Can I continue business with the other party while arbitration is ongoing?

Can You Continue Business with the Other Party While Arbitration Is Ongoing?

A European manufacturing company supplies critical industrial components to an Indian automotive parts manufacturer under a three-year supply agreement. A pricing dispute arises after the Indian buyer refuses to pay for shipments citing alleged defects. The European supplier invokes the arbitration clause. The Indian buyer immediately stops all communication and halts business entirely, assuming that arbitration means complete severance of commercial relations. Meanwhile, the supplier still has inventory allocated for the buyer, production schedules are disrupted, and both parties face significant operational costs. The question becomes urgent: can they continue doing business while arbitration proceeds, or does arbitration demand complete commercial disengagement?

This scenario is far more common than most enterprises realize. Many businesses assume that once arbitration is invoked, all commercial interactions must stop. This assumption causes unnecessary operational disruption, damages long-term supplier relationships, and often worsens the underlying dispute. Arbitration is a dispute resolution mechanism, not a business divorce. Understanding how to manage ongoing commercial relationships during arbitration is critical for multinational corporations, cross-border suppliers, procurement-led enterprises, and foreign investors dealing with India.

Executive Summary

Key Takeaways:

• Arbitration does not legally require termination of ongoing business relationships
• Parties can continue commercial operations unless specifically prohibited by contract or interim orders
• Continuing business may demonstrate good faith and commercial reasonableness
• Clear documentation and separation of disputed claims from ongoing transactions is essential
• Interim relief under Section 9 or Section 17 of the Arbitration and Conciliation Act, 1996 may restrict certain activities
• Without express legal prohibition, business continuity is a commercial decision, not a legal bar
• Strategic clarity prevents operational disruption and preserves business value during dispute resolution

Legal Framework Governing Business During Arbitration

The Arbitration and Conciliation Act, 1996 governs arbitration in India. The Act does not prohibit parties from continuing commercial relationships during arbitration proceedings. There is no statutory provision that mandates severance of business ties once arbitration is invoked.

Key Statutory Provisions:

Section 7 defines arbitration agreements but does not impose restrictions on ongoing commercial operations.

Section 8 allows parties to refer disputes to arbitration if an arbitration agreement exists, but this does not prevent continued business dealings.

Section 9 allows parties to approach civil courts for interim measures before or during arbitration proceedings. This includes injunctions, asset preservation, and orders preventing disposal of property. However, these are discretionary remedies requested by parties, they are not automatic consequences of arbitration commencement.

Section 17 empowers arbitral tribunals to grant interim measures during proceedings. Again, these are party-initiated applications, not default restrictions.

Section 23 requires expeditious conduct of arbitration and fair treatment of parties. Continuing business does not violate this principle unless it interferes with the arbitral process or creates prejudice.

Section 34 governs challenges to arbitral awards, which can extend timelines and impact ongoing financial arrangements but does not prohibit continued commercial relations.

The absence of statutory prohibition means that business continuity is fundamentally a contractual and commercial question, not a legal impossibility.

Contractual Considerations and Agreement Terms

Whether parties can continue business during arbitration depends heavily on the terms of the underlying agreement and any subsequent arrangements.

Review the Dispute Resolution Clause

Most arbitration clauses focus on dispute resolution procedure but do not address operational continuity. Some contracts include specific provisions:

• Clauses requiring parties to continue performance pending arbitration
• Clauses suspending obligations during disputes
• Clauses requiring security deposits or bank guarantees before continuing supply
• Clauses explicitly permitting continuation of non-disputed obligations

Separation of Disputed and Non-Disputed Obligations

A critical distinction exists between disputed obligations and ongoing non-disputed obligations. For example:

• If a pricing dispute concerns invoices from January to March, there is no automatic bar to continuing supply from April onwards under mutually agreed pricing
• If a warranty dispute concerns one product batch, it does not necessarily affect supply of other products
• If payment terms are disputed, parties may agree on interim payment arrangements while arbitration proceeds

Express Agreement to Continue Business

Parties may execute supplementary agreements explicitly permitting continuation of business during arbitration. These agreements should:

• Clearly define which obligations continue
• Specify payment terms for ongoing transactions
• Document that continued performance is without prejudice to arbitration claims
• Establish that ongoing transactions are separate from the disputed matters

Such agreements prevent the argument that continued business implies waiver or settlement of disputed claims.

