'Can' In Arbitration Clause Implies Choice, No Mandatory Arbitration Without Clear Agreement: Supreme Court

The Supreme Court on Friday held that an arbitration clause using the word “can” does not make arbitration mandatory, ruling that parties cannot be compelled to arbitrate unless there is a clear and binding agreement to that effect under Section 7 of the Arbitration and Conciliation Act, 1996.

A Division Bench of Justice Sanjay Karol and Justice Nongmeikapam Kotiswar Singh held that the clause in question only indicates a possibility of arbitration and not a binding obligation.

“The 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. 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. In that view of the matter, we are of the considered view that this appeal is bereft of merit,” the Court observed.

Emphasising party autonomy, the court said, “Alternate Dispute Resolution mechanisms or more particularly, arbitration, which is relevant in this case, can only be the chosen method if both/all parties to the dispute can agree that it will be so. This freedom is not only in so far as choosing the medium, but it also encompasses choice of forum, applicable law and to some extent even procedural norms. This enables parties to have their dispute decided by keeping in view their own structures and realities.”

Dismissing an appeal filed by Nagreeeka Indcon Products Pvt. Ltd. against Cargocare Logistics (India) Pvt. Ltd., the court upheld the Bombay High Court's order refusing to appoint an arbitrator under Section 11 of the 1996 Act.

The dispute traces back to a routine commercial arrangement for shipping aluminum foil consignments to South Carolina in the United States. Nagreeeka had hired Cargocare to transport six containers under a contract worth Rs. 2.23 lakh.

Four consignments reached without any hitches. Trouble began with the fifth, delivered on October 21, 2020. The consignee had not produced the original bill of lading, yet the goods were handed over. Nagreeeka says this resulted in a loss of USD 28,064.86, an issue it formally raised with Cargocare on December 10, 2020.

At the centre of the dispute was Clause 25 in the bills of lading, titled “Arbitration.” It read:

“The contract evaluated hereby or contained herein shall be governed by and construed according to Indian Laws. 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.”

Nagreeeka relied on this clause to invoke arbitration on March 10, 2022. Cargocare resisted, maintaining that the wording left arbitration as an option rather than a binding route and that both sides would still need to agree to it once a dispute arose.

That view found favour with the Bombay High Court. In its February 23, 2023 order, the court held that the use of the word “can” did not make arbitration compulsory and dismissed the request to appoint an arbitrator.

Before the Supreme Court, Nagreeeka pressed the point that even loosely drafted clauses can reflect an intention to arbitrate, especially given the law's pro-arbitration approach and the limited scrutiny courts undertake at this stage.

Cargocare, however, argued that the clause fell short of what the law requires for a valid arbitration agreement, pointing out that it did not clearly bind the parties to resolve disputes through arbitration.

Interpreting the word “can,” the Supreme Court referred to standard dictionary meanings and held that it denotes possibility or discretion, not compulsion.

Explaining the distinction, the Court observed: “Put differently, the authority is permitted to do something but is not required to. If it is the requirement that is to be denoted, 'shall' is the most appropriate word which signals a mandate or obligation.”

The court further held that a valid arbitration agreement must disclose a clear and enforceable intention to refer disputes to arbitration and must not contemplate the need for fresh consent when disputes arise.

Applying these principles, the court concluded that Clause 25 merely indicates a future possibility of arbitration and does not constitute a binding arbitration agreement in law.

The appeal was accordingly dismissed, and the High Court's refusal to appoint an arbitrator was upheld.