In today’s fast-paced commercial world where time is money and litigation are often a long and winding road, arbitration stands as the knight in shining armor for parties seeking quick, confidential, and cost-effective dispute resolution. Arbitration has long been championed as the backbone of alternative dispute resolution (ADR), offering efficiency, confidentiality, and party autonomy in a world where litigation often translates into years of delay and mounting costs. India’s tryst with arbitration began under the Arbitration Act of 1940, which was often criticized for fostering excessive court intervention. The paradigm shift came with the Arbitration and Conciliation Act, 1996, modelled on the UNCITRAL Model Law, aimed at bringing India in line with global best practices. Over the years, amendments in 2015, 2019, and 2021 further sought to strengthen arbitration’s position, promising a streamlined mechanism to decongest courts and build confidence among foreign investors.
Yet, at the heart of this mechanism lies the arbitration agreement; the very engine that sets the arbitral process in motion. Without it, arbitration is like a ship without a sail destined to go nowhere. The recent ruling[1] by the Hon’ble Supreme Court of India has once again stirred the waters by highlighting how mere permissive language in dispute resolution clauses may render arbitration agreements invalid and unenforceable.
THE ARBITRATION AGREEMENT: NOT JUST FINE PRINT
An arbitration agreement is not merely a boilerplate clause appended at the end of a commercial contract. Rather, it is the jurisdictional cornerstone upon which arbitral tribunals derive their authority. Section 7(1) of the Arbitration and Conciliation Act, 1996 defines an arbitration agreement as an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not.[2] For an arbitration agreement to be valid and enforceable, it must reflect a clear, unequivocal, and binding intent of the parties to refer disputes to arbitration. Ambiguity in language or mere contemplation of arbitration without a mandate to do so could defeat its very purpose.
In K.K. Modi v. K.N. Modi, (1998) 3 SCC 573, the Supreme Court cautioned against clauses that merely express a general intention to arbitrate without creating a binding obligation. Similarly, in Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd., (2011) 5 SCC 532, the Court clarified that not all disputes are arbitrable and emphasized the need for careful drafting to avoid jurisdictional issues.
Thus, an arbitration agreement is not an afterthought or legal ornament but the jurisdictional foundation that grants life to the arbitral tribunal.
TYPES OF ARBITRATION AGREEMENTS: ONE SIZE DOESN’T FIT ALL
Arbitration agreements manifest in diverse forms, often tailored to suit the nature of the relationship and potential disputes. Broadly, they fall into two categories:
> Pre-dispute Arbitration Clauses: These are prospective in nature and embedded in contracts before any dispute arises. They create an obligation to arbitrate future disputes. Such clauses are commonplace in commercial contracts, offering predictability and procedural clarity. For example, in long-term construction contracts, the parties ensure that disputes are channeled to arbitration rather than courts.
> Post-dispute Submission Agreements: These are entered into after a dispute has emerged, often when no arbitration clause was agreed to beforehand. Although less common, they still carry equal legal weight, provided the intent is unambiguous and in writing.
Under Section 7(2) of the Arbitration and Conciliation Act, 1996, an arbitration agreement can take various written forms. It may be included as a clause within a main contract or exist as a separate agreement focused solely on arbitration. Such agreements can also arise through written exchanges like emails or letters, where both parties clearly agree to arbitrate. Even a reference to an arbitration clause in another document is valid, provided it is accepted in writing. These flexible forms reflect the importance of party autonomy in arbitration law.
TWO-TIER ARBITRATION AGREEMENTS: A DOUBLE EDGED SWORD
In an attempt to strike a balance between internal resolution and external adjudication, some contracts incorporate two-tier arbitration agreements. These are multi-layered dispute resolution mechanisms wherein disputes must first be referred to a designated authority, such as a project engineer or an internal committee, and only if unresolved, escalated to formal arbitration. While theoretically beneficial and offering a chance to nip disputes in the bud; two-tier arbitration agreements must be drafted with caution. Any ambiguity regarding whether the first tier is mandatory or optional can give rise to jurisdictional challenges and procedural deadlocks.
While interpreting Section 35 of the Arbitration and Conciliation Act, 1996,[3] the Supreme Court in Centrotrade Minerals and Metals Inc. v. Hindustan Copper Ltd.[4]clarified that the phrase “final and binding” in the Act does not mean that an arbitral award is absolutely final in every situation. The Court rejected the earlier view that once an arbitral tribunal gives an award, the original dispute cannot be reopened. Instead, it held that parties are free to agree to a two-tier arbitration process, where an award made in the first round of arbitration can be reviewed or appealed before a second arbitral forum. Although the law does not explicitly mention two-tier arbitration, the Court emphasized that party autonomy i.e., the freedom of parties to decide how their disputes will be resolved, is a central principle of Indian arbitration law. So, if parties agree to a multi-level arbitration structure, it is legally valid as long as their intention is clearly recorded in the agreement.