Practical Business Scenarios

Ongoing Supply Contracts

A foreign supplier and Indian buyer have a long-term supply agreement. A payment dispute arises over past invoices. Arbitration is invoked. The supplier can continue fulfilling orders under the same agreement, provided:

• Pricing and terms for new supplies are clear
• Payment terms for ongoing supplies are agreed
• Disputed past invoices are clearly segregated from new transactions
• Neither party has obtained interim orders prohibiting supply

Continuing supply demonstrates commercial reasonableness and may strengthen the supplier's position by showing commitment to the relationship.

Software Licensing and Support Agreements

A US-based software company licenses enterprise software to an Indian company. A dispute arises over performance benchmarks and service level agreements (SLAs). The Indian company invokes arbitration seeking damages and refunds. The software company can continue providing software updates, bug fixes, and technical support under the existing license unless:

• The license agreement itself suspends obligations during disputes
• The tribunal issues interim orders restricting access
• Payment obligations are in default and trigger suspension clauses

Continuing support may mitigate damages claims and demonstrate good faith performance.

Joint Venture Operations

Two companies, one foreign, one Indian, operate a joint venture. A shareholder dispute arises over dividend distribution and fund allocation. Arbitration is initiated. The joint venture operations can continue:

• Day-to-day business operations are not automatically suspended
• Board decisions on operational matters (distinct from disputed governance issues) can proceed
• Employees, vendors, and customers are not automatically affected
• Normal business operations continue unless interim orders restrict specific actions

Suspending joint venture operations during arbitration could cause irreparable commercial harm and violate fiduciary duties to the entity itself.

Interim Relief and Court Orders

While arbitration does not automatically prohibit business continuity, parties may seek interim relief that restricts certain activities.

Section 9 Applications to Civil Courts

Before tribunal constitution or during arbitration, parties may approach civil courts under Section 9 for:

• Interim injunctions prohibiting certain commercial activities
• Orders restraining disposal of assets
• Orders preventing transfer of shares or intellectual property
• Orders securing amounts due under contracts

If such orders are granted, they must be complied with. Violation constitutes contempt of court.

Section 17 Applications to Arbitral Tribunals

Once the tribunal is constituted, parties may apply under Section 17 for interim measures. Tribunals have wide powers to grant:

• Injunctions
• Appointment of receivers
• Orders securing amounts in dispute
• Directions preserving subject matter of dispute

Tribunal orders are enforceable like court orders under Section 17(2).

Strategic Considerations

If a party seeks interim orders prohibiting business operations, the opposing party should:

• File a strong opposition demonstrating commercial prejudice
• Show that continued business does not prejudice arbitration
• Propose safeguards such as bank guarantees or escrow arrangements
• Argue that suspension of business is disproportionate and commercially destructive

Courts and tribunals generally avoid unnecessarily disrupting legitimate business operations absent clear risk of dissipation or prejudice.

Documentation and Risk Management

Continuing business during arbitration requires careful documentation to avoid legal complications.

Maintain Clear Separation

• Issue separate invoices for ongoing transactions
• Reference new purchase orders or agreements
• Avoid mixing disputed claims with new transactions
• Use clear accounting records showing separation

Without Prejudice Communications

• Mark communications regarding ongoing business as "without prejudice to arbitration proceedings"
• Clarify that continued performance does not waive claims
• Document that ongoing business is independent of disputed matters

Payment Handling

• If payments are received during arbitration, clearly allocate them to new transactions
• Avoid ambiguity about whether payments settle disputed claims
• Use separate bank accounts or escrow arrangements if necessary

Contractual Amendments

• Document any agreed modifications to terms during arbitration
• Ensure amendments are executed as formal addenda
• Avoid informal email agreements that create interpretation disputes

Good Faith and Commercial Reasonableness

Indian courts recognize the principle of good faith in commercial contracts, especially in cross-border transactions. Continuing business during arbitration may demonstrate:

• Good faith commitment to the commercial relationship
• Mitigation of damages
• Commercial reasonableness
• Willingness to separate disputes from ongoing operations

Conversely, abruptly severing business without justification may:

• Increase damages claims
• Demonstrate bad faith
• Violate contractual obligations
• Create additional litigation risk

The principle of mitigation requires parties to take reasonable steps to minimize losses. Continuing mutually beneficial business may align with this duty.

Cross-Border and FEMA Considerations

For foreign entities dealing with India, additional regulatory considerations apply.

Foreign Exchange Management Act (FEMA), 1999

Continuing business during arbitration must comply with FEMA regulations:

• Import-export transactions must follow prescribed procedures
• Payments must comply with RBI-approved channels
• Foreign investment transactions must comply with FDI policy
• Repatriation of funds must follow FEMA guidelines

Arbitration does not exempt parties from FEMA compliance.

