For business owners

Choosing arbitration or mediation over court — what the law allows, and where the institutions sit

A practical guide to alternative dispute resolution for Indian commercial parties: when ADR is mandatory, when it is optional, what each forum decides, and how to choose between them.

Court is no longer the default. For commercial disputes above the specified value in Commercial Courts Act 2015, pre-institution mediation under Commercial Courts Act 2015, s 12A is now a statutory pre-condition before a suit can be filed (subject to the urgent-relief carve-out). The Mediation Act 2023 has, for the first time, given Indian mediation a comprehensive statutory framework with enforceable settlement agreements under section 27. The Arbitration and Conciliation Act 1996, as amended in 2015, 2019, and 2021, has been progressively narrowed at every limb where courts once had room to intervene. In short: the legislature has made ADR not merely available but, in many cases, the first procedural step.

What ADR is, and what it is not

ADR — alternative dispute resolution — is the family of mechanisms by which parties resolve a commercial dispute outside the ordinary civil courts. The three principal forms are negotiation, mediation, and arbitration. Each is recognised under Indian law, each carries its own procedural framework, and each produces an outcome of a different legal quality.

Mediation and arbitration both produce outputs that are enforceable as decrees of a civil court. The difference is consent at the close: a mediated settlement requires the parties to agree on the outcome; an arbitral award is decided by the tribunal and binds whether or not the losing party agrees with it.

When ADR is mandatory

1. Pre-institution mediation under the Commercial Courts Act 2015

Section 12A of the Commercial Courts Act 2015 requires that, before a suit of a commercial nature is filed in a Commercial Court above the specified value, the parties exhaust the remedy of pre-institution mediation. The carve-out is for suits that contemplate urgent interim relief. The Supreme Court has confirmed the mandatory character of section 12A in Patil Automation (P) Ltd v Rakheja Engineers (P) Ltd (2022) 10 SCC 1 (SC) [verification recommended against SCC text before reliance], holding that suits filed without exhausting pre-institution mediation are not maintainable.

2. Mandatory ADR by contract

Where the contract contains a binding ADR clause, the parties are bound by it. A multi-tier clause (negotiation → mediation → arbitration) is enforceable provided each tier carries a meaningful step. Indian courts have set aside clauses where one of the tiers was illusory.

3. Statutory ADR in specific sectors

In sectors with statutory ADR frameworks (consumer disputes under the Consumer Protection Act 2019, financial-services disputes under the RBI Ombudsman Schemes), the statutory mechanism is the first port of call.

When arbitration is the right choice

Arbitration is appropriate where the parties want a binding, enforceable, confidential decision rendered by a neutral panel within a defined timeline. It is the standard choice for:

• Commercial contracts of meaningful value where the parties want a procedural framework that is faster than the ordinary civil court system
• Cross-border contracts where Indian courts are not the desired forum
• Sectors with technical complexity (construction, infrastructure, IP licensing) where the parties want decision-makers familiar with the subject matter
• Long-term commercial relationships where the parties want a confidential resolution that does not become public record

Arbitration is not appropriate where the dispute is non-arbitrable. Following Vidya Drolia v Durga Trading Corporation (2021) 2 SCC 1 (SC), the fourfold non-arbitrability test excludes disputes affecting rights in rem, sovereign and public-interest functions, statutory disputes that legislatures have reserved to special tribunals, and matters that would defeat the integrity of the framework. Insolvency disputes, after admission, fall on the wrong side of this line: see Indus Biotech Pvt Ltd v Kotak India Venture Fund I (2021) 6 SCC 436 (SC).

When mediation is the right choice

Mediation is appropriate where:

• The parties want to preserve a continuing commercial relationship
• The dispute has a large emotional or relational dimension (family business, partnership)
• The legal merits are unclear and a commercial settlement is more efficient than litigation
• Speed and confidentiality matter more than precedent
• Pre-institution mediation under section 12A is being commenced

Under the Mediation Act 2023, a mediated settlement agreement signed by the parties and authenticated by the mediator is enforceable as a decree of a civil court under section 27. This makes mediation a meaningful first step rather than a procedural detour.

