Arbitration was marketed as faster, cheaper, more flexible than courts, and tailor‑made for commercial players. But, for sub‑contractors, the reality is brutally different. Escalating fees, narrow judicial review and structural barriers to even getting a fair hearing often turn arbitration into a high‑risk gamble rather than an effective remedy, leaving them in a worse position than if...
Arbitration was marketed as faster, cheaper, more flexible than courts, and tailor‑made for commercial players. But, for sub‑contractors, the reality is brutally different. Escalating fees, narrow judicial review and structural barriers to even getting a fair hearing often turn arbitration into a high‑risk gamble rather than an effective remedy, leaving them in a worse position than if they had pursued a focused civil suit or statutory forum. The article exfoliates the promise and focuses upon reality.
Arbitration's Promise vs Reality
Arbitration in India has expanded rapidly where Indian parties are among the top users of leading international institutions like SIAC and ICC. Yet in practice, delay, inconsistent procedures, high fees and tightly restricted grounds for judicial interference have eroded its image as a speedy, cost‑effective, party‑friendly alternative to court litigation.
A Constitution Bench in Gayatri Balasamy v. ISG Novasoft Technologies Ltd. (2025) reconfirmed that Section 34 of the Arbitration and Conciliation Act, 1996 (“Act”) permits setting aside or even modifying an award only on narrow grounds like patent illegality, procedural violations or conflict with public policy, and even then, only in very limited, exceptional situations.
For a sub‑contractor that has already sunk time and money into arbitration, this means that even a plainly unjust or commercially unworkable award is very hard to correct, unlike a civil decree which can be appealed on merits.
Cost, Delay, and Structural Bias:
For a sub‑contractor, the cost architecture of arbitration is often structurally hostile:
1. Schedule IV fee slabs under the Act frequently make arbitral fees disproportionate when compared with modest court fees, effectively pricing out MSMEs and small sub‑contractors from meaningful participation.
2. In ONGC Ltd. v. Afcons Gunanusa JV (2024) the Supreme Court itself acknowledged that the statutory fee structure has made arbitration “beyond reach for a common litigant” and that high fees deny access to arbitration.
3. Respondents must often pay separate fees even for counterclaims, a burden unknown to ordinary civil courts where a counterclaim is typically permitted on payment of proportionate but moderate court fee in the same proceeding.
Delay compounds the problem. Statutorily, awards should be pronounced within 12 months from completion of pleadings, extendable by 6 months by consent, but in practice arbitrations regularly drag on for years due to repeated adjournments and liberal extensions under Section 29A.
For sub‑contractors, whose cash flow often depends on timely recovery of narrow margins, such delay converts arbitration from a “fast-track” remedy into a slow and high‑burn process not very different from regular litigation, but with much less scope for appellate correction.
Unilateral appointment and “in‑house” panels, particularly in public works contracts, make matters worse. Even after Perkins Eastman Architects DPC v. HSCC (India) Ltd. held that a party interested in the outcome cannot unilaterally appoint the sole arbitrator, parties still frequently have to move Section 11 courts to invalidate one‑sided clauses, adding further upfront cost and time before the dispute even begins. For a sub‑contractor, this can mean months of preliminary fight, merely to secure a neutral forum.
Sub‑contractor's Struggle: Recovery and Recognition:
Sub‑contractors typically stand at the end of the payment chain yet bear the blow of performance: site execution, labour payments, materials, and statutory compliances. Their core problems in arbitration are:
1. Lack of privity with the owner/principal employer: Often the arbitration clause exists only in the principal contract between owner and main contractor, while the sub‑contractor agreement either has no arbitration clause or has a separate clause not mirrored in the “upstream” contract.
2. Cash‑flow vulnerability: Sub‑contractors operate on thinner margins, so high arbitral fees and repeated hearings consume working capital that should be spent on execution of project.
3. Limited remedial bandwidth: With Section 34 review being so narrow, a sub‑contractor cannot realistically hope to correct an award that under‑values its claims or mechanically enforces harsh liquidated damages.
Situationally, this plays out in a recurring pattern:
1. The owner withholds payment from the main contractor, citing defects or delays.
2. The main contractor passes the burden downwards, withholding or delaying the sub‑contractor's legitimate dues and sometimes raising exaggerated back‑charges.
3. The sub‑contractor, not being privy to the principal arbitration agreement, finds itself with no direct seat at the owner – contractor arbitration table, even though the dispute is factually centred on its work.
Even when the sub‑contractor has its “own” arbitration against the main contractor, that proceeding may be practically toothless if the main contractor's ability to pay depends on a separate or strategically stalled arbitration against the owner.
