The Illusion of an Arbitration Clause: When a Civil Court Fallback Leaves Your Dispute Clause Toothless

Does an arbitration clause with civil court option still count as arbitration?

On this clause, the Indore Bench said no. In M/s Global Buildocon v. Harsh and Another (Arbitration Case No. 88 of 2026, neutral citation 2026:MPHC-IND:30500), Justice Vinay Saraf examined a dispute clause in a registered Development Agreement. The clause spoke of arbitrators and of an arbitral decision, yet it also allowed both parties to go to a civil court, or any other court, if the dispute was not resolved through the arbitrators. The Court held that this meant the arbitrators’ decision was not final and binding. The clause therefore was not an arbitration agreement, and an application under Section 11(6) of the Arbitration and Conciliation Act, 1996 for appointment of a sole arbitrator could not succeed.

The order matters beyond one development project. An arbitration clause with civil court option can look sensible on the day a contract is signed, since it names arbitrators and still keeps a civil court in reserve. The judgment shows that the label does not decide the question. What decides it is whether the clause commits the parties to a private tribunal whose decision binds them.

The Court also gave an additional ground for refusing a reference. It treated the developer’s claim for refund of advance money as dead wood, because the demand was made in March 2026 on an agreement of 2015, and the limitation period for recovering money is three years. So a Section 11 application can fail at the threshold on the clause itself, or on the age of the claim.

A genuine clause has real consequences. The same High Court has recently held, in a different setting, that executing courts must refer disputes to arbitration where a compromise decree carries a valid clause covering the dispute. A clause that fails the test never reaches that stage.

The dispute: a development agreement, a stalled project and a refund demand

The agreement was executed on 26 March 2015 and registered on 15 April 2015. Under it, the applicant firm, M/s Global Buildocon, acting through its partners, was to develop land owned by the non-applicants at Village Bada Bangarda, Tehsil Hatod, District Indore. The land covered 1.225 hectare across four survey numbers, and the plan was a P+6 multi dwelling unit residential complex to be called Global Towers. The order records that the landowners had obtained permission from the Town and Country Planning Department and a diversion order under Section 172(1) of the Madhya Pradesh Land Revenue Code, 1959, dated 6 September 2014.

As recorded in the order, the developer’s account was that the planning permission had to be renewed and that possession was to be handed over after demarcation and measurement. It alleged that the landowners did not comply with the conditions of a permission granted on 28 December 2011, and that part of the land was notified as Green Area by the State Government, so that no development could take place. These are the developer’s allegations. The Court did not adjudicate them.

On money, the developer said it paid Rs. 1 Crore to the landowners and spent a further Rs. 25 lakhs on registration, stamp duty and similar costs. On 30 March 2026 it demanded the amount back with interest, and the landowners refuted the demand. The developer then invoked the arbitration clause by notice. The landowners denied that any arbitration clause existed and refused consent, which led to the Section 11(6) application.

The governing law in plain terms: what turns a clause into an arbitration agreement

Section 11(6) lets a party ask the High Court to appoint an arbitrator when the agreed route has failed. The order treats the threshold as a question of existence: is there an arbitration agreement at all? Relying on the Supreme Court’s decision in BGM and M-RPL-JMCT (JV) v. Eastern Coalfields Ltd., which the landowners cited, the order records that the referral court’s task under Section 11(6-A) is confined to the existence of an arbitration agreement on the basis of Section 7. That examination is prima facie. It is not a laborious or contested inquiry, the burden lies on the party relying on the agreement, and the court is not to hold a mini-trial. Deeper questions go to the arbitral tribunal under Section 16, which is not bound by the referral court’s prima facie view. A fuller account is available in this note on the referral court’s role under Section 11.

A prima facie look still has to ask whether the clause is an arbitration agreement. The Court answered that by applying three overlapping tests drawn from the Supreme Court.

Six attributes from K.K. Modi

In the Nagreeka Indcon passage reproduced in the order, the Supreme Court restated the attributes that K.K. Modi v. K.N. Modi requires of an arbitration agreement:

1. The decision of the tribunal must bind the parties.
2. The tribunal’s jurisdiction must come from the parties’ consent, a court order or a statute that makes clear the process is arbitration.
3. The tribunal must determine the substantive rights of the parties.
4. The tribunal must act impartially and judicially, with equal fairness to both sides.
5. The agreement to refer must be intended to be enforceable in law.
6. The tribunal must decide a dispute already formulated when the reference is made.

