The Supreme Court has clarified that the use of the word 'can' in a dispute resolution clause does not create a mandatory obligation to arbitrate, reinforcing the foundational principle of party autonomy in arbitration agreements. This judgment resolves a critical ambiguity in commercial contracts where ambiguous language has led to protracted litigation over the enforceability of arbitration clauses.
Background & Facts
The Dispute
The appellant, Nagreeka Indcon Products Pvt. Ltd., a manufacturer of aluminium foil containers and kitchen rolls, entered into a contract with the respondent, CargoCare Logistics (India) Pvt. Ltd., for the transportation of six containers of aluminium foil products to South Carolina, USA. The total contract value was Rs. 2,23,550, inclusive of freight, ocean charges, and container maintenance. Four containers were delivered successfully. However, upon delivery of the fifth container on 21st October 2020, the consignee, American Alupack Industries (AAI), failed to pay for the goods or produce the original bill of lading. Despite this, the respondent handed over the goods, resulting in a financial loss of USD 28,064.86 to the appellant.
Key Facts
- The bill of lading issued by the respondent contained Clause 25, titled "Arbitration", which stated: "Any difference of opinion or dispute thereunder can be settled by arbitration in India or a place mutually agreed with each party appointing an arbitrator."
- The appellant raised the issue with the respondent on 10th December 2020, seeking compensation.
- The respondent denied liability, citing past practice of releasing goods without the original bill of lading.
- On 10th March 2022, the appellant issued a notice invoking arbitration for USD 13,230.86.
- The respondent responded by disputing the validity of the arbitration clause, asserting that it was permissive, not mandatory.
- The appellant filed Arbitration Application No. 168 of 2022 before the Bombay High Court seeking appointment of a sole arbitrator.
Procedural History
- 21st October 2020: Fifth container delivered without production of original bill of lading; payment not received.
- 10th December 2020: Appellant raised dispute with respondent.
- 10th March 2022: Notice of invocation of arbitration issued by appellant.
- 23rd February 2023: Single Judge of Bombay High Court dismissed the arbitration application, holding that the word 'can' rendered the clause non-mandatory.
- 2023: Appellant filed Special Leave Petition (Civil) No. 19026 of 2023 before the Supreme Court.
- 17th April 2026: Supreme Court delivered judgment dismissing the appeal.
Relief Sought
The appellant sought: (1) appointment of a sole arbitrator under Section 11 of the Arbitration and Conciliation Act, 1996; (2) referral of the dispute to arbitration; and (3) enforcement of the arbitration clause in Clause 25 of the bill of lading.
The Legal Issue
The central question was whether the use of the word 'can' in a dispute resolution clause constitutes a binding arbitration agreement under Section 7 of the Arbitration and Conciliation Act, 1996, or whether it merely indicates a permissive option open to the parties.
Arguments Presented
For the Appellant
The appellant relied on Eastern Coalfields v. Sanjay Transport Agency, Babanrao Rajaram Pund v. M/s Samarth Builders, and Enercon (India) Ltd. v. Enercon GmbH to argue that a pragmatic interpretation of arbitration clauses should prevail. It contended that the heading "Arbitration" and the use of the term "arbitrator" demonstrated a clear intent to arbitrate. Reliance was placed on Visa International Ltd. v. Continental Resources USA Limited to argue that the absence of precise wording does not invalidate an arbitration clause if the overall intent is discernible. The appellant also cited Panasonic India (P) Ltd. v. Shah Aircon to assert that 'can' can denote a mandatory obligation in context, and referenced Zhejiang Bonly Elevator Guide Rail Manufacture Co. Ltd. v. Jade Elevator Components to argue that an option between arbitration and court does not negate arbitration as a valid mechanism.
