In a latest judgment titled BGM and M-RPL-JMCT (JV) v. Eastern Coalfields Limited, 2025 INSC 874, the Supreme Court of India ("Court") interpreted the following portion of clause 13, titled "Settlement of Disputes" of the contract between the parties, and held it not to be a binding arbitration agreement:
"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".
Relevant Facts
The appellant impugned the order passed by the Calcutta High Court, in Arbitration Petition No. 745 of 2023, whereby a petition under Section 11, Arbitration and Conciliation Act, 1996 ("ACA"), seeking appointment of an arbitral tribunal on the strength of the above-quoted clause, was dismissed.
Having placed reliance on the judgments in Jagdish Chander v. Ramesh Chander, (2007) 5 SCC 719 and Mahanadi Coalfields Limited v. IVRCL AMR Joint Venture, (2022) 20 SCC 636, the High Court held that the use of the word "may" demonstrates that there is no clear intention of the parties to be bound by an arbitration agreement.
Parties' Contentions
The Appellant contended that:
1. The use of the word "may" is only to indicate that either of the parties has an option to take recourse to arbitration. Once either of the parties exercises that option, it becomes a binding arbitration agreement;
2. Jagdish Chander (supra) and Mahanadi Coalfields (supra) dealt with entirely different clauses than the one in question, and are not applicable to the present case; and
3. The High Court travelled beyond the scope of Section 11, ACA. The High Court ought to have satisfied itself with the prima facie existence of the arbitration agreement and should have appointed the arbitral tribunal to rule on its validity.
Per contra, the Respondent contended that:
1. The use of the term "may" indicate that the parties were not ad idem on referring the disputes to arbitration;
2. The language of clause 32 [reproduced hereunder], indicates that disputes were to be settled through regular court proceedings. Clause 32:
"Legal Jurisdiction: - Matters relating to any dispute or difference arising out of this tender and subsequent contract award based on this tender shall be subject to the jurisdiction of District Court where the subject work is to be executed."
3. If on a plain reading of the clause, the court comes to a conclusion that the parties were not ad idem regarding arbitration, the very existence of the arbitration agreement comes into question.
Analysis and Judgment
Whether the question of existence of an arbitration agreement should be left for the arbitral tribunal to decide?
The Court placed reliance on In Re: Interplay Between Arbitration Agreements Under The Arbitration And Conciliation Act 1996 and The Indian Stamp Act 1899, 2023 INSC 1066, wherein the following has been settled:
1. The scope of Section 11(6A), ACA, is a limited examination to determine prima facie existence of an arbitration agreement. The Court must examine whether the underlying contract prima facie contains an arbitration agreement; and
2. The referral court is not to hold a mini trial by allowing the parties to adduce evidence. The determination of existence and validity of an arbitration agreement based on evidence is to be left to the arbitral tribunal.
The Court held that in the present case, the appellant is relying on just a single clause, hence, a prima facie inquiry can be made without having to hold a mini trial, or adducing evidence.
Whether clause 13 (supra) would constitute an arbitration agreement between the parties as contemplated under Section 7 of the 1996 Act?
The Court placed reliance on Bihar State Mineral Development Corporation v. Encon Builders, (2003) 7 SCC 418, wherein essential ingredients of an arbitration agreement were culled out as (a) there must be a present or future difference in connection with some contemplated affair; (b) the parties must intend to settle the difference by a private tribunal; (c) the parties must agree in writing to be bound by the decision of such tribunal; and (d) the parties must be ad idem.
The Court further considered Jagdish Chander (supra), wherein it was held that a mere possibility of the parties agreeing to arbitration in future, as contrasted from an obligation to refer disputes to arbitration, does not constitute a valid and binding arbitration agreement. Mere use of the words 'arbitration' or 'arbitrator' in a clause will not make it an arbitration agreement, if it requires or contemplates a further or fresh consent of the parties for reference to arbitration .
