Brief Overview

Indian law does not recognize optional arbitration clauses. A clause stating that parties “arbitration may be sought” is not a valid arbitration agreement under Section 7 of the Arbitration and Conciliation Act, 1996 (“A&C Act”).

For arbitration to be enforceable, the language must be definitive, using terms like “shall” or “will”, indicating that arbitration is the agreed mode of dispute resolution, not just a possibility.

Technical Details

1) Following were the key issues before the Indian Supreme Court:

(a) Whether an ‘optional’ arbitration constitute an arbitration agreement as per Section 7 of the A&C Act?

The Court held that an arbitration clause stating that arbitration “may be sought” does not constitute a binding arbitration agreement. Such clauses are merely enabling and require further consent from both parties. Citing Mahanadi Coalfields Ltd. v. IVRCL AMR JV (2022) and Jagdish Chander v. Ramesh Chander (2007), the Court reiterated that a mere reference to arbitration is insufficient if it lacks a clear obligation to arbitrate.

(b) Whether the question of existence of an arbitration agreement should be determined by the arbitral tribunal or by the courts at the referral stage?

The Court observed that referral courts can assess the existence of an arbitration agreement at a prima facie level under Section 7 of the A&C Act. If no valid agreement exists, courts are not obliged to refer the dispute to arbitration, and such questions need not be left solely to the arbitral tribunal.

JC takeaway

1) Ambiguous or optional arbitration clauses are not valid under Section 7 of the A&C Act.

2) A clear and mutual agreement to arbitrate is essential.

3) Courts can conduct a prima facie review of arbitration clauses in the proceedings under Section 11 of the A&C Act.

For further details, please see:

BGM AND M-RPL-JMCT (JV) VERSUS EASTERN COALFIELDS LIMITED (SLP (C) Diary No. 21451/2024)

For any queries/clarifications, please feel free to ping us and we will be happy to chat: