In its recent decision in Nagreeka Indcon Products Pvt.Ltd. v. Cargocare Logistics (India) Pvt. Ltd. , the Supreme Court held that when an arbitration clause only provides for the possibility of going to arbitration but not an obligation to do so, it does not constitute a valid arbitration agreement. For commercial parties, this decision emphasizes the importance of drafting arbitration clauses precisely.
The Appellant contracted with the Respondent for transport of goods to a purchaser company in USA. Disputes arose when the Appellant did not receive payment from the purchaser for one of its consignments. The Appellant alleged that it suffered financial loss due to lapses by the Respondent. The Appellant invoked the arbitration clause in the bill of lading which stated that disputes between the parties ‘can’ be referred to arbitration. The Respondent rejected the reference to arbitration. The Appellant’s application for appointment of an arbitrator was dismissed by the Bombay High Court which held that the clause did not mandate arbitration. Hence, the appeal.
The question before the Supreme Court was that when an arbitration clause uses the word ‘can’, does it mandate the reference of all disputes to arbitration or is it open to the parties to seek recourse through other dispute resolution mechanisms?
The Supreme Court concluded that the word ‘can’ provides only a possibility; it does not constitute a valid and binding arbitration agreement.
The Court emphasized the importance of party autonomy and accordingly based its finding on an interpretation of the parties’ intent. It relied on the principle that the words chosen by the parties are the most reliable manifestation of their intent. Accordingly, the Court analysed the ordinary meaning of the word ’can’ and concluded it to mean possibility, not compulsion or mandate. The Court also noted that the arbitration clause provided an incomplete procedure for appointment of arbitrators. This, the Court concluded, made it obvious that the intention of the parties was unclear. The Court held that a valid arbitration agreement must demonstrate a clear, enforceable obligation to refer disputes to arbitration and not merely preserve a future option to do so.
It is well settled that at the stage of an application under Section 11 of the Arbitration and Conciliation Act, 1996 (“A&C Act”), the Court must only take a prima facie view as to the existence of an arbitration agreement. Courts are also encouraged to take a liberal approach when referring matters to arbitration, particularly since jurisdictional objections can be raised before the arbitral tribunal once constituted. Yet, as this decision demonstrates, the Courts’ power to not send parties to arbitration, unless it is clearly their chosen and intended mechanism, remains firmly intact. The lesson for commercial parties is to ensure that the dispute resolution clauses in their contracts are drafted with precision and clarity of intention. Headings like “Arbitration” or general references to the A&C Act are insufficient. The judgment raises caution and ought to encourage parties to re-examine standard form contracts with templatized arbitration clauses.
Link to Judgment: Click here