In a recent judgment, the Supreme Court ("SC") in BGM and M-RPL-JMCT (JV) v. Eastern Coalfields Limited1 reiterated that not every inclusion of an arbitration clause in a contract would amount to a valid arbitration agreement, especially when the language of the contract states that arbitration may be invoked rather than mandating it. This decision highlights the significance of precise drafting of arbitration clauses in a contract, and if due consideration is not given then the preferred choice of dispute resolution can by itself become a cause of protracted litigation.
Factual background
The case arose from a contract for transportation and handling of goods entered between BGM and M-RPL-JMCT (JV) ("Appellant") and Eastern Coalfields Limited ("Respondent"). Through the course of performance of the contract, disputes arose between the parties. The Appellant relied on Clause 13 of the General Terms of Contract ("GCC"), which formed part of the contract, to contend that disputes were to be resolved through arbitration and filed an application for the appointment of an arbitrator. The Respondent challenged this before the Calcutta High Court ("HC"), contending that the wording of Clause 13 of the GCC was not a binding intention of the Parties to arbitrate. Clause 13 of the GCC has been reproduced below:
13. Settlement of Disputes
In case of parties other than Govt. Agencies, the redressal of the dispute may be sought through Arbitration and Conciliation Act, 1996 as amended by Amendment Act of 2015.
The HC accepted this contention, emphasizing that the use of the word 'may' in the arbitration clause implied that there was no clear intention of the parties to refer disputes to arbitration ("Impugned Judgment"). Accordingly, the prayer for an appointment of an arbitrator was rejected. Aggrieved by the Impugned Judgment, the Appellant filed an appeal before the SC.
Point of Contention
Before the SC, a key issue was whether Clause 13 of the GCC constituted a valid arbitration agreement under Section 7 of the Arbitration and Conciliation Act, 1996 ("Act").
Supreme Court Ruling
The SC upheld the Impugned Judgment and ruled that Clause 13 of the GCC did not amount to an arbitration agreement as it fails to fulfill the essential attributes of an arbitration agreement in terms of Section 7 of the Act. The SC reasoned that the use of the words 'may be sought' in Clause 13 of the GCC, indicates only a possibility of arbitration, not a binding commitment between the parties. It was emphasized that even though a clause may be titled as 'Settlement of Disputes', what is decisive is the substance of the clause and whether it demonstrates a clear and unequivocal intention of the parties to refer disputes to arbitration. The SC clarified that a valid arbitration clause must demonstrate a clear intention of the parties to refer disputes to arbitration. If a clause is framed in such a manner that it requires further consent or consensus before arbitration can be invoked, it does not meet the requirements of Section 7 of the Act that provides parties must demonstrate a clear intention to settle disputes through arbitration in an arbitration agreement.
The SC further relied on Jagdish Chander v. Ramesh Chander & Ors.2 and Mahanadi Coalfields Limited & Anr. v. IVRCL AMR Joint Venture3, holding that clauses which merely suggest arbitration as a potential or optional step, rather than expressing the specific and direct expression of intention of the parties to have disputes settled by arbitration, cannot qualify as a valid arbitration agreement under the Act.
Drafting Arbitration Clauses: Ensuring Clarity in Language
When drafting arbitration clauses, the use of direct and unambiguous language is critical. Simply replacing the term 'may' with 'shall' does not, by itself, guarantee the enforceability of an arbitration clause. What is essential is that the arbitration clause reflects the parties clear and unequivocal intention to resolve disputes through arbitration. In order to achieve this, qualifying phrases such as 'subject to mutual consent' or 'if the parties so determine' should be avoided, as they create uncertainty and imply that arbitration will depend on a future agreement between the parties, instead of being a binding obligation from the very start.
Further, if the parties intend to insert a clause such as negotiation prior to the arbitration, such a clause must be structured carefully. It should specify how the negotiations will be triggered, set a clear time frame for its completion, and identify the point at which the process will be treated as having failed, and only then should arbitration be expressly mandated in the clause as the final and binding method of dispute resolution. Such drafting ensures that the dispute resolution framework is both commercially workable and legally enforceable.
This judgment underscores the importance of drafting an arbitration clause with clarity and precision so that they reflect the parties' intention to settle disputes through arbitration. Otherwise, ambiguities in drafting may invite prolonged litigation over the applicability of the clause, thereby defeating the fundamental purpose of choosing arbitration as a speedy and efficient mode for dispute resolution.
Footnotes
1. 2025 SCC OnLine SC 1471.
2. 2007 SCC OnLine SC 570.
3. 2022 SCC OnLine SC 960.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
