The Supreme Court has held that a dispute resolution clause stating that disputes “can be settled by arbitration” does not constitute a binding arbitration agreement under the Arbitration and Conciliation Act, 1996, because it indicates only the possibility of arbitration and not a mandatory or enforceable obligation to refer disputes to arbitration. Where the clause contemplates or necessitates further consent of the parties before reference, it is merely an agreement to enter into an arbitration agreement in future, and not an arbitration agreement in law.
Accordingly, in the absence of a mandatory agreement to arbitrate, and where one party refuses to submit disputes to arbitration, a Section 11 application for appointment of an arbitrator is not maintainable
A Two-Judge Bench comprising Justice Sanjay Karol and Justice Nongmeikapam Kotiswar Singh observed that arbitration is founded on party autonomy and mutual intention, and that parties must agree to arbitration as the chosen dispute resolution mechanism for an arbitral tribunal to derive jurisdiction. At the Section 11 stage, the court’s scrutiny is confined to a prima facie examination of the existence of an arbitration agreement, and not to a detailed adjudication on merits.
The Bench examined the word “can” in its ordinary meaning and held that it denotes capacity, capability, or possibility, and not a mandate. It contrasted “can” with “shall”, observing that while “shall” ordinarily signals obligation, “can” indicates only a choice available to the parties. Applying settled principles of contractual interpretation, the Bench held that the words chosen by the parties are the most reliable manifestation of their intent and courts cannot impute an obligation not intended by the contracting parties.
The Bench further observed that a valid arbitration agreement must disclose a determination and obligation to go to arbitration, and not merely a possibility of doing so. The clauses contemplating future consent or further agreement for arbitration do not amount to binding arbitration agreements. On the language of Clause 25, the Bench found that it merely kept open the future possibility of arbitration and therefore required fresh consensus between the parties after disputes arose.
Briefly, the appellant, a manufacturer of aluminium foil containers and kitchen rolls, engaged the respondent logistics company for shipment of six containers to South Carolina, USA, for a total consideration of Rs. 2.23 lakhs. Four containers were delivered successfully, but a dispute arose in relation to the fifth container when the respondent delivered the consignment to M/s American Alupack Industries on October 21, 2020 without obtaining the original bill of lading and without the consignee making payment, resulting in an alleged loss to the appellant of USD 28,064.86. The appellant raised the issue with the respondent on December 10, 2020, and thereafter invoked Clause 25 of the bill of lading by notice dated March 10, 2022 seeking reference of disputes to arbitration.
Clause 25 of the bill of lading, captioned “Arbitration”, provided that any difference of opinion or dispute “can be settled by arbitration in India or a place mutually agreed with each party appointing an arbitrator.” The respondent contested the invocation on the ground that the clause was not mandatory and merely left arbitration open as an option. The Bombay High Court, in a Section 11 application for appointment of arbitrator, held that the use of the word “can” did not make arbitration compulsory and dismissed the application.
Appearances:
AOR Krishan Kumar, for the Appellant
AOR Rohan Ganpathy, for the Respondent
