पाठशाला Pathshala · नियम Niyam, Law and compliance · Lesson 22 · Build

Contract disputes: arbitration, courts and the Indian reality

A dispute clause is a bet on where and how fast you can collect. Write one that will survive a challenge, use the faster tracks the law gives small suppliers, and price the fight before you start it.

Pathshala, The Founder Library · 11 October 2026 · 6 min read

Thick brown ropes knotted tightly on the deck of a sailing ship. — Photograph: Terje Sollie · Pexels

A Pune software company is owed ₹80 lakh by a client that has stopped answering. The contract says disputes go to arbitration. The founder’s lawyer says the claim is strong. Four years later the company holds an award, the client has challenged it, and the lawyer’s bills have passed ₹20 lakh. The award was right. The decision to pursue it was never actually made; it happened one notice at a time.

Founders draft dispute clauses as if the only question were who wins. In India the harder questions are how long it takes, what it costs, and whether the other side will still have money at the end. This lesson covers the clauses that make a dispute winnable and enforceable, the routes the law now offers before and instead of a full fight, the special track for small suppliers, and a way to put a number on a dispute so that settling or fighting is a decision rather than a drift. The [ten clauses lesson](/library/contracts-ten-clauses-that-decide-disputes) covers the drafting of the clause itself; this one covers what happens when it is used.

The clause decides the forum

Every commercial contract chooses, explicitly or by silence, where a dispute is heard. There are three forums. Courts, which in India means a commercial court or the commercial division of a High Court for most business claims. Arbitration, a private tribunal chosen by the parties whose award is enforced like a court decree. And mediation, a structured negotiation with a neutral that produces a settlement only if both sides sign one. A good clause uses all three in sequence: a short period of negotiation between senior people, then mediation, then arbitration or court, with the right to seek urgent interim relief from a court at any time. Give each step a clock: thirty days of negotiation between named senior people, a fixed window for mediation, then the formal forum. A step without a clock becomes a delay the other side can use, and a step without named people becomes a meeting nobody attends.

An arbitration clause is enforceable when it is unambiguous. It names a seat, the city whose courts supervise the arbitration. It names an institution or its rules, so that appointing the arbitrator does not itself require a court application. It fixes the number of arbitrators, one for anything below a few crore. It states the language and the governing law. And it avoids the drafting that invites challenge: a clause that lets one party alone choose the sole arbitrator, a clause that says disputes “may” be referred to arbitration, two inconsistent forums in the same contract. Each of those has cost founders a year in court before the arbitration began.

Courts, mediation first

The 2018 amendment to the Commercial Courts Act, as summarised by PRS Legislative Research, lowered the specified value of a commercial dispute from ₹1 crore to ₹3 lakh, so nearly every business claim a startup brings is a commercial suit. It also made pre-institution mediation mandatory where the plaintiff does not seek urgent interim relief: the parties must try mediation before the suit is filed, and the mediation must finish within three months, extendable by two. It allowed commercial courts at district level where the High Court has no original jurisdiction.

The Gothic stone facade of the Bombay High Court building in Mumbai. — Most business claims now begin as commercial suits. Mediation comes first unless the plaintiff needs urgent relief. Photograph: Harsh Khandelwal · Pexels

Treat the mediation as a real step, not a box to tick. It is the cheapest moment in the whole dispute to settle, because neither side has yet spent money it will want to recover. Go with a number, a walk-away, and the person who can say yes. Where the claim needs urgent protection, say to stop the other side moving assets or using your code, the plaintiff can go to court for interim relief without first mediating, and the clause should preserve that right.

Arbitration, with the clocks it now has

Arbitration was once chosen to escape slow courts and then became slow itself. Parliament has since added clocks. The 2019 amendment, summarised by PRS, requires the statement of claim and defence to be completed within six months of the arbitrators’ appointment, keeps the twelve-month time limit for domestic awards while turning it into an endeavour for international commercial arbitration, and provides for an Arbitration Council of India to promote arbitration and the other forms of dispute resolution. The [ten clauses lesson](/library/contracts-ten-clauses-that-decide-disputes) sets out how the award clock runs and what section 9 of the Act lets a court do in the meantime.

Two realities sit beside the clocks. An award is not money: the losing side can apply to a court to set it aside on limited grounds, and enforcement against a reluctant debtor is its own process. And arbitration is paid for by the parties: the arbitrators’ fees, the institution’s fees and the hearing costs fall on the two sides, on top of their lawyers. For claims under a few crore against a solvent local counterparty, a commercial court after a failed mediation can cost less than arbitration and be no slower. Choose the forum for the claims you are actually likely to bring.

The small supplier’s faster route

A company registered on Udyam as a micro or small enterprise has a route most founders do not use. The Ministry of MSME’s Samadhaan portal explains that a buyer who does not pay within 45 days of accepting the goods or services owes compound interest with monthly rests at three times the bank rate notified by the Reserve Bank. The supplier can refer the dispute to the Micro and Small Enterprises Facilitation Council of its State, and every reference must be decided within ninety days. A buyer who wants to challenge the Council’s award in court must first deposit 75 per cent of the award amount.

That deposit changes the negotiation. A large buyer that would happily spend three years challenging an arbitral award has much less appetite when three quarters of the money must sit with the court while it does. Register on Udyam before the first invoice, quote the registration on every invoice, and the [section 43B(h) lesson](/library/section-43b-h-paying-msme-vendors-on-time) explains why the buyer’s tax position gives it another reason to pay on time.

An award is a right to be paid, not a payment. Price the fight in today’s money before you start it.

When settling beats winning

The value of a dispute is not the claim. It is the claim multiplied by the chance of winning, multiplied by the chance of collecting from the other side if you win, discounted for the years until the money arrives, less what it costs to get there. A startup discounts heavily, because money in four years is worth far less to a company with eighteen months of runway than money now. Founders routinely do the first multiplication, skip the second, ignore the third and underestimate the fourth.

Run your own dispute through the figure. Start with your lawyer’s estimate of the chance of winning, then ask a separate question: if we win, can we collect? A counterparty that is itself burning cash, or whose assets sit in another group company, may leave you with an award and nothing to enforce it against.

With the defaults, an ₹80 lakh claim with a seventy per cent chance of winning and a sixty per cent chance of collecting, four years out at twenty per cent, is worth about ₹4.5 lakh today once ₹18 lakh of costs is spread across those years: roughly a twentieth of its face value. Any settlement offer above that line is a better deal than winning. Below it, the case for fighting is real, but it is a case about principle or precedent, and those should be argued explicitly in a board minute rather than assumed.

The dispute routine

For every contract above a month’s revenue, confirm at signing that the dispute clause has a seat, an institution, a sole arbitrator for small claims, a negotiation and mediation step, and the right to urgent court relief. When a receivable passes ninety days, write to the counterparty with the amount, the contract clause and a date, and if you are a registered micro or small enterprise, say so. When a dispute becomes likely, run the figure with your lawyer’s numbers, write the walk-away settlement in the board minutes, and revisit it every quarter as the facts change. Take the mediation seriously. And when an offer clears the line, take it, bank the cash, and spend the founder hours on customers who pay.

Nothing here is legal or tax advice; confirm the current rule with a chartered accountant or lawyer before acting.