Supreme Court Clarifies Arbitration Clauses
“Can Be Settled” Does Not Equal Mandate
Consent and Clear Intention Remain Essential
By Legal Reporter
New Delhi: April 18, 2026:
The Supreme Court recently addressed a crucial question in arbitration law: does a clause stating that disputes “can be settled by arbitration” automatically bind parties to arbitrate? The Court held that such language is permissive, not mandatory, and does not create an enforceable arbitration agreement under the Arbitration and Conciliation Act, 1996.
This ruling arose in a dispute where one party attempted to invoke arbitration based on a contract clause that merely suggested arbitration as a possible mode of settlement. The opposing party resisted, arguing that the clause lacked the mandatory intent required under law.
Legal Framework
- Arbitration and Conciliation Act, 1996: Governs arbitration agreements, proceedings, and enforcement in India.
- Section 7: Defines an arbitration agreement as one where parties agree to submit disputes to arbitration. The agreement must be explicit, unequivocal, and reflect a binding intention.
- Section 11: Empowers courts to appoint arbitrators when parties fail to agree, but only if a valid arbitration agreement exists.
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Supreme Court’s Reasoning
The Court emphasized that:
- The phrase “can be settled by arbitration” is directory, not mandatory. It merely indicates arbitration as one of the possible options, not a binding commitment.
- For an arbitration agreement to be valid, parties must clearly express their intention to submit disputes to arbitration, leaving no ambiguity.
- Courts cannot compel arbitration unless the clause demonstrates a mandatory obligation.
The Bench drew upon earlier precedents:
- K.K. Modi v. K.N. Modi (1998): Held that arbitration requires certainty and binding intent.
- Jagatjit Industries Ltd. v. Prabhjit Singh (2019): Reiterated that vague or optional clauses do not constitute enforceable arbitration agreements.
- Perkins Eastman Architects v. HSCC (India) Ltd. (2019): Stressed the importance of neutrality and clarity in arbitration clauses.
Key Takeaways from the Judgment
- Mandatory vs. Permissive Language
- Words like “shall be referred to arbitration” create binding obligations.
- Words like “may be settled by arbitration” or “can be settled” are optional and non-binding.
- Consent is Central
- Arbitration is based on party autonomy. Without clear consent, arbitration cannot be imposed.
- Judicial Scrutiny
- Courts must carefully examine the wording of clauses before appointing arbitrators under Section 11.
- Drafting Lessons for Contracts
- Parties must use precise language to avoid disputes over enforceability.
- Ambiguity in drafting can derail arbitration proceedings and prolong litigation.
Broader Implications
This ruling strengthens the principle that arbitration is a consensual process. It prevents misuse of loosely worded clauses to drag parties into arbitration against their will. At the same time, it underscores the importance of careful contract drafting, especially in commercial agreements where arbitration is often preferred for speedy resolution.
By clarifying the distinction between permissive and mandatory clauses, the Court has provided guidance to businesses, lawyers, and drafters to ensure that arbitration agreements are enforceable and effective.
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FAQ: Key Legal Points
Q1. What is an arbitration agreement under Indian law?
An agreement where parties explicitly agree to submit disputes to arbitration, as defined under Section 7 of the Arbitration and Conciliation Act, 1996.
Q2. Does the phrase “can be settled by arbitration” create a binding obligation?
No. It is permissive and optional, not mandatory. Arbitration requires clear and unequivocal consent.
Q3. What kind of wording makes arbitration mandatory?
Phrases like “shall be referred to arbitration” or “disputes will be settled by arbitration” indicate binding intent.
Q4. Why is consent important in arbitration?
Arbitration is based on party autonomy. Without clear consent, arbitration cannot be imposed by courts.
Q5. What role does Section 11 of the Arbitration Act play?
It allows courts to appoint arbitrators, but only if a valid arbitration agreement exists.
Q6. What happens if the clause is vague or optional?
Courts will not enforce arbitration. The dispute may proceed in regular civil courts.
Q7. What drafting lessons emerge from this ruling?
Contracts must use precise, mandatory language if parties intend arbitration. Ambiguity can lead to litigation.
Q8. How does this ruling affect businesses?
It ensures that arbitration remains consensual and prevents misuse of loosely worded clauses, encouraging better contract drafting.
In conclusion, the Supreme Court has reaffirmed that arbitration cannot be forced through vague or optional clauses. Only clear, mandatory language creates enforceable arbitration agreements—making precision in contract drafting more critical than ever.