Transfer Pricing and Tax Implications

Continuing business at altered pricing or payment terms may trigger transfer pricing scrutiny under Section 92 of the Income-tax Act, 1961. Arm's length pricing must be maintained even during disputes.

Goods and Services Tax (GST)

Continued supply of goods or services attracts GST obligations. Proper tax invoices, GST compliance, and input tax credit mechanisms must be maintained regardless of arbitration.

Common Mistakes and Risks

Assuming Arbitration Means Business Termination

Many parties incorrectly assume arbitration requires complete severance. This creates unnecessary operational disruption and damages long-term relationships.

Informal Agreements Without Documentation

Agreeing verbally to continue business without written documentation creates evidentiary problems. Clear written agreements are essential.

Mixing Disputed and Non-Disputed Transactions

Failing to clearly separate ongoing business from disputed matters creates confusion over what is being arbitrated and what is not.

Ignoring Interim Orders

Violating court or tribunal interim orders, even inadvertently, can result in contempt proceedings and damage credibility in arbitration.

Failing to Communicate Strategy to Business Teams

Legal teams must clearly communicate to procurement, sales, and operations teams what activities are permitted and what restrictions apply. Operational teams may not understand legal nuances.

Strategic Guidance for Enterprises

Step 1: Review the Contract

Examine the arbitration clause, dispute resolution provisions, and any clauses addressing performance during disputes.

Step 2: Assess Business Necessity

Determine whether continuing business is operationally necessary, commercially beneficial, or strategically sound.

Step 3: Check for Interim Orders

Verify whether any Section 9 or Section 17 applications are pending or granted. Ensure compliance with any existing orders.

Step 4: Document Clearly

Execute written agreements explicitly permitting continuation of business. Mark all communications as without prejudice to arbitration.

Step 5: Separate Transactions

Maintain clear separation between disputed claims and ongoing transactions. Use separate invoices, purchase orders, and accounting records.

Step 6: Legal and Operational Coordination

Ensure procurement, finance, and operations teams understand legal boundaries and documentation requirements.

Step 7: Monitor Compliance

Ensure FEMA, GST, transfer pricing, and other regulatory compliance is maintained during ongoing business.

Frequently Asked Questions

Can arbitration force me to stop doing business with the other party?

No. Arbitration itself does not automatically prohibit business continuity. Only specific court orders or tribunal orders under Section 9 or Section 17 can impose restrictions. Without such orders, continuing business is a commercial decision.

Will continuing business weaken my arbitration claims?

Not if properly documented. Continued business can demonstrate good faith, mitigation of damages, and commercial reasonableness. Ensure all communications are marked without prejudice and ongoing transactions are clearly separated from disputed matters.

What if the contract says we must stop all dealings during disputes?

If the contract explicitly requires suspension of business during arbitration, you must comply unless both parties agree otherwise. However, such clauses are rare. Most contracts do not mandate complete severance.

Can I negotiate new payment terms while arbitration is ongoing?

Yes. Parties can agree on modified payment terms for ongoing transactions. Document the agreement clearly, ensure it is without prejudice to arbitration, and maintain separation from disputed claims.

Do I need court permission to continue business during arbitration?

No. Unless a court or tribunal has issued interim orders restricting business activities, you do not need permission. However, ensure compliance with any existing orders.

What if the other party refuses to continue business?

Refusal is a commercial decision. You cannot legally compel continued business unless the contract requires it. However, document the refusal as it may support claims for damages or demonstrate the other party's lack of good faith.

Can continuing business affect the arbitration timeline?

No. Continuing business does not delay or interfere with arbitration proceedings. Arbitration focuses on resolving the dispute. Ongoing business is a separate operational matter.

Are there legal frameworks that govern ongoing business during arbitration in India?

Yes, the Arbitration and Conciliation Act, 1996 governs arbitration proceedings in India, which includes provisions that dictate the conduct of parties during arbitration. However, it does not prohibit continued commercial relations.

What actions can be taken if the other party violates the arbitration agreement while conducting business?

If the other party violates the arbitration agreement, legal remedies such as seeking enforcement of the agreement or requesting the tribunal's intervention may be possible. Consult a dispute resolution lawyer for specific guidance.

Strategic Takeaway & Corporate Outlook

Arbitration is a dispute resolution process, not a commercial death sentence. Multinational corporations, cross-border suppliers, and procurement-led enterprises should approach arbitration as a structured mechanism to resolve specific disputes while preserving operational continuity and business relationships where commercially sensible. The key is procedural clarity, clean documentation, and strategic separation of disputed claims from ongoing transactions. Proactive legal architecture prevents unnecessary disruption and ensures that arbitration remains a tool for resolution rather than a trigger for commercial collapse.

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