Author: Harsh Khanchandani*
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Introduction
The basis of arbitration is party consent. But whether parties have in fact agreed to arbitrate is often much more complicated than the premise suggests, particularly where the contractual language is permissive rather than mandatory. This issue has recently been considered by the Supreme Court of India in Nagreeka Indcon Products Pvt. Ltd. v. CargoCare Logistics (India) Pvt. Ltd., where the Supreme Court of India considered whether a clause providing that “any difference of opinion or dispute thereunder can be settled by arbitration in India or a place mutually agreed with each party appointing an arbitrator” meets the statutory requirements for an arbitration agreement under Section 7 of the Arbitration and Conciliation Act, 1996. The Court answered that question in the negative, adopting a literal and narrow reading of the clause. The decision thus raises a significant question in arbitration law: if contractual language reflects an apparent intention to arbitrate, how clearly must that intention be expressed before a court will recognize a valid arbitration agreement? More generally, the decision highlights the tension between two competing considerations: ensuring certainty as to the parties’ consent to arbitrate while respecting party autonomy by giving effect to the language they chose.
The decision raises broader questions about how permissive terms such as “may” and “can” should be interpreted in arbitration agreements. Comparing the Court’s reasoning with approaches taken in other common law jurisdictions highlights the competing roles of party consent and commercial intent in resolving that question.
Brief facts
Nagreeka Indcon Products Pvt. Ltd (the appellant), a manufacturer of kitchen rolls and aluminium foil containers, engaged CargoCare Logistics (India) Pvt. Ltd (the respondent) as a freight forwarder for transportation of six containers to South Carolina.. The appellant had received an export order for corrugated aluminium foil boxes from an American buyer and engaged the respondent to transport six containers to South Carolina. Five containers were delivered without incident. The sixth, however, was released to the buyer in October 2020 without payment or production of the original bill of lading. The buyer then failed to pay for the goods, giving rise to the dispute. When the appellant raised the issue with the respondent about two months later, the respondent maintained that it bore no responsibility because the parties had an established practice of delivering cargo without production of the original bill of lading.
Unable to resolve the issue amicably, the appellant sent a notice of arbitration in March 2022, citing Clause 25 of the Bill of Lading entered into between the parties (“BOL”) which was titled “Arbitration” and provided that disputes “can be settled by arbitration in India.” The respondent contested the invocation, inter alia, arguing that the use of “can” made arbitration permissive rather than mandatory and therefore did not create a valid arbitration agreement. The Bombay High Court agreed and rejected the appellant’s application under Section 11 of the Arbitration and Conciliation Act, 1996, for appointment of an arbitrator. The appellant appealed to the Supreme Court.
Holding and Reasoning
The Supreme Court affirmed the decision of the High Court and dismissed the appeal, holding that Clause 25 of the BOL did not constitute a binding arbitration agreement enforceable under Section 11. The Supreme Court ruled that, unlike “shall,” the word “can” ordinarily refers to capacity or potential rather than obligation. Its inclusion in a dispute resolution clause, without more, suggested that arbitration remained a viable option for resolving conflicts, rather than the exclusive process to which the parties had unambiguously committed themselves.
The Court also considered and distinguished the decisions in Eastern Coalfields Ltd. v. Sanjay Transport Agency, Babanrao Rajaram Pund v. Samarth Builders and Developers, and other cited by the appellants. The Court held that in each of the cited cases, the parties accepted arbitration as the selected forum, allowing the courts to settle disputes only pertaining to the scope, operation, or procedural aspects of the arbitration agreement. In contrast, Nagreeka raised the more fundamental question of whether there had ever been consensus ad idem agreement to arbitrate at all.
On this premise, the Court then proceeded further to consider the statutory requirements for a valid arbitration agreement as laid down in K.K. Modi v. K.N. Modi, and emphasized that the clause must represent a binding consensus between the parties to submit disputes to arbitration. It also relied on the test developed in Jagdish Chander v. Ramesh Chander, wherein the phrase that disputes “can” or “may” be referred to arbitration was interpreted to mean that an additional act of consent would still be required before arbitration could begin. The Nagreeka Court held that such clauses only amounted to an agreement to agree to arbitration and did not constitute an enforceable arbitration agreement under Section 7.
The Court further noted that Clause 25 was silent on the nomination of the presiding arbitrator and, when combined with its permissive wording, gave the impression of an incomplete and exploratory arrangement rather than a completed agreement to arbitrate. Even at the referral stage, the Court ruled that judicial scrutiny cannot create consent if the agreement between the parties itself does not disclose it. Drawing on Narasimha J.’s concurring opinion in Cox & Kings Ltd. v. SAP India (P) Ltd., the Nagreeka Court held that consent remains the necessary foundation of an arbitral tribunal’s jurisdiction, and that no commercially convenient interpretation can compensate for its absence.
