‘May’ Is Not ‘Shall’: Supreme Court Tightens Test for Valid Arbitration Agreements

 

By Adv Sreeraj Muralidharan, BBM, FCS, LLB, CFORA 

Email: advsreerajm@gmail.com

Mob: +91-9778307400

 In a recent and notable ruling that reaffirms the doctrinal core of consensual arbitration, the Hon’ble Supreme Court of India held that the phrase “arbitration may be sought” is insufficient to constitute a binding and enforceable arbitration agreement within the meaning of Section 7 of the Arbitration and Conciliation Act, 1996. This pronouncement will have far-reaching implications for contractual drafting, institutional arbitration, and the invocation of arbitral jurisdiction under Section 11 and Section 8 of the Act.

 The Case in Focus

The decision came in "Mahanadi Coalfields Ltd. v. IVRCL AMR Joint Venture", 2024 SCC OnLine SC 797, where the Apex Court was called upon to adjudicate whether a clause that states “in case of disputes, arbitration may be sought” would amount to a valid arbitration agreement, entitling the parties to seek reference under Section 11(6) of the Arbitration Act.

The Arbitration Clause Under Scrutiny

The clause in question was worded as follows:

“In the event of any dispute or difference arising out of or in connection with this contract, the parties may seek to resolve the dispute through arbitration…”

On a plain reading, the clause neither mandated arbitration nor made it an unequivocal obligation. It merely permitted the possibility, leaving it to the discretion or volition of the parties post-dispute.

The Supreme Court's Analysis

Justice Sanjay Kishan Kaul, delivering the judgment, underscored the foundational principle that “consent” is the cornerstone of arbitration. The Court held that for an arbitration agreement to be binding under Section 7 of the Arbitration Act, it must reflect “a clear and unequivocal intent of the parties to refer disputes to arbitration as a binding and final mechanism of dispute resolution.”

Quoting extensively from earlier authorities, the Bench observed:

“An arbitration agreement must disclose an obligation—not merely a possibility—for reference to arbitration. The word 'may' expresses an enabling provision, not a mandate.”
— Para 12, Mahanadi Coalfields Ltd. v. IVRCL AMR JV.

Statutory Backdrop: Section 7 of the Arbitration Act

Section 7(1) of the Arbitration and Conciliation Act, 1996 provides:

“In this Part, ‘arbitration agreement’ means an agreement by the parties to submit to arbitration all or certain disputes...which have arisen or which may arise...”

However, Section 7(4)(b) mandates that the agreement must be in writing and contain “a record of the agreement to arbitrate.”

The Court noted that the statute demands not only a written clause but a manifest intention to arbitrate. The mere inclusion of the word “arbitration” or a hypothetical reference does not suffice.

Judicial Precedents Cited

The Hon’ble Court referred to and relied upon several past judgments that clarified the essential elements of a valid arbitration agreement:

1. K.K. Modi v. K.N. Modi, (1998) 3 SCC 573

The Court held that an arbitration agreement must be "an agreement to refer present or future disputes to arbitration and not merely a clause that provides for the possibility of arbitration.”

2. Jagdish Chander v. Ramesh Chander, (2007) 5 SCC 719

It was held that:

“If a clause suggests that parties ‘may’ refer disputes to arbitration, it indicates that arbitration is merely an option and not a binding pre-dispute commitment.”

3. Wellington Associates Ltd. v. Kirit Mehta, (2000) 4 SCC 272

In this case, the clause stated that the parties “shall be entitled to refer disputes to arbitration,” which the Court held as non-mandatory, lacking mutual obligation.

4. M.R. Engineers and Contractors Pvt. Ltd. v. Som Datt Builders Ltd., (2009) 7 SCC 696

The Court clarified that incorporation by reference must be clear, unambiguous, and unequivocal. A loosely drafted clause without a definite commitment does not satisfy the requirements under Section 7.

Practical Implications of the Ruling

1. Drafting Precision: Commercial contracts must use mandatory language such as “shall be referred to arbitration” to ensure enforceability. Use of the word “may” invites uncertainty and weakens the sanctity of arbitration.
2. Section 11 Petitions: Courts will not entertain petitions under Section 11(6) unless the arbitration clause reveals a definitive obligation to arbitrate.
3. Risk of Litigation: Parties relying on loosely worded arbitration clauses may find themselves dragged into lengthy civil suits, contrary to their commercial intent of speedy dispute resolution.
4. Institutional Rules & Boilerplate Clauses: Even when referencing institutional rules (like SIAC, ICC, LCIA), unless the clause mandates reference to such institutions, it won’t ipso facto bind the parties.

Comparative Jurisprudence

Interestingly, this approach aligns with English and Singaporean jurisprudence. In Nissan Motors v. Audi Volkswagen, [2012] EWHC 2241 (Comm), the English court refused to enforce an arbitration clause that used “may refer” language, noting it lacked mutuality.

Similarly, in Singapore High Court’s decision in Dyna-Jet Pte Ltd v Wilson Taylor Asia Pacific Pte Ltd, [2017] SGHC 238, the Court observed:

 “An agreement to agree to arbitrate in the future, or that arbitration is one of the methods the parties may use, is not enforceable unless it imposes an obligation.”

Concluding Thoughts

 This decision is yet another reminder that arbitration thrives on clarity, consent, and certainty. Suppose arbitration is the intended dispute resolution mechanism. In that case, parties must eschew permissive language and adopt categorical expressions such as “shall refer”, “must be referred”, or “disputes will be settled by arbitration.”

As seasoned practitioners often remind younger counsel, a single misplaced modal verb can undo an entire agreement. The Supreme Court’s reiteration of this principle strengthens the Indian arbitration ecosystem by reinforcing drafting discipline and contractual certainty.

 Let this be a wake-up call for corporate drafters, in-house counsel, and legal practitioners alike: Arbitration must be a meeting of minds, not a conjecture of convenience.

 Have you reviewed your arbitration clause recently? A single word might be the difference between a swift remedy and years of litigation.

 

Citation:

a.    Mahanadi Coalfields Ltd. v. IVRCL AMR Joint Venture, 2024 SCC OnLine SC 797

b.    K.K. Modi v. K.N. Modi, (1998) 3 SCC 573

c.     Jagdish Chander v. Ramesh Chander, (2007) 5 SCC 719

d.    Wellington Associates v. Kirit Mehta, (2000) 4 SCC 272

e.    M.R. Engineers v. Som Datt, (2009) 7 SCC 696