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In a significant ruling, the Hon'ble Supreme Court in BGM And M-RPL-JMCT (JV) v. Eastern Coalfields Limited, 2025 INSC 874, clarified that a clause stating redressal of the dispute may be sought through arbitration is not a valid arbitration agreement under Section 7 of the Arbitration and Conciliation Act, 1996.
The Hon'ble Court while deciding the present case relied upon its earlier decisions in Mahanadi Coalfields Ltd. vs. IVRCL AMR Joint Venture, (2022) 20 SCC 636 and Jagdish Chander vs. Ramesh Chander and Others, (2007) 5 SCC 719, and held as under:
"That mere use of the word "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 Jagdish Chander (supra), use of words such as "parties can, if they so desire, refer their disputes to arbitration", or "in the event of any dispute, the parties may also agree to refer the same to arbitration", or "if any disputes arise between the parties, they should consider settlement by arbitration", in a clause relating to settlement of disputes, were found not indicative of an arbitration agreement. Similarly, a clause which states that "if the parties so decide, the disputes shall be referred to arbitration" or "any disputes between parties, if they so agree, shall be referred to arbitration" would not constitute an arbitration agreement. Because such clauses merely indicate a desire or hope to have the disputes settled by arbitration, or a tentative arrangement to explore arbitration as a mode of settlement if and when a dispute arises. This is so, because such clauses require the parties to arrive at a further agreement to go to arbitration, as and when disputes arise. Therefore, any agreement, or clause in an agreement, requiring or contemplating a further consent or consensus before a reference to arbitration, is not an arbitration agreement."
The Hon'ble Court held clauses that express only a desire or possibility to arbitrate and requiring further consent when disputes arise do not constitute valid arbitration agreements. They reflect a tentative arrangement and not a binding intention to arbitrate.
The Hon'ble Court also held that under Section 11, the Referral Court before appointing an arbitral tribunal will have to be prima facie satisfied that an arbitration agreement exists and if not, the Court can refuse to appoint an Arbitrator.
The judgment reinforces that an arbitration clause must unequivocally record the parties' intention to submit disputes to arbitration, without leaving the requirement of further consent or any scope for ambiguity.
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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.