The first attribute is the one on which this case turned. If the decision does not bind, the clause is not arbitration, whatever vocabulary it uses.

The Jagdish Chander principles

Jagdish Chander v. Ramesh Chander, reproduced at length in the order, says that the intention to arbitrate must be gathered from the terms of the agreement. The words must disclose a determination and an obligation to arbitrate, not merely a possibility. The same passage names two warning signs. A clause saying that the authority’s decision is not final and binding, or that a dissatisfied party may file a civil suit, cannot be termed an arbitration agreement. And a clause that needs fresh consent before reference is only an agreement to arbitrate in future if the parties later agree.

The order also reproduces a three part formulation from P. Dasaratharama Reddy Complex v. Government of Karnataka. The clause must provide for reference of disputes to a private forum other than a court, for an enquiry giving both sides a fair opportunity, and for a decision that is final and binding without recourse to any other remedy. Where any of these is missing, there is no arbitration agreement.

What each side argued

The developer’s case

Senior counsel for the developer argued that Clause 5 of the Development Agreement is an arbitration clause, and relied on three Supreme Court decisions. In Babanrao Rajaram Pund v. Samrat Builders and Developers ((2022) 9 SCC 691), as the order records the submission, a clause can be treated as an arbitration clause even without express words of finality, if the parties’ discernible intention to refer disputes to arbitration appears. In Tarun Dhameja v. Sunil Dhameja (2024 SCC OnLine SC 3715), the argument was that an arbitration clause should be read pragmatically with attention to the parties’ intent, and that the absence of specific words, or a mention that civil court remained available, did not frustrate the clause. In Zhejiang Bonly Elevator Guide Rail Manufacture Co. Ltd. v. Jade Elevator Components ((2018) 9 SCC 774), the Supreme Court appointed an arbitrator under a clause that offered arbitration or the court, because the petitioner had chosen arbitration.

The landowners’ case

The landowners made two sets of points. On the facts, they denied that Rs. 1 Crore was paid. Cheques totalling Rs. 37 lakhs were encashed, they said, and the remaining cheques were never handed over. They also denied the claim of Rs. 25 lakhs in expenses.

On the clause, they argued that Clause 5 itself lets the parties go to a civil court or any other court if the dispute is not resolved through arbitration, so the arbitrators’ decision is not final and binding and the clause cannot be an arbitration clause. They relied on Jagdish Chander, Dasaratharama Reddy Complex, BGM, Nagreeka Indcon Products v. Cargocare Logistics (2026 SCC OnLine SC 630) and Alchemist Hospitals Ltd. v. ICT Health Technology Services India (P) Ltd. (2025 SCC OnLine SC 2354).

How the Court reasoned: a binding decision is the dividing line

The Court’s own reasoning is short and turns on one feature of Clause 5. In substance, as the order reproduces it in Hindi, the clause has three parts. First, if any dispute arises, a panch, meaning an arbitrator, or panchs acceptable to both sides will be appointed. Second, the panch’s decision will be obtained and accepted. Third, if the dispute is not resolved through the panchs, both parties may approach a civil court (vyavahar nyayalaya) or any other court.

The Court gave decisive weight to the third part. Because the parties kept a civil court, and any other court, open if the arbitrators did not decide the dispute, the arbitrators’ decision would not be final and binding. The Court read the clause as showing an intention to approach arbitrators to attempt a resolution, and not an intention to resolve the dispute through arbitration, even though the word arbitration appeared in the first part. With no stipulation that the arbitrator’s decision is final and binding and that no party may go to court, the clause could not be treated as an arbitration clause. The Court placed the clause within the line of Supreme Court decisions from K.K. Modi to the most recent, Alchemist Hospitals, and concluded that the parties are free to approach the competent civil court in accordance with law.

