Consent, clarity and arbitration clause lessons

In Nagreeka Indcon Products Pvt Ltd v Cargocare Logistics (India) Pvt Ltd, the Supreme Court held that the word “can” within an arbitration clause connotes mere permissibility, not a mandatory obligation to arbitrate. The decision reaffirms a cardinal principle of arbitration jurisprudence: arbitral jurisdiction derives from unequivocal party consent expressed in clear contractual terms, not from implication.

The conflict arose out of a commercial shipping transaction governed by bills of lading, stipulating that disputes can be settled by arbitration in India or a place mutually agreed on.

‘Can’ clause defeats section 11

Following disputes concerning the delivery of goods and alleged financial loss, the appellant filed a petition under section 11 of the Arbitration and Conciliation Act, 1996. The respondent resisted the reference, contending that the clause did not impose any mandatory arbitral obligation. Both the Bombay High Court and the Supreme Court upheld this objection.

A single word was responsible for this dispute. Distinguishing “can” from mandatory expressions such as “shall”, the court observed that the former indicates mere permissibility, not obligation. Accordingly, a clause providing that disputes can be settled by arbitration treats arbitration as one possible mode of dispute resolution, rather than a binding contractual mechanism.

Central to the judgment is the court’s emphasis on arbitration as a consent-based mechanism. Relying on Cox & Kings Ltd v SAP India (P) Ltd, the court reiterated that an arbitral tribunal derives its jurisdiction from party consent. While arbitration offers efficiency, confidentiality and procedural flexibility, parties cannot be compelled to arbitrate in the absence of an unequivocal agreement.

The court further placed reliance on Jagdish Chander v Ramesh Chander & Ors, where clauses providing that parties may arbitrate if they so decide were characterised as mere “agreements to agree”. Reaffirming this, the court held that a clause requiring fresh consent at the time of dispute cannot constitute a valid arbitration agreement under section 7 of the above-mentioned act.

Consent required for liberal construction

Notably, the court declined to adopt an expansive pro-arbitration construction. While the appellant relied on Vidya Drolia & Ors v Durga Trading Corporation, and Enercon (India) Ltd & Ors v Enercon GmbH & Anr, which favour a liberal construction of arbitration clauses, the court clarified that such principles apply only where the parties are already ad idem (of the same mind) on arbitration itself. Liberal construction, in other words, presupposes a foundation of consent; it cannot substitute for one.

The ruling is significant for commercial contracting. Dispute resolution clauses are frequently treated as boilerplate provisions, reproduced from prior drafts, minimally negotiated, and rarely scrutinised until a dispute arises, at which point it is too late. The Nagreeka Indcon case underscores the hazards of imprecise contractual drafting, where a single word rendered the arbitral mechanism unenforceable. The court also observed the absence of a complete procedure for constituting the tribunal, including the appointment of a presiding arbitrator. The judgment signals that courts will not reconstruct an arbitral framework where the parties’ intention to arbitrate itself remains uncertain.

The decision is relevant to industries reliant on standard-form contracts, including shipping, logistics, infrastructure and international trade. Bills of lading and transport contracts are frequently reproduced from existing templates without adequate regard to evolving arbitration jurisprudence. This is not merely an academic concern. Ambiguities in dispute resolution clauses can lead to jurisdictional disputes, parallel proceedings, and increased costs and delays.

The prescription is unambiguous: arbitration clauses must employ mandatory language, expressly designating arbitration as the chosen dispute resolution mechanism, and provide a procedure for constituting the tribunal. Expressions such as “can”, “may”, or “if parties agree” risk engendering precisely the uncertainty that arbitration is designed to avoid.

Courts cannot conjure arbitral consent

Ultimately, the Nagreeka Indcon case signals an exacting approach to arbitration agreements while reaffirming party autonomy as the foundational premise of arbitration jurisprudence. While other arbitration-friendly jurisdictions adopt a liberal and commercially pragmatic construction of arbitration clauses, they too require unequivocal consent to arbitrate.

The decision underscores a truth easily overlooked in the frenzy of commercial negotiation: Courts may construe arbitration agreements liberally, but they cannot conjure consent where none exists.

Hiral Gupta is a partner and Surabhi Sharan is a senior associate at Bharucha & Partners