In Mahanadi Coalfields (supra), the Court applied the ratio laid down in Jagdish Chander (supra) and held the following clause to not be an arbitration agreement:
"15. Settlement of Disputes/Arbitration:
15.1 It is incumbent upon the contractor to avoid litigation and disputes during the course of execution. However, if such disputes take place between the contractor and the department, effort shall be made first to settle the disputes at the company level. The contractor should make request in writing to the Engineer-in-Charge for settlement of such disputes/claims within 30 (thirty) days of arising of the case of dispute/claim failing which no disputes/claims of the contractor shall be entertained by the company.
15.2 If differences still persist, the settlement of the dispute with Govt. Agencies shall be dealt with as per the Guidelines issued by the Ministry of Finance, Govt. of India in this regard. In case of parties other than Govt. Agencies, the redressal of the disputes may be sought in the Court of Law."
Applying the above stated law Court held that the use of the words "may be sought" in clause 13 (quoted above) implies that there is no binding arbitration agreement between parties. It is just an enabling clause whereunder, if parties agree, they could resolve their disputes through arbitration.
The Court added that clause 32 (quoted above) does not arbitration. It only fixes jurisdiction, and in the event of there being an arbitration agreement, could determine the juridical seat.
Authors' View
The judgment in Jagdish Chander (supra) was passed long before the insertion of Section 11(6A), ACA. Hence the examination conducted by the Court in Jagish Chander (supra) was not confined to prima facie existence of an arbitration agreement, as laid down in Duro Felguera, S.A. v. Gangavaram Port Limited, (2017) 9 SCC 729 and subsequently upheld in In Re: Interplay Between Arbitration Agreements Under The Arbitration And Conciliation Act 1996 and The Indian Stamp Act 1899 (supra).
Turning to the judgment in Mahanadi Coalfields (supra), the relevant contractual clause therein prima facie does not even consider the possibility of arbitration. The decision in Mahanadi Coalfields (supra) was not on the consideration of whether a mere future possibility of arbitration is contemplated, or whether the arbitration agreement is binding. Contrarily, the decision is based on the consideration of whether a prima facie an arbitration agreement even exists in its most formal sense.
The judgment in Mahanadi Coalfields (supra) predates the judgment in In Re: Interplay Between Arbitration Agreements Under The Arbitration And Conciliation Act 1996 and The Indian Stamp Act 1899 (supra). When Mahanadi Coalfields (supra) was passed, the prevailing judgment regarding the scope of examination under Section 11, ACA, was Vidya Drolia v. Durga Trading Corporation, (2021) 2 SCC 1. This is important because Vidya Drolia (supra) erroneously disregarded Section 11(6A), ACA, as having been repealed. The Court rectified this in In Re: Interplay Between Arbitration Agreements Under The Arbitration And Conciliation Act 1996 and The Indian Stamp Act 1899, as follows:
"152. We are of the opinion that the above premise of the Court in Vidya Drolia (supra) is erroneous because the omission of Section 11(6A) has not been notified and, therefore, the said provision continues to remain in full force. ...
154. ... In Duro Felguera (supra), this Court held that the referral courts only need to consider one aspect to determine the existence of an arbitration agreement – whether the underlying contract contains an arbitration agreement which provides for arbitration pertaining to the disputes which have arisen between the parties to the agreement. Therefore, the scope of examination under Section 11(6A) should be confined to the existence of an arbitration agreement on the basis of Section 7. Similarly, the validity of an arbitration agreement, in view of Section 7, should be restricted to the requirement of formal validity such as the requirement that the agreement be in writing. ... We accordingly clarify the position of law laid down in Vidya Drolia (supra) in the context of Section 8 and Section 11 of the Arbitration Act."
In light of the above, the scope of examination while appointing an arbitral tribunal under Section 11, ACA, as it stands today, is much different from that as applied in the judgments of Jagdish Chander (supra) and Mahanadi Coalfields (supra).
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