Alchemist Hospitals is the closest authority the order cites. The clause there led from negotiation to mediation and then to a process called arbitration before the chairmen of the two companies, and said that if the dispute was not resolved within fifteen days after that arbitration, the complaining party would seek remedies in the courts of law. The Supreme Court found no indication that the proposed arbitration was meant to be final and binding, and read the court remedy as pointing to an attempt at amicable resolution rather than a definitive submission to arbitration. The passage reproduced in the order adds that correspondence after the dispute arose could not supply an arbitration agreement that was missing at the start, unless that correspondence was unequivocal about referring the dispute to arbitration.

Nagreeka Indcon adds a related point. As reproduced in the order, the Supreme Court held that a clause saying the parties can settle disputes by arbitration records only a possibility, and needs a further agreement to become binding. Clause 5 differs in wording, because its first part speaks of appointment of arbitrators in mandatory terms. Its defect lies elsewhere. It is the court option, and not the choice of words, that removes finality.

Reading an arbitration clause with civil court option: six clauses side by side

The order sets several clauses next to one another. The table below collects them, with the result recorded for each. Entries for the developer’s authorities reflect how counsel presented them in the order.

The pattern is consistent. Where the clause obliges the parties to arbitrate and the decision binds them, the clause survives. Where the decision does not bind, or a further consent or a court route stands behind it, the clause fails.

A distinction the order does not spell out

Zhejiang Bonly may appear to sit uneasily with Clause 5, since both mention a court. The two clauses are built differently. In Zhejiang the choice between arbitration and the court is made at the outset, and once the petitioner chose arbitration the Supreme Court appointed an arbitrator. In Clause 5 the court option arises only after arbitration has not resolved the dispute. That reading is offered as commentary. The order does not itself contrast the two.

The second hurdle: why a stale refund claim is dead wood

Having held that Clause 5 is not an arbitration clause, the Court went on to ask whether the claim was live or dead wood. The order states that claims which appear ex facie time barred at first glance cannot be referred to arbitration. It relies on Vidya Drolia v. Durga Trading Corporation ((2021) 2 SCC 1) for the proposition that, on a Section 11 application, the court should preliminarily weed out manifestly ex facie non-existent and invalid arbitration agreements and non-arbitrable disputes. The order describes this review as limited in purpose: it exists to eliminate clearly baseless claims where dismissal is obvious and unquestionable, so that manifestly dead and time barred disputes are disposed of efficiently.

On the facts, the Court noted that the advance was paid when the agreement was executed in 2015, that nothing happened afterwards and no progress was achieved, and that the refund demand came only on 30 March 2026. The limitation period for recovery of money is three years, and by Section 43 of the 1996 Act the law of limitation applies to arbitration proceedings as well. On that footing the claim was ex facie time barred, it was dead wood, and a dispute of that kind cannot be referred to arbitration.

The gap is the story. Counting from the dates in the order, about eleven years separate the agreement from the demand. The order records the allegation that part of the land was notified as Green Area, but it does not date that notification, and it does not say what the developer did between 2015 and 2026. For a developer the practical point is plain: when a project stalls, a claim for return of an advance does not wait indefinitely for a convenient moment.

This second ground sits beside the narrow Section 11 inquiry described in BGM. The order does not discuss how the two fit together. It treats the time bar as apparent from the dates, which keeps the scrutiny summary and avoids any evidentiary inquiry.

What the Court left open

The order decides two things and leaves several others untouched.

• Payment. The Court made no finding on whether Rs. 1 Crore was paid, or only the Rs. 37 lakhs the landowners accept, or on the claimed Rs. 25 lakhs of expenses.
• Responsibility for the stalled project. Compliance with the 2011 permission and the effect of the Green Area notification remain the developer’s allegations and the landowners’ denial.
• The developer’s authorities. The order records the three decisions the developer relied on, but does not separately explain why they did not apply. Its stated basis is the Supreme Court line from K.K. Modi to Alchemist Hospitals.
• Fallback versus challenge. The order treats a court option that arises when arbitrators fail to decide the dispute as showing that their decision is not final and binding. It does not separately analyse whether a court option operating only when arbitration produces no decision differs from a right to reopen a decision already made. That is an open analytical question, not a holding.
• Limitation mechanics. The order does not say from which event the three years ran, does not mention any acknowledgement or other ground that might extend time, and does not decide whether a civil suit on the same claim would be in time. It says only that the parties may approach the competent civil court in accordance with law.
• Reach. This is an order of a single Judge on a Section 11 application, tied to the text of Clause 5. It does not say that every clause mentioning a court falls outside Section 7.

