Court’s Decision
The Supreme Court dismissed the appeal challenging a High Court order that had rejected the appointment of an arbitrator under the Arbitration and Conciliation Act, 1996. The apex court held that the clause relied upon by the appellant did not constitute a binding arbitration agreement. Observing that the clause merely provided for the possibility of referring disputes to arbitration if both parties so decided, the Court ruled:
“Use of the words ‘may be sought’ implies that there is no subsisting agreement… it is just an enabling clause.”
The Court emphasized that for a valid arbitration agreement under Section 7, the parties must unequivocally agree to resolve disputes through arbitration.
Facts
The appellant and the respondent entered into a commercial contract involving the transportation and handling of goods. A dispute arose, and the appellant invoked Clause 13 of the contract’s General Terms and Conditions, seeking appointment of an arbitrator under Section 11 of the Arbitration and Conciliation Act, 1996.
Clause 13 provided a two-tier in-house dispute resolution mechanism. It also stated that for parties other than government agencies, redressal “may be sought through [the] Arbitration and Conciliation Act, 1996.”
The High Court rejected the appellant’s application, holding that Clause 13 was not a valid arbitration agreement as it did not mandate arbitration but merely suggested it as an option.
Issues
- Whether the existence of an arbitration agreement should be left to the arbitral tribunal to decide.
- Whether Clause 13 constituted a valid arbitration agreement under Section 7 of the 1996 Act.
- Whether Clause 32 of the Instructions to Bidders excluded arbitration.
Petitioner’s Arguments
The appellant argued that Clause 13 gave either party the option to seek arbitration, and once one party exercised that option, it became binding. It contended that:
- The use of the word “may” indicated a permissive but enforceable right, not a mere hope.
- At the Section 11 stage, the court’s role was limited to a prima facie examination of the arbitration agreement’s existence—not its validity or enforceability.
- The final determination of jurisdiction and existence of the agreement should rest with the arbitral tribunal.
Respondent’s Arguments
The respondent countered that:
- Clause 13 was merely enabling and required further consent; it did not constitute a binding arbitration agreement.
- The language used lacked mutual intention to arbitrate.
- Clause 32 of the Instructions to Bidders provided that disputes would be subject to the jurisdiction of civil courts, further supporting the absence of any binding arbitration clause.
- Without mutual agreement at the outset or a later ad hoc agreement, arbitration could not be imposed.
Analysis of the Law
The Court referred extensively to the seven-judge Constitution Bench judgment in Interplay Between Arbitration Agreements under Arbitration Act and Stamp Act (2024), which clarified:
- Section 11(6A) restricts courts to a prima facie “examination” of whether an arbitration agreement exists under Section 7.
- Courts must weed out frivolous claims but are not empowered to conduct mini-trials.
- If a clause, on its plain reading, does not establish a clear intent to arbitrate, courts can refuse referral.
The Court reiterated that an arbitration agreement must:
- Be in writing;
- Contain a present or future agreement to submit disputes to arbitration;
- Be mutually binding and exclude court jurisdiction.
Precedent Analysis
The Supreme Court relied on:
- Jagdish Chander v. Ramesh Chander (2007): Held that a clause stating parties “may agree to refer to arbitration” does not constitute an arbitration agreement unless the intent to arbitrate is mandatory and final.
- Mahanadi Coalfields Ltd. v. IVRCL AMR JV (2022): Affirmed that merely calling a clause “Arbitration/Dispute Resolution” is insufficient without a firm and binding obligation to arbitrate.
- Cox and Kings Ltd. v. SAP India (2024): Reaffirmed the need for “conclusive proof” of mutual agreement to arbitrate.
Court’s Reasoning
The Supreme Court found that Clause 13:
- Merely enabled the possibility of arbitration if both parties so agreed.
- Did not record mutual consent to refer disputes to arbitration.
- Was not binding or determinative—it left open whether arbitration would actually occur, which undermines the core requirement of an arbitration agreement under Section 7.
Clause 32 of the Instructions to Bidders, which submitted disputes to the jurisdiction of local courts, further supported this view. Although it did not explicitly preclude arbitration, it indicated the absence of exclusivity.
Conclusion
The Court concluded that:
“Clause 13 does not bind parties to use arbitration for settlement of disputes… It is just an enabling clause.”
Accordingly, the appeal was dismissed, and the appointment of an arbitrator under Section 11 was refused.
Implications
This decision reinforces the strict requirements under Indian arbitration law for a clause to qualify as an arbitration agreement. Mere permissive or enabling language is insufficient—there must be a clear, binding obligation to arbitrate. The ruling serves as a caution to parties drafting contracts to ensure dispute resolution clauses are precise and mandatory if arbitration is desired.
Referred Cases and Their Application
- Jagdish Chander (2007): Applied to show that arbitration cannot be based on tentative or conditional clauses.
- Mahanadi Coalfields (2022): Used to highlight that titles or labels (e.g., “Arbitration Clause”) do not determine binding intent.
- Interplay Between Arbitration and Stamp Act (2024): Clarified that Section 11 only requires prima facie examination and prevents deeper inquiry into enforceability.
- Cox and Kings (2024): Cited to reaffirm that arbitration agreements must reflect conclusive contractual consent to exclude court proceedings.
FAQs
1. Can arbitration be invoked if the contract says disputes ‘may be referred to arbitration’?
No. The Supreme Court held that such permissive language does not create a binding arbitration agreement unless it reflects mutual and unequivocal consent to arbitrate.
2. What does the court examine under Section 11 of the Arbitration Act?
Under Section 11(6A), the court only examines whether an arbitration agreement prima facie exists—it does not evaluate its validity or interpret ambiguous clauses unless clearly frivolous.
3. Is a dispute clause that allows court jurisdiction incompatible with arbitration?
Not necessarily, but if a clause confers court jurisdiction and does not clearly mandate arbitration, courts may infer absence of an arbitration agreement.