The sub‑contractor becomes trapped between two forums, neither of which fully hears its story, while its liabilities to labour, suppliers, and statutory authorities continue as if there were no dispute at all.
Group of Companies Doctrine and the Non‑Signatory Sub‑contractor: A newly recognized remedial doctrine.
The Group of Companies (GoC) doctrine was introduced to precisely to deal with commercial realities where multiple entities participate in one composite transaction but only some sign the formal arbitration agreement.
In Cox and Kings Ltd. v. SAP India Pvt. Ltd. (2023 INSC 1051), a five‑judge Bench confirmed that a non‑signatory within a corporate group may be bound by an arbitration agreement if there is sufficient evidence of common intention and participation in negotiation, performance, or termination of the contract.
In theory, this doctrine should help sub‑contractors in at least two ways:
1. First, where the sub‑contractor is closely integrated with an affiliate that is a formal signatory (for example, different SPVs or group entities handling bidding and execution), and
2. Secondly, where the sub‑contractor's performance is central to a composite project involving multiple layered contracts, such that all disputes ought to be decided in a single arbitral forum.
However, the same line of case law also emphasizes that GoC cannot be used to dilute consent and privity arbitrarily.
Courts insist on factors such as defined legal relationship, mutual intent, commonality of subject‑matter and composite transaction. Where these strict evidentiary tests are not met, non‑signatories including sub‑contractors, are refused impleadment and are told to pursue separate proceedings.
Two contrasting consequences emerge for sub‑contractors:
1. When the sub‑contractor seeks to be impleaded in the main arbitration (to have its claim decided directly against the owner), tribunals and courts often insist on strict proof of common intention and may refuse joinder, leaving the sub‑contractor outside despite bearing actual performance and liability at site.
2. When the sub‑contractor, or its group affiliate, is sought to be dragged into arbitration to share liability (for example, by a main contractor seeking contribution or indemnity), tribunals have been more willing to infer consent from commercial conduct and apply GoC to bind the non‑signatory.
The net result is an asymmetry: sub‑contractors often find it easier to be bound (for liability) than to be heard (for recovery), especially when documentation has not been drafted with a deliberate GoC / joinder strategy.
Recent judicial pronouncements have also warned against over‑expansion of GoC in a way that undermines the foundational principle that arbitration is consensual.
For the sub‑contractor, this means that “getting in” to the main arbitration is still an uphill battle unless the factual matrix like emails, minutes, certifications, payment flows, clearly demonstrate that all parties treated the sub‑contractor as an integral participant in a single, composite transaction.
What Remedies Remain for Sub‑contractors:
Against this backdrop, a sub‑contractor's remedial strategy should consciously look beyond blind reliance on contractual arbitration clauses and consider:
1. Negotiation and structured settlement mechanisms:
a) Invocation of contractual dispute‑resolution board, engineer's decisions, or Top‑level management meetings before arbitration.
b) Time‑bound, without‑prejudice negotiations tied to running account payments and measurement reconciliation, rather than “all‑or‑nothing” stand‑offs.
2. Civil litigation and statutory forums:
a) Carefully‑framed civil suits for recovery, especially where there is no arbitration agreement with the owner, or where the arbitration clause is one‑sided.
b) Use of MSME Facilitation Council jurisdiction under the MSMED Act in qualifying cases, which can override contractual arbitration and often provides a more affordable, statutorily supported route to recovery.
3. Proactive drafting and joinder planning (for future contracts):
a) Ensuring that the sub‑contractor is a party to a back‑to‑back arbitration clause that mirrors the principal contract.
b) Expressly recording composite transaction language and mutual intent that disputes be resolved in a single forum, so that any future application of GoC or non‑signatory joinder is grounded in clear contractual text rather than uncertain inference.
4. Targeted use of arbitration, not default use:
a) Reserving arbitration for high‑value, technically complex disputes where tribunal expertise is genuinely beneficial and where the sub‑contractor can realistically afford the process.
b) For straightforward payment disputes with clear measurements and invoices, a well‑drafted civil suit or MSME claim may yield faster, cheaper and more enforceable outcomes than a prolonged, expensive arbitration.
In this sense, the lesson from recent jurisprudence on costs, Section 34 limits, and the Group of Companies doctrine is that arbitration is no longer a “one size fits all” solution. For sub‑contractors struggling for recognition and timely recovery, it is a forum to be chosen cautiously, backed by deliberate drafting and evidence strategy, and often best treated as one tool among many rather than the default or preferred remedy.
Authors are Delhi based Advocates. Views are personal.