Drafting lessons for a dependable dispute clause

Anyone holding an arbitration clause with civil court option in an existing contract may want to read it again with the tests above in mind. The following points are drafting observations drawn from those tests. They are commentary, not holdings.

1. Use mandatory words. The Supreme Court passages in the order contrast a clause saying disputes shall be referred to arbitration with clauses saying the parties can, may or should consider arbitration, or will arbitrate if they later agree.
2. State finality expressly. The Court noted the absence of any stipulation that the arbitrator’s decision is final and binding.
3. Do not pair arbitration with an open door to civil courts on the merits. If any role for a court is intended, define it narrowly and separately, so that it cannot be read as a right to start again.
4. Settle the appointment machinery. A clause that depends on arbitrators acceptable to both sides should say what happens if the parties cannot agree on one.
5. Make each language version say the same thing. Where a clause is drafted in more than one language, a difference between versions can invite exactly the kind of dispute about intention that arose here.

A note on vernacular clauses

Clause 5 was drafted in Hindi. The Court did not treat the Hindi vocabulary as the problem. It read panch as arbitrator, and its concern was the closing sentence allowing recourse to a civil court or any other court. Where parties draft in Hindi, or in Hindi and English, three things deserve a close check: the word used for the tribunal, the words that make its decision final, and the final sentence about courts. As this order shows, a Hindi clause that says the panch’s decision will be accepted can still fail if a later sentence preserves court access.

The same construction exercise arises in arbitration and commercial litigation practice, where the dispute clause is read before anything else.

Records to assemble before approaching the High Court

A claimant who wants to test a dispute clause, or a respondent who wants to answer one, can assemble the following before any filing. The list is practical and drawn from what was contested in this case. It is not a statement of what any court requires.

• The complete executed agreement, with the dispute clause in its original language and a faithful translation if more than one language was used. The Court worked from the text of Clause 5 itself.
• Registration and stamp duty papers, with their dates.
• Proof of every payment: bank statements, cheque copies, receipts and acknowledgements. The amount paid was contested here, with the landowners accepting only the encashed cheques of Rs. 37 lakhs.
• Permissions and official papers, such as planning permission, a diversion order, renewals, and any notification or notice affecting the land. They help fix when the project could not proceed.
• A dated chronology of what happened after signing, including demarcation, handing over of possession and every communication between the parties.
• The notice invoking the clause, the reply and proof of service. In this case the reply denied that any arbitration clause existed.
• A limitation note stating the date from which the claim is said to have accrued and the document that supports it.

Forum also needs early attention. This application was filed before and decided by the High Court at its Indore Bench. The Madhya Pradesh High Court sits at its Principal Seat in Jabalpur and at benches in Indore and Gwalior, so MP High Court bench jurisdiction should be checked before filing.

Conclusion: what the order settles and what it leaves open

What the order settles is narrow and useful. An arbitration clause with civil court option, where the court option opens if arbitration does not resolve the dispute, was held by the Indore Bench not to be an arbitration agreement, because the arbitrators’ decision would not be final and binding. The Court reached that view by applying the Supreme Court’s tests from K.K. Modi through Jagdish Chander to Alchemist Hospitals. It also confirmed that a Section 11 application can be refused at the threshold where the claim is ex facie time barred.

What it leaves open matters as much. The payment dispute and the responsibility for the stalled project were not decided. The line between a fallback that applies when arbitration yields no decision and a right to reopen a decision was not analysed. The developer’s authorities were recorded but not separately distinguished. The start date for limitation, and the position of any civil suit, were not addressed. And the order is a single Judge’s decision on one clause.

The practical message for litigants is to read the clause before issuing the notice, to check the dates before filing the application, and to treat a money claim arising from a stalled project as one with a running clock. For the institutions and drafters who sign such agreements, including developers and public bodies working from standard forms, the message is to treat the dispute clause as an operative part of the contract: mandatory words, express finality, no open civil court route on the merits, and each language version saying the same thing. Nothing in the order guarantees any result in another case, because each clause will be read on its own words.