Arbitration is a method of alternative dispute resolution in which the parties agree to submit their dispute to one or more arbitrators, whose decision (called an arbitral award) is binding on the parties. Under Indian law, arbitration is governed by the Arbitration and Conciliation Act, 1996, which defines an arbitration agreement in Section 7 and provides the comprehensive framework for domestic and international commercial arbitration.
Legal definition
Section 7 of the Arbitration and Conciliation Act, 1996 defines the arbitration agreement:
Section 7(1): In this Part, "arbitration agreement" means an agreement by the 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, whether contractual or not.
Section 7(2): An arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement.
Section 7(4): An arbitration agreement is in writing if it is contained in — (a) a document signed by the parties; (b) an exchange of letters, telex, telegrams, or other means of telecommunication including communication through electronic means which provide a record of the agreement; or (c) an exchange of statements of claim and defence in which the existence of the agreement is alleged by one party and not denied by the other.
Section 2(1)(a) defines "arbitration" to mean any arbitration whether or not administered by a permanent arbitral institution. The Act is based on the UNCITRAL Model Law and provides for three categories: domestic arbitration (Part I), international commercial arbitration (Part I with modifications), and enforcement of foreign arbitral awards (Part II).
How courts have interpreted this term
P. Anand Gajapathi Raju v. P.V.G. Raju [(2000) 4 SCC 539]
The Supreme Court laid down the requirements for referring parties to arbitration under Section 8 of the Act: (i) there must be a valid arbitration agreement; (ii) a party must bring an action in court; (iii) the subject matter of the action must be the same as in the arbitration agreement; and (iv) the other party must apply for reference to arbitration before submitting its first statement on the substance of the dispute.
BALCO (Bharat Aluminium Co.) v. Kaiser Aluminium Technical Services [(2012) 9 SCC 552]
The Supreme Court held that Part I of the Act applies only to arbitrations seated in India, while Part II deals with enforcement of foreign awards. This landmark decision clarified the territorial scope of the Act and significantly impacted international commercial arbitrations involving Indian parties.
Vidya Drolia v. Durga Trading Corporation [(2021) 2 SCC 1]
The Supreme Court formulated a four-fold test for determining when a dispute is "non-arbitrable": (i) when the cause of action relates to actions in rem (rights against the world at large); (ii) when the dispute affects rights of third parties who are not parties to the arbitration agreement; (iii) when the dispute relates to sovereign functions of the State; and (iv) when the dispute is required by statute to be adjudicated by a specific public forum.
Why this matters
Arbitration has become the preferred dispute resolution mechanism for commercial transactions in India and internationally. The Arbitration and Conciliation Act, 1996, particularly after the 2015 and 2019 amendments, provides a modern, efficient framework that reduces judicial intervention, promotes party autonomy, and aligns Indian arbitration practice with international standards.
For practitioners, the validity and enforceability of the arbitration agreement is the threshold question. If a valid arbitration agreement exists, courts are required under Section 8 to refer the parties to arbitration and cannot entertain a suit on the same subject matter. The Supreme Court has consistently held that courts should adopt a pro-arbitration approach and refer disputes to arbitration unless the arbitration agreement is ex facie void or non-existent.
The enforceability of arbitral awards is a critical advantage over other ADR mechanisms. Under Section 36, an arbitral award is enforceable as a decree of a civil court once the time for challenging it under Section 34 has expired. Foreign arbitral awards are enforceable under Part II of the Act, subject to limited grounds of refusal. This gives arbitration a finality and enforceability that mediation and conciliation do not inherently possess.
Related terms
Alternative dispute resolution:
Opposite:
Frequently asked questions
Is an arbitral award enforceable like a court decree?
Yes. Under Section 36 of the Arbitration and Conciliation Act, 1996, an arbitral award is enforceable as a decree of the court once the time for filing a challenge under Section 34 has expired or the challenge has been rejected. Execution proceedings can be initiated in the same manner as for a court decree.
Can a court refuse to refer parties to arbitration?
Under Section 8, the court is obligated to refer parties to arbitration if a valid arbitration agreement exists. The court can refuse referral only if it finds that the arbitration agreement is null and void, inoperative, or incapable of being performed, or if the subject matter of the dispute is non-arbitrable.
What is the difference between domestic and international commercial arbitration?
Domestic arbitration involves disputes between Indian parties with the arbitration seated in India. International commercial arbitration, as defined in Section 2(1)(f), involves at least one party that is a national or habitual resident of a country other than India, or a body corporate incorporated outside India. Both are governed by Part I of the Act, but international commercial arbitrations have certain additional provisions.
This entry is part of the Veritect Indian Legal Glossary, a comprehensive reference of Indian legal terminology grounded in statutory text and judicial interpretation.
Last updated: 2026-03-27. Veritect provides this content for informational purposes and does not constitute legal advice.