“May Be” is Not Enough: Supreme Court Clarifies Binding Nature of Arbitration Agreements

Introduction

In a significant ruling that re-emphasises arbitration jurisprudence in India, the Supreme Court (Court) in BGM and M-RPL-JMCT (JV) v. Eastern Coalfields Ltd.¹ held that the phrase “may be sought through arbitration” does not amount to a binding arbitration agreement. This decision² reiterates a foundational principle of arbitration law: the intent to arbitrate must be expressed in clear, definite, and unambiguous terms. While this is not the first time the Court has emphasised the necessity of clarity in arbitration clauses, the persistence of vague and permissive language in contracts suggests that many parties continue to overlook the legal precision required in drafting dispute resolution mechanisms.

Factual background and clause in question

The dispute in this case³ arose from a contract between BGM and M-RPL-JMCT (JV) and Eastern Coalfields Ltd. for transportation and handling services. Clause 13 of the General Terms and Conditions (GTC), part of the e-tender notice, laid out a multi-tiered dispute resolution process. The operative portion of the clause stated:

In case of parties other than government agencies, the redressal of the dispute may be sought through the Arbitration and Conciliation Act, 1996⁴, as amended by the Amendment Act of 2015⁵.

The appellant relied on this clause to invoke arbitration under Section 11⁶ of the Arbitration and Conciliation Act, 1996. The Calcutta High Court dismissed the application, holding that the clause did not amount to a binding arbitration agreement. The Supreme Court, while affirming this view and upholding the High Court’s decision, made several critical observations.

The Supreme Court emphasised that the use of the word “may” in the clause does not indicate a mandatory obligation to arbitrate. Arbitration requires a clear and binding agreement, and permissive language falls short of this requirement. The Court reiterated that the foundation of arbitration lies in the mutual consent of the parties, and such consent must be expressed in unequivocal terms. It also noted that the clause was embedded within a broader dispute resolution framework that prioritised internal mechanisms and committee-based resolution. Arbitration was presented as a contingent option, not a mandatory step. This structure, the Court held, undermined any claim of a binding arbitration agreement.

Similar judgments

The High Court and Supreme Court relied on numerous judicial pronouncements to arrive at the conclusion that “may” does not amount to a binding arbitration clause. The High Court relied extensively on the precedent set in Jagdish Chander v. Ramesh Chander⁷. In that case, the Court had held that clauses which merely suggest the possibility of arbitration, such as “may be referred to arbitration” or “if the parties so determine”, do not constitute arbitration agreements under Section 7⁸ of the Arbitration and Conciliation Act. The Court emphasised that an arbitration agreement must reflect a clear intent to submit disputes to arbitration and must not be contingent on future consent.

The judgment also drew from Mahanadi Coalfields Ltd. v. IVRCL AMR (JV)⁹, where a clause titled “Settlement of Disputes/Arbitration” ultimately directed parties to seek redressal in Court. Despite the heading, the substantive language did not bind parties to arbitration. The Supreme Court in that case held that mere use of the word “arbitration” is insufficient if the clause requires further agreement or discretion to invoke arbitration.

The Court also referred to other decisions, such as Cox & Kings Ltd. v. SAP India (P) Ltd.¹⁰, which reaffirmed that an arbitration agreement is a contractual undertaking to resolve disputes through arbitration to the exclusion of domestic courts. Additionally, the Court cited Bihar State Mineral Development Corpn. v. Encon Builders (I) (P) Ltd.¹¹, which laid out the essential ingredients of an arbitration agreement: a defined legal relationship, intent to arbitrate, agreement in writing, and consensus ad idem.

Applying these principles, the Court in the present case¹² found that Clause 13 was similarly permissive. It did not bind either party to arbitration and instead left open the possibility of arbitration subject to future agreement. The clause was structured as an enabling provision, not a mandatory commitment.

In addition to the precedents referred to by the courts in BGM and M-RPL-JMCT (JV) case¹³, there are numerous other cases that opined the same conclusion regarding an express arbitration clause. In Pure Diets India Ltd. v. Lokmangal Agro Industries Ltd.¹⁴, the Delhi High Court held that consensus ad idem was missing in the given arbitration agreement and therefore, mere use of the words “arbitration” and “arbitrators” does not constitute a binding arbitration agreement.

Additionally, in Dascon Sourav Commercial (P) Ltd. v. CLE (P) Ltd.¹⁵, the Calcutta High Court referred to Section 7(5)¹⁶ of the Arbitration and Conciliation Act, 1996, while stating that there must be a clear intention to incorporate an arbitration clause from one agreement to another. Therefore, in agreements involving contractors and subcontractors, it must be duly ensured that both parties wish to resort to arbitration in case of any dispute, and the same clause must be expressly included in the agreement between them.

There are other judgments that dealt with nomenclature in arbitration agreements. For example, in Arif Azim Co. Ltd. v. Micromax Informatics FZE¹⁷, the Supreme Court opined that in arbitration agreements where there is an express allocation of an arbitration place without any contrary provision to prove otherwise, such place would be the “seat” of arbitration even if it is named as a “venue” in the arbitration agreement.

