Supreme Court Clarifies: “May Be Sought” Clause Does Not Constitute a Binding Arbitration Agreement
The Supreme Court of India, in its landmark judgment dated July 18, 2025, in the case of BGM and M-RPL-JMCT (JV) v. Eastern Coalfields Limited (2025 INSC 874), has reiterated the critical importance of clear and unequivocal language in drafting arbitration agreements. The Court held that a contractual clause stating disputes “may be sought” through arbitration does not constitute a binding arbitration agreement under Section 7 of the Arbitration and Conciliation Act, 1996 (“Act”). This ruling underscores the necessity of precise contract drafting to ensure enforceable dispute resolution mechanisms, a cornerstone of effective business dealings.
Key Highlights of the Judgment
1.Non-Binding Nature of Permissive Language
The Supreme Court emphasized that clauses using permissive language, such as “may be sought,” do not establish a binding arbitration agreement. Relying on its earlier decisions in Jagdish Chander v. Ramesh Chander (2007) and Mahanadi Coalfields Ltd. v. IVRCL AMR Joint Venture (2022), the Court clarified that an arbitration agreement requires a clear and mutual intent to arbitrate disputes. A clause contemplating future consent or merely enabling arbitration lacks the consensus ad idem necessary for enforceability under Section 7 of the Act.
2. Interpretation of “Arbitration” Terminology:
The Court held that the mere inclusion of terms like “arbitration” or “arbitrator” in a clause does not automatically render it a valid arbitration agreement. If the clause requires further consent or mutual agreement post-dispute, it is deemed an “enabling provision” rather than a binding commitment to arbitrate. This reinforces the need for unambiguous language to avoid disputes over the existence of an arbitration agreement.
3. Scope of Judicial Review Under Section 11(6-A)
The Court clarified that referral courts, while exercising powers under Section 11(6-A) of the Act, are limited to a prima facie examination of the existence of an arbitration agreement. A plain reading of the contractual clause to determine its binding nature does not constitute a “mini-trial” or violate the limited scope prescribed by the 2015 Amendment to the Act. This ensures that deeper scrutiny of the agreement’s validity is left to the arbitral tribunal under Section 16 (competence-competence principle).
4. Case-Specific Analysis: Clause 13
In the case, the appellant relied on Clause 13 of the contract, which stated that disputes “may be sought through Arbitration and Conciliation Act, 1996” for non-government parties. The Supreme Court upheld the Calcutta High Court’s decision, ruling that this clause was not a binding arbitration agreement due to its permissive language and requirement for further consensus. The Court further noted that Clause 32, which subjected disputes to district courts, did not explicitly exclude arbitration but was irrelevant given the non-binding nature of Clause 13.
5. Precedents and Legal Principles
The judgment aligns with established precedents:
- Jagdish Chander (2007): A valid arbitration agreement requires clear intent, not merely a possibility of future arbitration.
- Mahanadi Coalfields (2022): Clauses requiring additional consent post-dispute do not satisfy Section 7 requirements.
- The Court emphasized that an arbitration agreement must reflect a definitive commitment to arbitrate, using mandatory language like “shall” rather than permissive terms like “may.”
Importance of Precise Contract Drafting
This judgment serves as a clarion call for businesses and legal professionals to prioritize meticulous contract drafting. Arbitration clauses are pivotal in ensuring efficient dispute resolution, reducing litigation costs, and maintaining commercial relationships. The use of ambiguous or conditional language, such as “may” or “if parties agree,” can lead to protracted disputes over the enforceability of arbitration agreements, as seen in this case. Key takeaways for contract drafting include:
- Clarity and Intent: Arbitration clauses must explicitly state the parties’ mutual commitment to arbitrate disputes, avoiding permissive or conditional terms.
- Avoiding Ambiguity: Phrases that imply future consent or optional arbitration should be replaced with mandatory language to ensure enforceability.
- Alignment with Statutory Requirements: Clauses must comply with Section 7 of the Act, which mandates a clear agreement to submit disputes to arbitration.
- Holistic Contract Review: Ensure that arbitration clauses are consistent with other contractual provisions, such as jurisdiction clauses, to avoid conflicts or misinterpretations.
In business dealings, a well-drafted contract is not just a legal document but a strategic tool that mitigates risks and fosters trust. The Supreme Court’s ruling highlights that vague or poorly drafted arbitration clauses can jeopardize dispute resolution mechanisms, leading to costly litigation and delays.
Implications for Legal and Business Professionals
For legal practitioners, this judgment reinforces the importance of advising clients on the precise wording of arbitration clauses to avoid challenges to their enforceability. For businesses, it underscores the need to engage skilled legal counsel during contract drafting to safeguard their interests. The ruling also clarifies the limited role of referral courts under Section 11, ensuring that disputes over the existence of an arbitration agreement are resolved efficiently without delving into the merits of the case.
Conclusion
The Supreme Court’s decision in BGM and M-RPL-JMCT (JV) v. Eastern Coalfields Limited is a pivotal reminder of the sanctity of clear intent in arbitration agreements. By invalidating clauses that lack binding commitment, the Court has set a high standard for contract drafting, urging professionals to adopt precision and foresight in their agreements. As arbitration continues to gain prominence as a preferred dispute resolution mechanism, this ruling serves as a guiding light for drafting enforceable contracts that withstand judicial scrutiny.
For professionals navigating complex commercial agreements, this case is a testament to the adage: an ounce of prevention in drafting is worth a pound of cure in litigation. Let us prioritize clarity and precision in our contracts to build robust frameworks for dispute resolution.
Sources:
- Supreme Court of India Judgment: BGM and M-RPL-JMCT (JV) v. Eastern Coalfields Limited, 2025 INSC 874
- LiveLaw: Clause That Arbitration “May Be Sought” Doesn’t Constitute A Binding Arbitration Agreement
- Bar and Bench: Contract clause saying disputes ‘may be’ referred to arbitration is not an arbitration agreement
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