Clause Stating Disputes "Can" Be Settled By Arbitration Is Not A Binding Arbitration Agreement: Supreme Court

"Clause subject matter of dispute in this appeal indicates merely the future possibility of referring disputes to arbitration and as such, it cannot be said to be a binding arbitration agreement." Supreme Court, in a significant ruling dated April 17, 2026, held that a contract clause stating disputes "can" be settled by arbitration does not constitute a mandatory and binding arbitration agreement. A bench comprising Justice Sanjay Karol and Justice Nongmeikapam Kotiswar Singh observed that the word "can" denotes merely a factual possibility or capacity, meaning the parties would need to arrive at a fresh consensus to actually refer their dispute to arbitration.

The dispute arose from a commercial contract between the appellant, a manufacturer of aluminum foil containers, and the respondent logistics company tasked with transporting goods to the USA. The appellant alleged that the respondent delivered a consignment without collecting the original bill of lading, causing a substantial financial loss of USD 28,064.86. When the appellant invoked arbitration based on Clause 25 of the bill of lading, the respondent disputed the mandatory nature of the clause and refused to participate. The Bombay High Court subsequently dismissed the appellant's application for the appointment of an arbitrator under Section 11 of the Arbitration and Conciliation Act, 1996, prompting the present appeal before the Supreme Court.

The primary question before the court was whether an arbitration clause utilizing the word "can" necessitates the mandatory reference of all disputes to arbitration. The court was also called upon to determine if recourse to other dispute resolution mechanisms, including civil courts, remains open to parties under such a vaguely worded clause.

Scope Of Section 11 Limited To Prima Facie Scrutiny

The court first addressed the jurisdictional confines of a Referral Court under Section 11(6-A) of the Arbitration and Conciliation Act, 1996. Relying on recent decisions including SBI General Insurance Co. Ltd. v. Krish Spg. and Goqii Technologies (P) Ltd., the bench reiterated that the inquiry at the pre-arbitral stage is strictly limited to examining the prima facie existence of an arbitration agreement. The court noted that a Referral Court must not misuse this limited jurisdiction to force parties into a costly and time-consuming arbitration process when no definitive agreement actually exists.

Word "Can" Denotes Possibility, Not Compulsion

Analyzing the specific language of Clause 25, which stipulated that any difference of opinion or dispute "can be settled by arbitration", the court delved into the dictionary meaning and judicial interpretation of the modal verb. The bench observed that the word ordinarily signifies capacity, capability, or factual possibility, rather than a mandatory requirement to act. Unlike the word "shall", which clearly signals a mandate or obligation, the court noted that "can" merely indicates that the parties are permitted to choose arbitration but are not strictly required to do so.

"To disregard or to impute an obligation or meaning which was not intended would compromise party autonomy."

Party Autonomy And Contractual Interpretation

The court strongly emphasized the principle of party autonomy, describing it as the sine qua non for all arbitral proceedings. Citing the latin maxim Ex praecedentibus et consequentibus optima fit interpretatio, the bench held that the words deliberately chosen by the parties remain the most reliable manifestation of their contractual intent. The court observed that imputing a mandatory obligation where none was intended would severely compromise this autonomy. Arbitration, being an inherently voluntary dispute resolution mechanism, can only be the chosen method if both parties definitively agree to it at the relevant time.

Requirement Of Fresh Consent For Arbitration

Drawing heavily on the precedent set in Jagdish Chander v. Ramesh Chander, the bench clarified the essential attributes of a valid arbitration agreement. The court observed that the words used in a contract must disclose a clear determination and obligation to go to arbitration, rather than merely floating the idea as an option. If an agreement contemplates or requires a further or fresh consent from the parties before a reference to arbitration can be made, it operates only as an agreement to enter into an arbitration agreement in the future.

"When the word provides only a possibility, the same does not constitute a valid arbitration agreement."

Clause 25 Fails To Qualify As Binding Agreement

Applying these established principles to the facts at hand, the court concluded that Clause 25 merely left open the option for the parties to choose arbitration at a later stage. The bench observed that for the disputes to be successfully settled by arbitration under this specific clause, a further agreement would be required, which inherently demands the present consent of both litigating parties. Since the respondent explicitly refused to submit to arbitration, the court held that no compulsory reference could be made by the judiciary.

The Supreme Court ultimately upheld the Bombay High Court's decision and dismissed the appeal. The ruling establishes a crucial precedent on the strict textual interpretation of dispute resolution clauses, underscoring that permissive terminology like "can" will not be sufficient to compel an unwilling party into arbitration without their subsequent, explicit consent.

Date of Decision: 17 April 2026