Institutional vs ad-hoc arbitration

An institutional arbitration is administered by a recognised arbitral institution that provides rules, panels of arbitrators, case-management support, and a fee structure. An ad-hoc arbitration is administered by the parties themselves, typically with the procedural backbone supplied by Schedule 1 to the Arbitration and Conciliation Act 1996. For most commercial parties, institutional arbitration is the better choice: it produces a more predictable timeline, panels of vetted arbitrators, and reduced procedural friction.

Indian and international arbitral institutions worth considering

Note: This list is not exhaustive and is provided for orientation. Selection of an institution should follow a careful review of the institution’s rules, panel composition, and fee structure relative to the nature and value of the dispute.

The decision framework — ADR vs court

Drafting the ADR clause — minimum content

An ADR clause that survives challenge under Vidya Drolia and is internally consistent should at a minimum specify:

1. Scope: What disputes are referred to ADR (all disputes arising out of or in connection with the contract is the standard formulation).
2. Forum: Mediation under the Mediation Act 2023 followed by arbitration; or arbitration directly.
3. Institution and rules: The institution administering the arbitration and the applicable rules. If ad-hoc, the procedural law adopted.
4. Number of arbitrators and method of appointment: Sole or three; appointment mechanism that survives Perkins Eastman Architects DPC v HSCC (India) Ltd (2020) 20 SCC 760 (SC) (no party-controlled appointment).
5. Seat: The legal seat of the arbitration (this determines the supervisory court and the standard of review). The seat is not the same as the venue.
6. Language: The language of the arbitration.
7. Governing law of the contract: Indian law, in most cases.
8. Carve-outs: Where the parties want to preserve the right to seek interim relief from a court (typically section 9 of the 1996 Act for Indian-seated and foreign-seated arbitrations).

Sample arbitration clause — institutional

Any dispute, controversy, or claim arising out of or in connection 
with this Agreement, including any question regarding its existence, 
validity, breach, or termination, shall be referred to and finally 
resolved by arbitration administered by [Mumbai Centre for International 
Arbitration / Indian Council of Arbitration / other named institution] 
in accordance with its rules in force at the time of commencement of 
the arbitration, which rules are deemed to be incorporated by reference 
into this clause. The seat of arbitration shall be [Mumbai / New Delhi / 
named city]. The number of arbitrators shall be [one / three]. The 
language of the arbitration shall be English. The governing law of this 
Agreement shall be the laws of India. Nothing in this clause shall 
prevent any party from seeking interim relief under section 9 of the 
Arbitration and Conciliation Act 1996.

Sample mediation clause — pre-arbitration

Before referring any dispute under this Agreement to arbitration, 
the parties shall first attempt in good faith to resolve the dispute 
by mediation under the Mediation Act 2023. The mediation shall be 
administered by [named mediation institution] in accordance with its 
rules. If the mediation does not result in a mediated settlement 
agreement within sixty (60) days from the date a mediation request 
is served, or such longer period as the parties may agree in writing, 
either party may proceed to arbitration under [the arbitration clause 
above].

The cost question

Arbitration is widely understood to be cheaper than litigation. In Indian commercial practice, this is sometimes the case and sometimes not. Institutional fees, arbitrator fees, hearing-room costs, and counsel time can produce a total expenditure that exceeds the cost of a Commercial Court suit, particularly for matters under INR 10 crore. The cost calculus depends on the institution, the seat, the complexity of the matter, and whether the parties manage the procedure with discipline.

Mediation is, by every measure, materially cheaper than both arbitration and litigation. The Mediation Act 2023 framework caps mediator fees in many institutional contexts. Where mediation succeeds, the cost is a fraction of the alternative. Where it fails, the parties retain the right to proceed to the next step.

Practical takeaway

1. For commercial contracts, write an ADR clause. Default to mediation followed by arbitration.
2. Choose the institution before the dispute arises. The cheapest arbitration is the one whose clause was correctly drafted three years before the dispute.
3. Specify the seat with care. The seat determines the supervisory court and the standard of review.
4. Treat the section 12A pre-institution mediation requirement as a real procedural step, not a formality. Suits that bypass it are returned at the threshold.
5. Keep the right to interim relief under section 9 of the 1996 Act regardless of seat.