For nearly three decades, arbitration has been projected as the preferred mechanism for resolving commercial disputes in India. The Arbitration and Conciliation Act, 1996, inspired by the UNCITRAL Model Law, promised speed, party autonomy, confidentiality and minimal judicial interference. Successive legislative amendments and judicial pronouncements have further strengthened India’s ambition of becoming a global arbitration hub. Yet beneath this narrative of institutional success lies an under-examined reality. For thousands of subcontractors operating in infrastructure, construction, manufacturing, engineering and public procurement projects, arbitration frequently remains less a mechanism of justice than a system of structural exclusion. While principal contractors, government agencies and large corporations negotiate sophisticated arbitration clauses backed by significant legal resources, subcontractors often discover that the legal architecture governing commercial arbitration offers them little practical protection when disputes arise. The consequence is a widening gap between the theoretical promise of arbitration and its accessibility for those occupying the weakest position within commercial contracting.
The commercial relationship between a principal employer, the main contractor and various subcontractors is fundamentally hierarchical. The principal contract generally governs the overall project, while numerous subcontracts distribute specialised work among smaller entities. Although the success of the project frequently depends upon the performance of subcontractors, their contractual rights often remain confined to agreements executed only with the principal contractor. This doctrine of privity of contract has long occupied a central position in contract law. While it preserves contractual certainty, it also creates substantial difficulties when disputes involve delayed payments, defective designs supplied by the employer, variation orders or decisions taken under the principal contract. The subcontractor may suffer direct commercial loss without possessing any contractual relationship enabling it to proceed directly against the employer responsible for many of the underlying decisions.
This contractual structure becomes even more problematic once arbitration clauses are invoked. Most principal contracts contain detailed arbitration agreements providing for institutional arbitration, appointment procedures, governing law, venue and dispute resolution mechanisms. Subcontracts may contain different arbitration clauses, modified clauses or, in many cases, no effective arbitration agreement at all. Consequently, disputes arising from the same construction project often become fragmented across multiple legal forums. The employer arbitrates with the principal contractor, while the subcontractor simultaneously pursues independent proceedings against the contractor. Each tribunal examines only part of the commercial relationship, increasing costs, delaying resolution and creating the possibility of inconsistent findings on identical factual issues.
One of the most significant legal barriers confronting subcontractors is the absence of any automatic right to participate in arbitration proceedings arising out of the principal contract. Indian arbitration law continues to be fundamentally based upon consent. An arbitral tribunal derives jurisdiction not from the nature of the dispute but from the arbitration agreement itself. Unless the subcontractor is a party to that agreement or can establish some recognised legal exception, it ordinarily remains outside the arbitral process regardless of how directly the dispute affects its commercial interests. This principle protects party autonomy, which remains the cornerstone of arbitration. However, it also means that commercial reality often diverges sharply from procedural reality. A subcontractor may execute substantial portions of a project yet remain legally invisible during arbitration concerning decisions that directly determine its financial survival.
Indian courts have attempted to address this difficulty through doctrines such as the Group of Companies principle and evolving jurisprudence concerning non-signatories to arbitration agreements. Decisions of the Supreme Court have recognised that, in appropriate cases, entities that have not formally signed an arbitration agreement may nevertheless be referred to arbitration where their conduct, participation or the composite nature of the transaction demonstrates implied consent. More recently, Constitution Bench decisions have refined the legal basis for binding non-signatories, emphasising that the inquiry must remain rooted in contractual intention rather than broad notions of commercial convenience. These developments undoubtedly expand the flexibility of arbitration law. Nevertheless, they stop well short of creating a general remedy for subcontractors because each case ultimately depends upon highly specific factual circumstances demonstrating implied consent or interconnected contractual arrangements.
The economic realities of arbitration present an equally formidable obstacle. Modern commercial arbitrations frequently involve substantial tribunal fees, institutional administrative charges, expert witnesses, technical consultants and prolonged evidentiary proceedings. Large infrastructure disputes often continue for several years before awards are rendered. Major corporations may regard these costs as an ordinary component of commercial litigation. For subcontractors, however, such expenses can themselves become commercially devastating. Many smaller enterprises operate on narrow margins and depend upon timely payments to maintain working capital, pay employees and service bank borrowings. When arbitration becomes financially inaccessible, the theoretical availability of a legal remedy offers little practical protection.
This structural imbalance is particularly evident in the construction sector. Delays in certification of work, release of mobilisation advances, approval of variation claims or processing of final bills frequently originate at the level of the employer. Yet the subcontractor’s contractual claim ordinarily lies only against the principal contractor, who may himself be awaiting payment from the employer. Consequently, disputes cascade down the contractual chain. The subcontractor bears immediate financial consequences while possessing neither contractual control over the principal dispute nor procedural access to the arbitration determining when funds may eventually be released. This disconnect illustrates one of the most persistent weaknesses in multi-tier commercial contracting.
