India’s Supreme Court strikes down ‘nuclear veto’ arbitration clauses

The Supreme Court has rejected (52 pages/ 462 KB) an earlier ruling by the high court in Patna that allowed a state-owned construction company to annul the appointment of an arbitrator in a dispute over additional costs related to a major bridge construction project.

In 2014, Bihar Rajya Pul Nirman Nigam Limited (BRPNNL) awarded the contract to Hindustan Construction Co Ltd (HCC) to build a bridge over the River Sone in the districts of Aurangabad and Rohtas in Bihar, eastern India.

Clause 25 of the contract provided for arbitration in the event of a dispute, with the arbitrator to be appointed by the managing director of BRPNNL; and also provided that if such appointment was not possible then the matter should not be referred to arbitration at all.

However, HCC later invoked arbitration related to a second claim in August 2021. Although an arbitrator was appointed and proceedings continued for a further three years, in 2024 BRPNNL filed a petition to the court to annul the appointment.

After the high court halted the arbitration, HCC approached the Supreme Court to resolve the matter.  The two-judge panel ruled that the high court had erred in its interpretation, cut away the portion relating to the unilateral appointment and exclusionary condition and preserved the core agreement to arbitrate. It held that the court could appoint an arbitrator to allow the arbitration to continue. It further stated: “Arbitration is often a friend in conferences but a foe in practice” and that its “raison d’etre has always been to ease the burden on courts and to ensure the expeditious resolution of commercial disputes.”

The court went on to criticise delays and evasive tactics, calling for stricter scrutiny of behaviour in arbitration. It also held that if an arbitrator steps down, substitution must occur without restarting the process, saving time and cost.

Mohammed Talib, a legal expert with Pinsent Masons, said the ruling would be particularly relevant for international businesses contemplating investing in public contracts in India. “Clauses allowing one party, often a government entity, to appoint the arbitrator exclusively – or foreclosing arbitration if that fails – are void for arbitrariness,” he said. “Courts will sever such provisions and preserve the arbitration agreement.”

The court said it would refrain from imposing costs, but did "issue a stern warning to the then Managing Director of the respondent company" to remind public servants that "Public Officers are custodians of public faith, not mere administrators.” The judges added: “The officer is advised to reflect upon the responsibilities of public office and ensure that such indifference does not recur.”

The court also imposed limits on high courts reviewing appointment orders for arbitrators after they become final to reduce midstream disruptions to arbitrations.

The Supreme Court’s decision may now make it harder for public authorities to impede arbitration in major construction contracts, which could provide some welcome clarity for international investors, said Talib. “This ruling provides greater certainty for foreign investors and contractors that arbitration will remain available despite defective clauses,” he said. “Strong constitutional principles, such as Article 14, may now apply to arbitral appointments in public contracts. Businesses should review and negotiate arbitration clauses to eliminate unilateral or exclusionary provisions.”

The judgment also reinforces India’s “commitment to a pro-arbitration regime”, said arbitration expert Wee Jian Ang. “It reduces uncertainty and strengthens India’s position as a reliable destination for infrastructure and engineering, procurement, and construction investments. The court has effectively dismantled the ‘nuclear veto’ clauses that allowed public authorities to block arbitration. Companies negotiating government contracts should now insist on neutral appointment mechanisms.”