Kiran Raj

The Supreme Court of India Division Bench comprising Justice Surya Kant and Justice Nongmeikapam Kotiswar Singh delivered a judgement invalidating the interpretation of Article 20 of the Concession Agreements as an arbitration clause. The Court categorically held that the dispute resolution provisions under Article 20 across the relevant Concession Agreements neither constitute an arbitration agreement under Section 7 of the Arbitration and Conciliation Act, 1996 nor satisfy the requisite statutory and judicial standards for arbitration clauses. The Court issued a broader caution to legal practitioners and institutions against drafting ambiguous arbitration clauses and called for professional accountability to prevent misuse of the arbitration mechanism, which leads to unnecessary litigation and judicial burden.

The controversy originated from disputes under multiple Concession Agreements executed between the Municipal Corporation(s) of Delhi and private contractors for the development of parking and commercial complexes. These agreements led to prolonged disputes concerning the correct interpretation of Article 20, which contains the dispute resolution mechanism.

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In the case of South Delhi Municipal Corporation v. SMS Limited, a Concession Agreement was executed on 24 April 2012 for constructing a multi-storeyed parking facility at Defence Colony, New Delhi on a Design, Build, Finance, Operate, and Transfer (DBFOT) basis. Following the trifurcation of the Municipal Corporation of Delhi in 2012, the project came under the jurisdiction of the South Delhi Municipal Corporation. Disputes arose when SMS Limited alleged that SDMC failed to provide timely approvals, resulting in financial losses. Subsequent litigation by the Defence Colony Welfare Association led to a High Court order halting construction. SMS Limited formally sought termination of the agreement on 15 January 2014 and demanded a refund and compensation. Despite initially invoking mediation under Article 20, SMS Limited later claimed the clause constituted an arbitration agreement and approached the High Court seeking the appointment of an arbitrator.

In the case of M/s DSC Limited v. Municipal Corporation of Delhi, a Notice Inviting Tender was issued on 2 January 2009 for the development of a parking facility at Greater Kailash I, New Delhi. The project was awarded on 11 August 2011, and DSC Limited paid a concession fee of INR 16.65 crores. However, the MCD failed to deliver an encumbrance-free site. The MCD terminated the contract on 13 June 2017 and forfeited DSC Limited’s performance guarantee. DSC Limited demanded compensation amounting to approximately INR 406 crores and invoked Article 20, asserting it as an arbitration clause. The High Court dismissed this claim on 29 July 2022.

In the third matter, Municipal Corporation of Delhi v. M/s Consolidated Construction Consortium Limited, a Concession Agreement was executed on 30 July 2010 for the development of a commercial complex at South Extension, New Delhi. CCC Limited also invoked Article 20, seeking arbitration following disputes over project delays and financial claims. The High Court, on 2 November 2022, stated that Article 20 constituted an arbitration clause and directed the matter to arbitration.

The Municipal Corporations contended that Article 20 was limited to mediation and did not satisfy the statutory requirements of an arbitration agreement. They argued that the decision-making process under Article 20 was administrative, lacked neutrality, and did not involve an independent adjudicator. They further cited the Supreme Court’s decision in South Delhi Municipal Corporation v. SMS AAMW Tollways (P) Ltd., wherein a similarly worded clause was not recognized as an arbitration agreement.

Conversely, the private contractors argued that Article 20 satisfied the requirements under Section 7 of the Arbitration Act. They maintained that the clause provided for a binding decision and an adjudicatory process, satisfying the judicial precedents laid down in cases like K.K. Modi v. K.N. Modi.

The Supreme Court undertook a detailed two-pronged inquiry: first, to analyse the necessary ingredients of a valid arbitration agreement; and second, to examine whether Article 20 satisfied those requirements.

The Court recorded that “a valid arbitration agreement necessarily postulates the presence of a clear intent to arbitrate, a binding adjudicatory process, and compliance with arbitration norms.” It held that these ingredients must co-exist and be duly established by the party asserting the existence of an arbitration agreement.

Analysing the dispute resolution clauses, the Court observed, “A plain reading of Article 20 across all three Concession Agreements does not reveal any express intent to arbitrate.” It further stated that the use of the term ‘Mediation by Commissioner’ and the absence of the words ‘arbitration’ or ‘arbitrator’ clearly indicated that the clause was not designed to facilitate arbitration.

The Court noted that “the appointment of the decision-maker is entirely within the control of MCD, with no role for the other contracting party in selecting or influencing the selection of the officer.” Such an arrangement fails the neutrality and independence test required for valid arbitration.

In response to the argument that the officer’s decision was final and binding, the Court observed, “Finality alone does not equate the process to arbitration. The process described under Article 20 is at best an administrative fact-finding exercise, lacking any judicial element or structured adversarial process.”

The Court stated that “valid arbitration agreements invariably provide for a mutually agreed-upon arbitrator or an independent appointing authority,” which was absent in these cases.

On the requirement of an adversarial process, the Court recorded, “Article 20 lacks the judicial element that lends arbitration its distinct credibility as an adjudicatory mechanism. There are no provisions for oral hearings, examination and cross-examination of witnesses, or application of formal rules of evidence.”

The Court further concluded that “Article 20 does not satisfy the requirements of an arbitration agreement under Section 7 of the Arbitration Act. While certain textual elements may superficially resemble arbitration, a deeper examination reveals that the clause is procedurally and structurally deficient.”

The Supreme Court issued the following directives:

“Article 20 of the Concession Agreements executed in all the three appeals before does not form an arbitration agreement, and thus cannot be brought under the purview of the Arbitration Act.” The Court clarified that the impugned judgments of the High Court in the cases of SMS Limited and Consolidated Construction Consortium Limited are set aside.

It further directed that “the impugned judgment of the High Court in the case of DSC Limited is hereby upheld.”

The Court stated, “It is, however, clarified that the parties across all three appeals are at liberty to pursue their alternative remedies in accordance with law.”

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Concluding its directions, the Court observed that “This wilful and wanton wastage of judicial time is highly deplorable. It is high time that arbitration clauses are worded with piercing precision and clarity, and that they are not couched in ambiguous phraseology.”

The Court further stated that “Courts must show an unwavering tendency towards rejecting shoddily drafted clauses at the very threshold. Cases disclosing mala fides must be thrown out of the Court, as they have been indulged for far too long.”

Advocates Representing the Parties

For the Petitioners: Mr. Nakul Diwan, Senior Advocate; Mr. Deepak Khurana, Advocate; Mr. Abhishek Bansal, Advocate; Mr. Umesh Kumar Khaitan, Advocate-on-Record; Mr. Praveen Swarup, Advocate-on-Record; Mr. Pragyan Mishra, Advocate; Mr. Devesh Maurya, Advocate; Ms. Pareena Swarup, Advocate

For the Respondents: Mr. Sandeep Devashish Das, Advocate-on-Record; Mr. Praveen Swarup, Advocate-on-Record; Mr. Farrukh Rasheed, Advocate-on-Record

Case Title: South Delhi Municipal Corporation of Delhi v. SMS Limited & Ors.

Neutral Citation: 2025 INSC 693

Case Number: Civil Appeal Nos. 6849/2025

Bench: Justice Surya Kant and Justice Nongmeikapam Kotiswar Singh

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