The position becomes even more complex where insolvency proceedings intervene. The Insolvency and Bankruptcy Code, 2016 has substantially altered commercial dispute resolution by imposing moratoriums and restructuring contractual relationships once a corporate debtor enters insolvency. Contractors undergoing Corporate Insolvency Resolution Process may suspend payments to subcontractors despite work already performed. Although insolvency law provides mechanisms for lodging claims before the Resolution Professional, many subcontractors find themselves competing with secured creditors and other financial claimants within an insolvency framework that was not specifically designed around the operational realities of construction contracting. The resulting overlap between arbitration and insolvency frequently prolongs commercial uncertainty rather than resolving it.
Another recurring challenge concerns the increasing use of “pay-when-paid” and “pay-if-paid” clauses in commercial contracts. These contractual mechanisms effectively postpone payment to subcontractors until the principal contractor receives corresponding payment from the employer. While commercially attractive from the contractor’s perspective, such clauses transfer significant financial risk downstream to entities possessing the least bargaining power. Arbitration may eventually determine the legality of withholding payment, but by the time proceedings conclude, many subcontractors have already suffered severe liquidity crises or exited the market altogether. Thus, procedural justice often arrives too late to preserve commercial viability.
Equally significant is the limited scope of judicial intervention under the Arbitration and Conciliation Act. Indian arbitration jurisprudence has consistently moved towards reducing court interference in arbitral proceedings. Sections 34 and 37 provide narrowly defined grounds for challenging arbitral awards, emphasising finality and party autonomy. This policy has undoubtedly strengthened confidence in arbitration as an efficient dispute resolution mechanism. However, for weaker commercial actors, limited judicial review also means fewer opportunities to correct procedural disadvantages embedded within unequal contractual relationships. The pursuit of arbitral efficiency occasionally sits uneasily alongside concerns regarding substantive commercial fairness.
International experience demonstrates that several jurisdictions have attempted to address similar concerns through legislative reforms specifically targeting payment practices within the construction industry. Statutory adjudication models, mandatory payment timelines and specialised construction dispute mechanisms seek to provide rapid interim remedies without waiting for lengthy arbitral proceedings. Countries such as the United Kingdom, Singapore and Australia have experimented with variations of these approaches in recognition of the unique commercial dynamics characterising construction contracts. India, despite possessing one of the world’s largest infrastructure sectors, continues to rely predominantly upon conventional arbitration and civil remedies, leaving subcontractors exposed to prolonged payment disputes.
The issue is not that arbitration itself has failed. On the contrary, arbitration remains indispensable for resolving complex commercial disputes requiring technical expertise, confidentiality and international enforceability. The difficulty lies in assuming that a dispute resolution mechanism designed around contractual autonomy automatically delivers substantive equality across commercially unequal parties. Arbitration faithfully reflects the contractual architecture created by the parties. Where that architecture itself places subcontractors at a structural disadvantage, arbitration inevitably reproduces rather than corrects those inequalities.
Meaningful reform therefore requires looking beyond procedural efficiency alone. Standard form contracts in public procurement could provide clearer mechanisms for subcontractor participation in appropriate disputes. Greater transparency in payment certification, stronger statutory protection against prolonged withholding of dues, wider use of dispute adjudication boards and specialised fast-track mechanisms for operational claims may collectively reduce the burden presently falling upon smaller commercial entities. Institutional arbitration centres could also consider fee structures calibrated to the scale of disputes involving small and medium enterprises, thereby improving practical accessibility without compromising arbitral independence.
Recent judicial developments recognising commercial realities while preserving contractual consent demonstrate that Indian arbitration law continues to evolve. Courts have increasingly emphasised that arbitration should remain commercially pragmatic rather than mechanically formalistic. Nevertheless, lasting reform cannot emerge solely through judicial innovation. Legislative intervention and thoughtful contractual drafting remain essential if subcontractors are to receive meaningful protection within increasingly complex commercial projects.
Ultimately, the challenge confronting Indian arbitration is not whether it remains an effective dispute resolution mechanism for sophisticated commercial parties. It unquestionably does. The more difficult question is whether the system adequately serves those who perform much of the physical work underlying modern infrastructure while possessing the least contractual leverage. Subcontractors frequently occupy the lowest rung of the commercial hierarchy but bear the earliest and most severe financial consequences of delayed payments, contractual disputes and project failures. If India’s ambition is to build a truly inclusive and globally respected arbitration ecosystem, future reforms must ensure that efficiency is accompanied by accessibility, contractual certainty by commercial fairness, and party autonomy by meaningful access to justice. Only then can arbitration fulfil its original promise—not merely as an alternative to litigation, but as a genuinely equitable mechanism for resolving commercial disputes across every level of the contractual chain.
