Arbitration Clauses in Infrastructure Contracts — The Arbitration and Conciliation Act, 1996

Post 10 showed that courts cannot injunct an infrastructure project. But a real dispute — over payment, delay, or quality — still needs somewhere to go. For most modern infrastructure contracts, that somewhere is arbitration, governed by the Arbitration and Conciliation Act, 1996, not a civil court at all.

The Problem This Topic Solves

Ordinary civil litigation is slow, and Section 20A now bars the one remedy (injunction) that a contractor or authority might otherwise have used to force quick attention to a dispute. Almost every modern infrastructure contract — PPP concessions, EPC contracts, government works contracts — therefore builds in an arbitration clause: a private, faster, more technically-informed dispute-resolution mechanism the parties agree to in advance, as an alternative to the court system entirely.

The Arbitration Agreement — Section 7

Section 7 of the Arbitration and Conciliation Act, 1996 defines an arbitration agreement as an agreement by parties to submit to arbitration all or certain disputes which have arisen, or which may arise, between them in respect of a defined legal relationship. It must be in writing — either as a separate document or, more commonly in infrastructure contracts, as a clause within the main contract itself (an "arbitration clause"). Once such a clause exists, the parties are bound to resolve their disputes through arbitration rather than by filing an ordinary civil suit.

Section 8 — Courts Must Refer Parties to Arbitration

Section 8(1) — a judicial authority before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party so applies not later than the date of submitting its first statement on the substance of the dispute, refer the parties to arbitration, unless it finds that prima facie no valid arbitration agreement exists.

This is the practical mechanism that keeps infrastructure disputes out of civil court entirely: if one party tries to sue in the ordinary courts despite an arbitration clause, the other side can apply under Section 8, and the court is bound to send the dispute to arbitration instead of deciding it itself.

Section 25, Specific Relief Act — The Direct Link Back to This Unit

Section 25, Specific Relief Act, 1963 — "The provisions of this Chapter as to contracts shall apply to awards to which the Arbitration and Conciliation Act, 1996, does not apply and to directions in a will or codicil to execute a particular settlement."

This section is easy to misread. It does not mean the Specific Relief Act's Chapter II (specific performance) applies to ordinary arbitral awards under the 1996 Act — it means the opposite: Chapter II's specific-performance machinery is extended to cover the narrower category of awards that fall outside the 1996 Act's scope (for example, certain older or informal arbitration-like awards not governed by that Act), so that such awards are not left without an enforcement mechanism. Modern arbitral awards under the 1996 Act have their own complete, self-contained enforcement regime (Section 36 of that Act), which is why Section 25 expressly excludes them.

Section 34 — Challenging an Arbitral Award

An arbitral award is not immune from all court scrutiny — Section 34 of the 1996 Act allows a limited challenge, including on the ground that the award is in conflict with the "public policy of India."

Oil and Natural Gas Corporation Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705 — The Supreme Court held that an arbitral award can be set aside under Section 34 as being contrary to public policy if it is "patently illegal" — for example, where the tribunal ignored the terms of the contract itself, such as a validly agreed liquidated-damages clause, and required the party to separately prove actual loss despite the contract having already fixed the damages figure. The Court set aside the award and directed a refund.

This case matters for infrastructure and government contracts specifically, because they very often contain liquidated-damages clauses for delay — Saw Pipes confirms that an arbitrator cannot simply disregard such a clause and substitute his own view of what compensation should be.

Non-Signatories and the Limits of Court Power Once an Arbitrator Is Appointed

Kamal Gupta & Anr. v. L.R. Builders Pvt. Ltd. & Anr., decided by the Supreme Court on 13 August 2025 — The Court held that a person who is not a signatory to the arbitration agreement cannot be permitted to remain present in or participate in the arbitral proceedings, since doing so would violate the confidentiality mandate of the Arbitration and Conciliation Act, 1996. The Court further held that once an arbitrator is appointed under Section 11(6), the referring court becomes *functus officio* — it cannot issue further ancillary directions, since the Act is a self-contained code that expressly restricts judicial interference once arbitration has begun.