Why do parties still get it wrong?

Despite repeated judicial clarifications and a growing body of case law, both domestic and international, vague arbitration clauses continue to appear in commercial contracts. This persistent ambiguity is not merely a drafting oversight; it reflects deeper structural and behavioural issues in how contracts are negotiated, reviewed, and executed.

(1) Overreliance on templates and precedents: Many organisations, especially in infrastructure, public procurement, and construction sectors, rely heavily on standard form contracts or legacy templates. These documents often contain outdated or generic dispute resolution clauses that were never designed to reflect the specific commercial realities or legal risks of the current transaction. Even when parties modify commercial terms, dispute resolution clauses are frequently left untouched, resulting in language that is permissive, inconsistent, or legally insufficient.

(2) Lack of specialised legal input: In many cases, contracts are drafted or finalised without the involvement of lawyers who specialise in dispute resolution or arbitration. General counsel or transactional lawyers may not always appreciate the nuances of arbitration law, particularly the statutory requirements under Section 7¹⁸ of the Arbitration and Conciliation Act, 1996. This leads to clauses that mention arbitration but fail to establish it as a binding mechanism.

(3) Misunderstanding of legal terminology: The misuse of modal verbs such as “may”, “shall”, and “can” is a recurring problem. While “shall” typically denotes obligation, “may” implies discretion. In legal drafting, this distinction is critical. However, many drafters use these terms interchangeably, unaware of the interpretative consequences. Courts have repeatedly held that “may” does not create a binding obligation, yet it continues to appear in clauses intended to be mandatory.

(4) Strategic ambiguity: In some cases, parties deliberately use vague language to preserve flexibility. They may wish to avoid committing to arbitration upfront, preferring to assess the nature of the dispute before deciding on the forum. While this may seem commercially prudent, it often backfires when one party seeks arbitration and the other resists, leading to litigation over the validity of the clause itself.

(5) Multi-tiered clauses and procedural confusion: Clauses that incorporate negotiation, mediation, and arbitration in a sequential process often fail to specify when arbitration becomes binding. For example, if a clause states that parties “shall attempt to resolve disputes amicably, failing which they may refer the matter to arbitration”, it is unclear whether arbitration is mandatory or optional. Without a clear trigger or timeline, such clauses are vulnerable to judicial scrutiny and rejection.

Implications of the judgment

In light of the aforementioned persistent concerns with arbitration contracts, the judicial pronouncement in the BGM and M-RPL-JMCT (JV) case¹⁹ has numerous implications on commercial contractual practices. With regard to using standard form contracts, companies must revise them to ensure that their intention to either mandate arbitration or keep it an option is expressly mentioned in the contract to avoid any uncertainty. Moreover, specialised legal input from experienced legal counsel must be taken while drafting such contracts to take into account complexities in legal jargon, including the often-ignored differences between terms such as “may” and “shall”.

Additionally, parties to arbitration agreements must be aware that terms and phrases such as “in the event of any dispute, the parties may also agree to refer the same to arbitration”, and “any disputes between parties, if they so agree, shall be referred to arbitration”, do not mean mandatory arbitration, but imply an option of post-dispute consent wherein both parties must have to agree to arbitration after the dispute in spite of the clause. Furthermore, if the parties opt for a multi-tiered dispute resolution approach, they must ensure to clearly mention the sequence in which they should apply and the point at which arbitration becomes binding. For example, the clause “the parties should first attempt to resolve the dispute through negotiation. If the same fails, the parties should refer the matter to arbitration within 30 days”, proposes a clear timeline and has less scope for judicial rejection.

Conclusion

The Supreme Court’s decision in the BGM and M-RPL-JMCT (JV) case²⁰ is a critical reaffirmation of the principle that arbitration agreements must be drafted with clarity and precision. It sends a strong message to contracting parties: ambiguity in arbitration clauses can render them unenforceable, leaving parties without recourse to arbitration even when disputes arise.

This judgment²¹ is not merely about the choice to arbitrate. It could extend to the entire arbitration mechanism, including the appointment of arbitrators, procedural rules, and the seat of arbitration. The parties’ intent must be expressed in language that is unequivocal and unambiguous. Anything less risks judicial rejection and procedural delays.

The judgments in BGM and M-RPL-JMCT (JV) case²² and numerous other cases indicate a larger concern regarding nomenclature in arbitration agreements. Such ambiguities in terminology can be erased or at least reduced through appropriate intervention by legal experts, modifying standard form contracts to suit the facts of specific cases, and making sure that the consent of both parties to resort to arbitration in case of a dispute is expressly stated in the agreement.

As arbitration continues to grow as a preferred mode of dispute resolution, especially in commercial and cross-border transactions, this decision²³ serves as a cautionary tale. Legal teams and contract drafters must treat dispute resolution clauses with the same rigour as the commercial terms of the contract. The cost of ambiguity is high not just in litigation, but in lost time, resources and trust. International standards and domestic jurisprudence are aligned in this respect: clarity is not optional. It is essential.