Use of word “can” in arbitration clause not a binding arbitration agreement –SC

Use of word “can” in arbitration clause cannot be said to be a binding arbitration agreement –Supreme Court

In a recent judgment, Hon’ble Supreme Court has held that use of word “can” in arbitration clause in the contract indicates merely the future possibility of referring disputes to arbitration and as such, it cannot be said to be a binding arbitration agreement.

ABCAUS Case Law Citation:
5108 (2026) (04) abacus.in SC

Important Case Laws relied upon by Parties:
BGM and M-RPL-JMCT(JV) v. Eastern Coalfields Ltd
Jagdish Chander v. Ramesh Chander
K.K. Modi v. K.N. Modi
Bihar State Mineral Development Corporation v. Encon Builders (I) (P) Ltd.

The appellant was a manufacturer. In respect of an export order, it contracted with the respondent. However, in respect to one of the consignment, the respondent handed the consignment to the purchaser/importer without payment of the requisite amount and without production of original bill of lading at the time of delivery.

This act of the respondent resulted in financial loss to the appellant as it did not receive payment for supply of the goods. The appellant raised this issue with the respondent, who asserted the factum of a past practice of handing over the goods without production of the original bill of lading and denied any liability.

The bills of lading issued by the respondent contained a clause captioned as “arbitration” for dispute resolution mechanism which read that “any difference of opinion or dispute thereunder can be settled by arbitration in India or a place mutually agreed with each party appointing an arbitrator.” 

The appellant preferred Arbitration Application before the High Court seeking appointment of sole arbitrator. However, the Hon’ble High Court dismissed the application observing that arbitration clause, which had used the word ‘can’, do not make it imperative for the parties to be referred for arbitration and specifically when the respondent had refused to be referred for arbitration.

Before the Hon’ble Supreme Court, the appellant contended that Section 7 of the Arbitration and Conciliation Act 19962 does not prescribe any form for an arbitration agreement.  Apart from that, the intent of the parties to have arbitration be the chosen method of dispute resolution is evident from the bill containing a clause to that effect.

The Hon’ble Supreme Court noted that it had been held by it that the words used in the agreement should disclose a determination and obligation to go for arbitration and not only provide for the possibility of going to arbitration. When the word provides only a possibility, the same does not constitute a valid arbitration agreement

The Hon’ble Supreme Court further observed that it had held that mere use of the word “arbitration” or “arbitrator” in a clause will not make it an arbitration agreement, if it requires or contemplates a further or fresh consent of the parties for reference to arbitration. For example, use of words such as “parties can, if they so desire, refer their disputes to arbitration” or “in the event of any dispute, the parties may also agree to refer the same to arbitration” or “if any disputes arise between the parties, they should consider settlement by arbitration” in a clause relating to settlement of disputes, indicate that the clause is not intended to be an arbitration agreement.

The Hon’ble Supreme Court opined that in the instant case, the clause indicated merely the future possibility of referring disputes to arbitration and as such, it cannot be said to be a binding arbitration agreement. In other words, the possibility of arbitration being used to settle disputes is open however, for the disputes to be settled by arbitration, further agreement between the parties would be required and needless to add, such an agreement can only come into existence when both parties agree to the same.

Accordingly, the appeal was dismissed.

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