In the case of BGM and M-RPL-JMCT (JV) v Eastern Coalfields Ltd, the Supreme Court clarified the requirements for an arbitration clause to qualify as a binding agreement under section 7 of the Arbitration and Conciliation Act, 1996. Relying on Jagdish Chander v Ramesh Chander (2007) and Mahanadi Coalfields Ltd v IVRCL AMR JV (2022), the court reiterated that the language and intent of the clause must unequivocally reflect consensus ad idem (agreement to the same thing) to arbitrate.
The dispute arose from a contract for the transportation and handling of goods. The appellants invoked clause 13 of the general terms and conditions – annexed to the e-tender notice – as an arbitration clause and filed an application under section 11(6) of the act seeking appointment of an arbitrator. Clause 13, titled “settlement of disputes”, stated that in cases involving non-government parties, disputes may be resolved under the act.
Eastern Coalfields opposed the application, arguing that clause 13 lacked the mandatory language required to constitute a valid arbitration agreement. The Calcutta High Court agreed, holding that the use of “may” indicated a non-binding, optional mechanism. It concluded that the clause did not reflect a definitive intent to arbitrate and dismissed the application.
Before the Supreme Court, the appellants contended that the clause became binding once arbitration was invoked, and that the high court’s role was limited to a prima facie determination of the existence of an arbitration agreement.
The respondent maintained that clause 13 merely enabled future agreement to arbitrate, and did not of itself constitute a binding arbitration agreement.
The Supreme Court upheld the high court’s decision, affirming that clause 13 did not satisfy section 7. It held that the phrase “may be sought” denotes a permissive provision, operative only on mutual agreement. The clause lacked the certainty and binding intent necessary to constitute an arbitration agreement. Arbitration cannot be imposed unilaterally where the clause merely provides an option.
The court clarified that, under section 11(6A) of the act, the referral court must be prima facie satisfied of an arbitration agreement, applying limited scrutiny of documents to exclude frivolous claims. If multiple documents are involved and a prima facie case is made out, the matter may be referred to arbitration. In this case, no such prima facie agreement existed. The Supreme Court reinforced that permissive language such as “may” does not create a binding obligation to arbitrate and dismissed the appeal.
The dispute digest is compiled by Numen Law Offices, a multidisciplinary law firm based in New Delhi & Mumbai. The authors can be contacted at support@numenlaw.com. Readers should not act on the basis of this information without seeking professional legal advice.