The Arbitration and Conciliation (Amendment) Bill 2024, by recognizing the concept of ‘Appellate Tribunal’ is attempting to cloth the two-tier arbitration in a statutory framework.
THE SUPREME COURT’S RECENT JUDGMENT: “MAY” IS NOT “SHALL”
In a much-discussed ruling dated July 18, 2025 in BGM & M-RPL-JMCT (JV) v. Eastern Coalfields Limited,[5] the Hon’ble Supreme Court of India emphatically reiterated that a clause which merely states that parties “may seek arbitration” does not create a binding arbitration agreement. The facts were straightforward, the contract in question included a dispute resolution clause that read: “In case of any dispute or difference, parties may seek to resolve the matter through arbitration.” Upon arising of dispute, one party sought to invoke arbitration, while the other objected, stating that the clause lacked mandatory intent. The Hon’ble Court agreed. It held that for a clause to qualify as an arbitration agreement under Section 7, it must show a firm, binding, and enforceable obligation to refer disputes to arbitration. The use of the word “may” instead of “shall” left the arbitration decision entirely at the discretion of the parties, thereby stripping the clause of the enforceability needed to constitute a valid agreement.
Referring to the earlier case of Jagdish Chander v. Ramesh Chander,[6] the Court once again made it clear that vague or optional wording in an arbitration clause does not meet the legal requirements. In Chander’s case, the Court held that a clause in a contract can be construed as an ‘arbitration agreement’ only if an agreement to refer disputes or differences to arbitration is expressly or impliedly spelt out from the clause. Therefore, the main takeaway is simple: just saying that arbitration is a possibility isn’t enough; it has to be a clear and definite agreement.
COMPARATIVE PERSPECTIVE: HOW OTHER JURISDICTIONS VIEW PERMISSIVE LANGUAGE
Globally, courts have taken similar approaches:
– United Kingdom: In Aughton Ltd. v. M.F. Kent Services Ltd., [1991] 57 BLR 1, English courts insisted that arbitration clauses must reflect a clear intent; optional clauses were unenforceable.
– Singapore: Courts applying the Singapore International Arbitration Act emphasise that the parties’ intent must be mandatory for arbitration to be invoked (see Insigma Technology Co. Ltd. v. Alstom Technology Ltd., [2009] SGCA 24).
– UNCITRAL Model Law: The model law, adopted by India, requires arbitration agreements to be “in writing” and to reflect a binding intent. Ambiguous language falls short.
Thus, the Indian position is harmonised with global standards, ensuring predictability for cross-border contracts.
LESSONS IN DRAFTING: DOT THE I’S AND CROSS THE T’S
What this decision underscores is not merely a technicality but a foundational flaw that can derail the entire dispute resolution process. So, what should drafters watch out for?
> Use mandatory language: Avoid ambiguous verbs like “may” or “can.” Instead, use definitive words such as “shall” or “must.”
> Define the scope: Clearly outline the types of disputes covered; whether contractual, tortuous, or statutory.
> Set procedural terms: Indicate the rules governing arbitration (e.g., UNCITRAL, ICC, SIAC), seat and venue, language, number of arbitrators, and appointment mechanism.
> Harmonize with other clauses: Avoid contradictions between dispute resolution clauses and jurisdiction clauses.
These best practices not only make arbitration clauses legally sound but also enhance party autonomy and predictability which stand as the pillars of arbitral jurisprudence.
THE BIGGER PICTURE: AVOIDING THE COURTROOM DETOUR
In the absence of a valid arbitration agreement, even the best intentions to arbitrate can be thwarted. The courts, bound by the statutory mandate, cannot step in to rewrite or enforce incomplete clauses. As a result, parties may be thrown back into traditional litigation, defeating the very essence of opting for arbitration in the first place. Moreover, vague clauses are fertile ground for preliminary litigation, ironically leading to protracted court battles.
CONCLUSION: DRAFTING WITH AN EYE ON THE GAVEL
In essence, arbitration is a creature of contract. The arbitration agreement is not a mere accessory; it is the very lifeblood of the arbitral process. The recent Supreme Court ruling is a timely reminder that words matter, especially when those words determine the fate of millions in commercial disputes. For legal professionals, this is a clarion call to craft clauses with care, ensuring that the arbitration agreement not only reflects the commercial intent but also withstands judicial scrutiny. Because in arbitration, clarity is power and ambiguity is the silent assassin.
[1] BGM AND M-RPL-JMCT (JV) v/s EASTERN COALFIELDS LIMITED; SLP (C) Diary No. 21451/2024; July 18, 2025
[2] The Arbitration & Conciliation Act, No. 26 of 1996, § 7.
[3] The Arbitration & Conciliation Act, No. 26 of 1996, § 35.
[4] 2020 S.C.C. OnLine S.C. 479.
[5] 2025 LiveLaw (SC) 731.
[6] Jagdish Chander v. Ramesh Chander (2007) 5 SCC 719.