For the Respondent
The respondent argued that Clause 25 did not meet the essential requirements of a valid arbitration agreement under K.K. Modi v. K.N. Modi and Jagdish Chander v. Ramesh Chander. It emphasized that the word 'can' denotes possibility, not obligation, and that the clause required further mutual consent before arbitration could be initiated. The respondent also pointed out that the clause failed to provide for the appointment of a presiding arbitrator, violating Section 10 of the Act. It relied on BGM and M-RPL-JMCT(JV) v. Eastern Coalfields Ltd. and SBI General Insurance Co. Ltd. v. Krish Spg. to argue that courts must not impose arbitration where parties have not mutually agreed to it.
The Court's Analysis
The Court began by examining the ordinary meaning of the word 'can', citing Oxford, Merriam-Webster, and Britannica dictionaries, all of which define it as indicating possibility, capability, or option - not compulsion. The Court contrasted this with the mandatory force of 'shall' and the discretionary nature of 'may', noting that judicial interpretation must respect the parties' chosen language.
"The word 'can' is used to say that it is possible for someone or something to do something, or for something to happen."
The Court emphasized that party autonomy is the cornerstone of arbitration under the Arbitration and Conciliation Act, 1996. Citing Cox & Kings Ltd. v. SAP India (P) Ltd., it reaffirmed that arbitration jurisdiction arises only from mutual consent. The Court held that a clause requiring further agreement before arbitration can proceed is not an arbitration agreement but an agreement to agree - a non-enforceable promise.
The Court then applied the test laid down in K.K. Modi v. K.N. Modi and Jagdish Chander v. Ramesh Chander, which require that an arbitration agreement must contemplate a binding decision by a tribunal without requiring further consent. The Court found that Clause 25, by using 'can', fell squarely within the category of clauses rejected in Jagdish Chander: those that merely suggest arbitration as a possibility, not a commitment.
"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."
The Court distinguished Enercon and Zhejiang Bonly, noting that in those cases, the parties did not dispute the existence of an arbitration mechanism - only its operability. Here, the respondent categorically denied that the clause constituted an arbitration agreement at all. The Court also rejected the appellant’s reliance on Panasonic India, clarifying that the Delhi High Court’s observation on 'can' pertained to the power to invoke arbitration, not the creation of a binding obligation.
Finally, the Court underscored that Section 11 applications require only a prima facie existence of an arbitration agreement, but that threshold is not met where the clause itself is permissive and lacks mandatory language. The Bombay High Court’s dismissal was therefore upheld as consistent with statutory intent and contractual interpretation principles.
The Verdict
The appeal was dismissed. The Supreme Court held that Clause 25 of the bill of lading, which uses the word 'can', does not constitute a binding arbitration agreement under Section 7 of the Arbitration and Conciliation Act, 1996. The appellant’s application for appointment of an arbitrator was rightly dismissed by the Bombay High Court. No costs were awarded. The judgment affirms that arbitration cannot be imposed where the parties have not clearly and unambiguously agreed to it.
What This Means For Similar Cases
Permissive Language Invalidates Arbitration Clauses
- Practitioners must avoid using words like 'can', 'may', or 'should' in arbitration clauses; use 'shall' or 'must' to ensure enforceability.
- Drafting arbitration clauses with conditional language (e.g., "if the parties agree") renders them unenforceable under current jurisprudence.
- Any clause requiring further consent after a dispute arises is an agreement to arbitrate, not an arbitration agreement.
Courts Will Not Impute Intent Where Language Is Ambiguous
- Courts will not rescue poorly drafted clauses by reading in mandatory intent, even in commercial contexts.
- The burden is on the party seeking arbitration to prove that the clause, as written, reflects a mutual intention to be bound.
- Parties must ensure that arbitration clauses are self-contained, unambiguous, and comply with Section 7 and Section 10 of the Act.
Practical Takeaway for Contract Drafting
- Always use explicit mandatory language: "Any dispute shall be finally settled by arbitration..."
- Include clear procedures for appointment of arbitrators, including the third arbitrator.
- Avoid hybrid clauses (e.g., "arbitration or court") unless the intent to make arbitration primary is unmistakable.
- Review all standard form contracts (e.g., bills of lading, purchase orders) for permissive language that may inadvertently waive arbitration rights.
