A clause providing that disputes “can be settled by arbitration” merely indicates a possibility or option and not a binding agreement to arbitrate; in absence of clear and mandatory intention to refer disputes to arbitration, such clause does not constitute an arbitration agreement under Section 7 of the Arbitration and Conciliation Act, and courts cannot compel reference to arbitration under Section 11. (Paras 7, 12, 13)

advocatemmmohan

Arbitration – Arbitration Agreement – Interpretation of clause – Use of word “can” – Whether mandatory reference to arbitration – Party autonomy – Section 7 & Section 11 A&C Act

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A. Arbitration Agreement – Essential requirement – Intention of parties

• Arbitration is founded on mutual consent of parties.
• Mere reference to arbitration is insufficient unless there is a binding obligation to refer disputes.
  → Consent is sine qua non (Paras 6, 12)

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B. Interpretation of clause – Use of word “can” – Effect

• Word “can” denotes:
  • possibility
  • discretion
  • option
• Does not create mandatory obligation to arbitrate.
  → Clause using “can” is not binding arbitration clause (Paras 7, 13)

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C. Distinction – “May / Can” vs “Shall”

• “Shall” → mandatory obligation
• “May / Can” → discretionary / optional
  → Mandatory intent absent when “can” used (Para 7)

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D. Arbitration clause – Requirement of certainty

• Clause must disclose:
  • clear intention to arbitrate
  • binding nature of decision
  • enforceability
    → Mere possibility or future consent insufficient (Para 12, 13)

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E. Section 11 – Scope of Court’s jurisdiction

• Court only examines:
  • prima facie existence of arbitration agreement
• Cannot compel arbitration where agreement itself is uncertain.
  → Limited jurisdiction reaffirmed (Paras 7.1, 8)

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F. Contractual interpretation – Primacy of words used

• Words chosen by parties are:
  • best evidence of intent
• Courts cannot:
  • rewrite contract
  • impose arbitration where not agreed
    → Party autonomy preserved (Para 11)

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G. Non-binding clause – Future agreement required

• Clause stating disputes “can be settled by arbitration”:
  • only indicates future possibility
  • requires fresh consent
    → Not an arbitration agreement under law (Para 13)

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H. Result – Refusal to appoint arbitrator

• In absence of binding arbitration agreement:
  • Section 11 application not maintainable
    → Appeal dismissed (Para 13)

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ANALYSIS OF FACTS

1. Appellant entered into transport contract with respondent for export of goods. (Para 3)
2. Dispute arose when:
   • goods delivered without bill of lading
   • appellant suffered financial loss
     (Para 3)
3. Clause 25 of bill of lading stated:
   • disputes “can be settled by arbitration” (Para 3)
4. Appellant invoked arbitration → Respondent refused.
5. Section 11 application filed before Bombay High Court:
   • dismissed on ground that clause is not mandatory arbitration clause (Para 4)
6. Issue before Supreme Court:
   • Whether use of “can” creates binding arbitration agreement (Para 2)

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ANALYSIS OF LAW

1. Nature of Arbitration

• Arbitration is:
  • consensual
  • voluntary
• Tribunal derives jurisdiction only from consent (Para 6)

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2. Interpretation of “can”

• Court undertook lexical and contextual analysis:
  • “can” = possibility, capability
• Not equivalent to:
  • obligation or mandate

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3. Contractual Interpretation Principle

• Ex praecedentibus et consequentibus optima fit interpretatio
• Meaning derived from:
  • context
  • intention
• Court cannot:
  • import intention not expressed

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4. Requirements of Arbitration Agreement (K.K. Modi test)

Clause must show:

• binding decision
• adjudicatory mechanism
• enforceability
• intention to arbitrate

→ Present clause failed these requirements

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5. Precedent Analysis

Court distinguished cases where:

• arbitration was clearly intended
• or clause used mandatory language

Relied on:

• Jagdish Chander principle:
  → possibility ≠ agreement

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6. Section 11 Jurisdiction

• Court cannot:
  • create arbitration agreement
• Only verifies existence

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RATIO DECIDENDI

A clause providing that disputes “can be settled by arbitration” merely indicates a possibility or option and not a binding agreement to arbitrate; in absence of clear and mandatory intention to refer disputes to arbitration, such clause does not constitute an arbitration agreement under Section 7 of the Arbitration and Conciliation Act, and courts cannot compel reference to arbitration under Section 11. (Paras 7, 12, 13)

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CONCLUSION

• Clause held non-mandatory
• No binding arbitration agreement exists
• Section 11 application rightly rejected
• Appeal dismissed