Two lessons follow: arbitration's confidentiality is taken seriously enough that even interested non-parties can be excluded from the process, and once a tribunal is constituted, the courts largely step back and let the arbitral process run on its own, consistent with the minimal-interference philosophy of the 1996 Act.

From Dispute to Award — Four Stages

Stage 1 — A written arbitration clause already exists in the contract (Section 7)
Stage 2 — One party sues in civil court anyway; the other applies under Section 8, and the court must refer the dispute to arbitration
Stage 3 — Once a tribunal is appointed under Section 11(6), the referring court becomes functus officio and steps back (Kamal Gupta)
Stage 4 — The award is enforced under the Arbitration Act's own Section 36 — or challenged, only narrowly, under Section 34 (Saw Pipes)

Why Arbitration and the 2018 Amendment Fit Together

Mechanism	What it achieves for an infrastructure dispute
Section 20A/41(ha), Specific Relief Act	Stops an injunction from freezing the physical project
Arbitration clause + Section 8	Routes the underlying dispute to a private, faster tribunal instead of ordinary courts
Section 20B, Specific Relief Act	If the dispute does reach court (e.g., to enforce or challenge an award), a Special Court handles it
Section 34, Arbitration Act	Provides a narrow, public-policy-based safety valve against a genuinely illegal award

Must Know

Section 7, Arbitration Act — a written agreement to arbitrate present or future disputes over a defined legal relationship
Section 8 — a court must refer parties to arbitration where a valid arbitration agreement exists and a party timely applies
Section 25, Specific Relief Act — extends Chapter II's enforcement machinery only to awards outside the 1996 Act's scope, not to ordinary arbitral awards (which are enforced under that Act's own Section 36)
Section 34, Arbitration Act — an award can be set aside for being contrary to public policy, including "patent illegality" (ONGC v. Saw Pipes)
Kamal Gupta v. L.R. Builders (2025) — non-signatories cannot participate in arbitral proceedings; courts become functus officio once an arbitrator is appointed under Section 11(6)

Should Know

Infrastructure contracts almost always combine an arbitration clause with the Section 20A injunction bar — together they ensure the project keeps moving while the dispute is resolved privately and relatively quickly
Saw Pipes-type challenges are especially relevant to government/infrastructure contracts because these routinely contain liquidated-damages clauses for construction delay

A Practical Example

A metro-rail authority's contract with its civil contractor contains an arbitration clause and a clause fixing liquidated damages of ₹10 lakh per week of delay. A dispute arises over an eight-week delay, and the contractor files a civil suit instead of invoking arbitration, also seeking an injunction against the authority withholding payment.

The authority can apply under Section 8 of the Arbitration Act to have the court refer the dispute to arbitration rather than decide it itself. Separately, since a metro line falls within the Schedule's "Transport" category, any injunction that would impede the project's progress is barred under Section 20A of the Specific Relief Act regardless. If the resulting arbitral award later ignores the agreed ₹10 lakh-per-week figure entirely and awards a different amount without any basis in the contract, that award could be challenged under Section 34 as patently illegal, following the reasoning in ONGC v. Saw Pipes.

Quick Revision Points

Arbitration agreement (S.7) must be written; covers present or future disputes on a defined relationship
S.8: courts must refer parties to arbitration where a valid clause exists and objection is timely raised
SRA S.25 extends Chapter II enforcement only to non-1996-Act awards — ordinary arbitral awards use the Arbitration Act's own Section 36
S.34: award can be set aside for public policy violation, including patent illegality (Saw Pipes) — a narrow ground, not a full appeal
Kamal Gupta v. L.R. Builders: confidentiality excludes non-signatories; courts are functus officio post-appointment under S.11(6)
Arbitration + Section 20A's injunction bar work together to keep infrastructure disputes resolvable without stopping the project

11. Arbitration Clauses in Infrastructure Contracts — The Arbitration and Conciliation Act, 1996