practice.
• Clarification of Section 7 Jurisprudence. The “three-ingredient test” now stands as a succinct doctrinal tool for all courts while screening Section 11 petitions at the threshold.

4. Complex Concepts Simplified

Arbitration Agreement (Section 7, A&C Act)

A written pact where parties clearly agree to submit present or future disputes to a neutral tribunal whose decision (award) is binding and enforceable like a decree.

Mediation vs. Arbitration

Mediation is a facilitated negotiation producing non-binding settlement; arbitration is a quasi-judicial adjudication producing a binding award. The two are mutually exclusive in structure and legal effect.

Expert Determination

Parties nominate an expert to decide a technical question; though binding, it is not an arbitral award and is enforced by contract, not the Arbitration Act.

Neutrality & Impartiality

A cornerstone of arbitration requiring independence from either party; compromised when one party’s employee/officer is the sole decision-maker.

Incorporation by Reference

Section 7(5) allows an arbitration clause in another document to be imported, but only when intention to incorporate is unequivocal.

5. Conclusion

The Supreme Court has delivered a crisp yet far-reaching pronouncement: internal, one-sided “Commissioner” mechanisms are not arbitration. By weaving Indian and comparative jurisprudence into a practical “ingredients test,” the Court supplies lower courts and drafters with a ready checklist. The decision:

• resolves conflicting Delhi High Court views;
• protects party autonomy and neutrality in public contracts;
• sounds a cautionary note for counsel and contracting authorities against obfuscatory drafting; and
• re-emphasises that arbitration’s promise of speed and finality cannot be realised where the very gateway— the arbitration clause— is defective.

Going forward, entities—especially public bodies—must either embrace true arbitration with transparent safeguards or candidly opt for mediation/conciliation, thereby avoiding the trap of hybrid clauses that satisfy neither paradigm.