Arbitration Cannot Be Forced Where Parties Have Only Agreed to Consider Arbitration” — Directory Clause Does Not Constitute Arbitration Agreement: Supreme Court

“The Word ‘May’ Is Not a Mandate”: Supreme Court Denies Arbitration in Absence of Binding Contractual Obligation to Arbitrate. In a landmark ruling on 18th July 2025, the Supreme Court of India delivered a significant judgment in the case of BGM AND M-RPL-JMCT (JV) v. Eastern Coalfields Limited, holding that a permissive clause in a contract does not amount to an arbitration agreement under the Arbitration and Conciliation Act, 1996. The bench comprising Justice Pamidighantam Sri Narasimha and Justice Manoj Misra dismissed the appeal filed under Section 11 of the Arbitration Act, firmly stating that “an enabling provision cannot metamorphose into a binding arbitration agreement simply because one party chooses to invoke it.” This judgment settles the ambiguity surrounding directory arbitration clauses and draws a sharp line between a genuine arbitration agreement and a mere possibility of arbitration.

Supreme Court Affirms Judicial Duty to Weed Out Non-Existent Arbitration Agreements

The Supreme Court emphasised that the court’s role under Section 11 is to scrutinise the existence of an arbitration agreement before referring the matter to arbitration. Rejecting the appellant’s plea that the arbitral tribunal should determine the existence of the arbitration agreement, the Court said, “Where the alleged arbitration agreement is contained in an undisputed contract, the Referral Court has an obligation to examine the clause and see whether it satisfies the requirements of Section 7 of the Arbitration Act. Courts are not expected to abdicate this responsibility.”

Citing the recent Constitution Bench ruling in Interplay Between Arbitration Agreements under Arbitration Act, 1996 & Stamp Act, 1899, the Court reiterated that under Section 11, the court’s enquiry is limited but crucial. “The exercise is intended to weed out frivolous claims for reference to arbitration where prima facie no arbitration agreement exists,” the Court noted.

The Controversial Clause 13 — “An Invitation to Consider Arbitration, Not an Agreement to Arbitrate”

The controversy arose from Clause 13 of the General Terms and Conditions of the e-tender agreement between the parties. The appellant invoked Section 11 seeking appointment of an arbitrator, relying on the phrase in Clause 13 that stated, “the redressal of the dispute may be sought through Arbitration and Conciliation Act, 1996.”

Dismissing the contention, the Supreme Court categorically held that “the use of the expression ‘may be sought’ clearly signifies an option and not a binding commitment.” The Court remarked, “Arbitration is a matter of consent. The phraseology employed in Clause 13 does not reflect any agreement or commitment to refer disputes to arbitration. It merely keeps arbitration open as a future possibility.”

Referring to the test of consensus ad idem, the Court observed, “Clause 13 does not reveal any meeting of minds on compulsory arbitration. The intention to arbitrate must be unequivocal, and directory language like ‘may’ inherently lacks such compulsion.”

The Illusion of Unilateral Invocation — Arbitration Cannot Be Triggered by One Party Alone

The appellant argued that since either party could unilaterally seek arbitration, it amounted to a valid arbitration agreement. The Supreme Court decisively rejected this argument, clarifying that arbitration is built on mutual consent, not unilateral desire.

The Court observed, “It is a well-established principle that no party can be forced into arbitration unless it has unequivocally agreed to resolve disputes in this manner. A clause that merely allows parties to ‘seek’ arbitration by mutual agreement does not entitle one party to compel the other to arbitrate.”

In words that underline the voluntary nature of arbitration, the Court stated, “An arbitration agreement cannot be manufactured by the whim of one party; it must originate from the mutual intention of both contracting parties at the time of agreement.”

Precedents Affirming the Ruling — Citing Jagdish Chander and Mahanadi Coalfields

The Court placed heavy reliance on precedents, especially the decisions in Jagdish Chander v. Ramesh Chander (2007) and Mahanadi Coalfields v. IVRCL AMR Joint Venture (2022), where similar permissive clauses were held not to constitute binding arbitration agreements.

Quoting Jagdish Chander, the Court highlighted, “Where the parties merely agree to consider arbitration or use language like ‘may refer to arbitration,’ it reflects nothing more than a future possibility, not an enforceable obligation.” Applying the same principle, the Court held that Clause 13 suffered from the same deficiency.

Justice Misra, writing for the bench, summarised the rationale succinctly, stating, “Words must reveal a determination and obligation to go to arbitration, not a mere contemplation of arbitration.”

Clause 32 on Court Jurisdiction Does Not Rescue the Arbitration Claim

Though the issue of Clause 32 was considered unnecessary in light of the decision on Clause 13, the Court clarified that the presence of a clause conferring jurisdiction to civil courts does not negate arbitration where a valid arbitration agreement exists. However, in this case, the absence of any valid arbitration clause meant that Clause 32 reinforced the default position — that disputes were to be adjudicated by civil courts.

Justice Narasimha clarified, “Where there is no arbitration agreement, Clause 32 simply reiterates that disputes will be resolved before courts having jurisdiction. It cannot transform an enabling clause into a mandatory arbitration agreement.”

Upholding the Sanctity of Consent in Arbitration

Dismissing the appeal, the Supreme Court firmly reiterated the central principle of arbitration law: “Arbitration is founded on consensus, not compulsion.” The judgment enforces the clear demarcation between binding arbitration agreements and optional, directory clauses, ensuring that courts are not misused to create arbitration obligations where none exist.

In its concluding remarks, the Court stated, “Not every mention of arbitration creates an obligation to arbitrate. Where parties choose words of discretion rather than commitment, courts will respect that choice and refrain from compelling arbitration.”

With this ruling, the Supreme Court continues to uphold the principle that arbitration remains a consensual, not coercive, mode of dispute resolution.

Date of Decision: 18th July 2025