Supreme Court: Clause Stating Arbitration “May Be Sought” Is Not a Binding Arbitration Agreement

Table of Contents

• Case at a glance
• Key holdings and reasoning
• Practical implications for contracts and disputes
• How courts distinguish binding vs. optional language
• Bottom line

The Supreme Court has held that a clause saying disputes “may be sought” to be resolved through arbitration is merely permissive and does not constitute a binding arbitration agreement under the Arbitration and Conciliation Act, 1996. Affirming the Calcutta High Court’s refusal to appoint an arbitrator under Section 11, the Court ruled that such language shows no clear, enforceable intention to submit disputes to arbitration without further consent by both parties.

Case at a glance

• Case: BGM and M-RPL-JMCT (JV) v. Eastern Coalfields Limited, 2025 INSC 874 (decided 18 July 2025).
• Bench: Justices P.S. Narasimha and Manoj Misra.
• Clause considered (Clause 13): “In case of parties other than Govt. Agencies, the redressal of the dispute may be sought through arbitration as per 1996 Act.”.
• Holding: The wording “may be sought” is an enabling/optional formulation, not a binding agreement to arbitrate; no appointment under Section 11 is permissible on such a clause alone.

Key holdings and reasoning

• No binding intent: The clause “does not bind parties to use arbitration” and the words “may be sought” indicate there is no subsisting agreement that either party can unilaterally compel arbitration. It only keeps arbitration as a possible, future option if both parties agree then.
• Enabling vs. mandatory: An arbitration clause must demonstrate a clear, unequivocal intention to submit disputes to arbitration; clauses that contemplate further consent (e.g., “may,” “if parties agree/so desire”) are not arbitration agreements under Section 7.
• Scope of Section 11 inquiry: The High Court confined itself to the existence of an arbitration agreement and rightly refused reference; this aligns with Section 11(6-A)’s limited scrutiny. The Supreme Court upheld that approach and dismissed the appeal.
• Alignment with precedent: The Court’s view tracks earlier rulings like Jagdish Chander and Mahanadi Coalfields, which treat permissive formulations—“may refer,” “can, if they so desire”—as non-binding because they require fresh consent when disputes arise.

Direct extract from the judgment:

• “Use of the words ‘may be sought’… is just an enabling clause whereunder, if parties agree, they could resolve their dispute(s) through arbitration… not indicative of a binding agreement that any of the parties on its own could seek redressal… through arbitration.”

Practical implications for contracts and disputes

• Drafting arbitration clauses:
  • Use mandatory language: Prefer “shall be referred to arbitration” over “may be referred,” “may be sought,” or “parties may agree.” Mandatory phrasing evidences immediate, binding consent to arbitrate.
  • Avoid conditions requiring future agreement: Any requirement for fresh consent post-dispute undermines enforceability under Section 7.
  • Specify key elements: Seat/venue, governing law, number/appointment of arbitrators, and institutional vs. ad hoc rules. Clarity reduces Section 11 challenges.
• For pending Section 11 petitions:
  • Clauses with permissive language are susceptible to dismissal at the threshold for lack of a binding arbitration agreement; courts may refuse appointment strictly on “existence” grounds.
  • If parties later executed a separate agreement or exchange demonstrating consent to arbitrate a specific dispute, that subsequent consensus can cure the defect; absent such later agreement, Section 11 will fail.
• For transactional risk:
  • Vet legacy contracts for optional arbitration clauses; consider executing bilateral addenda converting permissive dispute-resolution language into mandatory arbitration to ensure enforceability.

How courts distinguish binding vs. optional language

Binding examples typically upheld:

• “All disputes arising out of or in connection with this contract shall be referred to arbitration…”
• “Any party may refer a dispute to arbitration, and the other party irrevocably agrees to submit…”

Non-binding examples typically rejected:

• “Disputes may be referred to arbitration if the parties so agree/desire…”
• “Parties should consider settlement by arbitration…”
• “Redressal of dispute may be sought through arbitration…”.

The Supreme Court underscored that merely mentioning “arbitration” in a dispute-resolution clause is insufficient; the clause must reflect present, binding consent to arbitrate without the need for further assent when disputes arise.

Bottom line

A clause stating arbitration “may be sought” is an optional, enabling provision—not a binding arbitration agreement under Section 7 of the 1996 Act—and cannot ground a Section 11 appointment by itself. Parties seeking certainty must adopt mandatory arbitration language that evidences an immediate and enforceable agreement to arbitrate.

References to the judgment and analyses:

• Supreme Court judgment PDF (18 Jul 2025) confirming “may be sought” is not binding.
• Case coverage and analysis reiterating the Court’s reasoning and alignment with Jagdish Chander and Mahanadi Coalfields.