Other jurisdictions have confronted the same tension between requiring clear consent to arbitrate and giving effect to the parties’ commercial expectations.
International Perspective
1. United Kingdom
In Fiona Trust & Holding Corp v Privalov, the House of Lords considered whether claims that a number of charterparties had been obtained through bribery were within the scope of the parties’ arbitration agreements. The shipowners commenced proceedings in English court seeking to rescind the contracts, while the defendants sought a stay in favor of arbitration. The relevant clause provided that either party “may,” by written notice, elect to refer a dispute to arbitration in London.
The House of Lords rejected a strict and literal reading of the clause and stressed that arbitration agreements should be interpreted in the context of commerce and in line with the assumption that the parties intended to settle any disputes which arose out of their contractual relationship by means of the arbitral forum to which they had agreed. Because the word “may” was used, arbitration was not regarded as merely optional in the sense of requiring the parties to reach a new agreement. On the contrary, once one party had exercised its right under the contract to choose arbitration, the other party was then bound by that choice.
A similar question was raised in Anzen Limited v Hermes One Limited, involving a shareholders’ agreement providing that “any Party may submit the dispute to binding arbitration.” After one shareholder commenced litigation in the British Virgin Islands, the other sought a stay in favor of arbitration.
The main issue was whether the word “may” meant that arbitration had to be started before a party could ask for a stay. The Privy Council adopted an intermediate interpretation by permitting a party to exercise its contractual right to arbitrate either by initiating arbitration or by making a clear demand for it, including by seeking a stay, as was done in this case. The Privy Council held that litigation was only accessible until one party explicitly chose arbitration, at which point the matter was compelled to be resolved through the arbitration process, making the arbitration clause as mandatory.
2. Canada
In Canadian National Railway Co v Lovat Tunnel Equipment Inc, the Ontario Court of Appeal dealt with a similar dispute-resolution provision that said, “the parties may refer any dispute under this Agreement to arbitration.” After Canadian National Railway commenced proceedings concerning alleged defects in tunnel-boring equipment, Lovat sought a stay in favour of arbitration. The Court held that the clause conferred a unilateral right on either party to elect arbitration; once exercised, arbitration became mandatory and the court’s jurisdiction was excluded. The Court rejected an interpretation requiring fresh post-dispute consent, observing that such a reading would deprive the clause of any independent legal effect. Thus, absent an election to arbitrate, the dispute could proceed in court, but once either party elected arbitration, the parties were bound to that forum.
3. United States
American courts have followed an essentially similar approach to interpreting such clauses. In Benihana of Tokoyo, LLC v. Benihana, Inc., the United States District Court for the Southern District of New York evaluated a license agreement that stated that issues “may” be resolved by binding arbitration. The Court clarified that this phrase does not require any party to initiate arbitration; a claimant is free, in the first instance, to seek litigation or another route entirely. However, that freedom lasts only as long as the other party does not exercise its own right to arbitrate. If a party does, arbitration ensues. Drawing on its previous reasoning in Travelport Global Distribution Systems B.V. v Bellview Airlines Ltd, the Court observed that reading “may” as requiring fresh consent from both parties would render the arbitration clause commercially meaningless, because parties can always agree to arbitrate after a dispute arises regardless of their contract.
A similar approach was taken in City of Louisa v Newland, where the arbitration clause provided that disputes “may be decided by arbitration” under the applicable AAA rules. The Supreme Court of Kentucky held that, although the clause used permissive language, it made arbitration compulsory once either party exercised the right to demand.
4. Australia
Similarly, in Pipeline Services WA Pty Ltd v ATCO Gas Australia Pty Ltd, the Supreme Court of Western Australia considered a multi-stage dispute-resolution system, with the final step stating that “either party may by notice to the other party refer the dispute to arbitration.” Following the termination of a pipeline installation contract, Pipeline Services filed a breach of contract suit, and ATCO sought a stay under the Commercial Arbitration Act 2012. The court held that the arbitration agreement survived termination and gave either party an enforceable right to elect arbitration. Once ATCO exercised that right through its stay application, the dispute was referred to arbitration.
Analysis and Conclusion
These rulings demonstrate that the difference between Nagreeka and the comparative authorities is more than just semantics in terms of interpreting words. What distinguishes them is the legal significance attached to the terms “may” and “can” within the business context of the parties’ agreement. The comparative authorities do not treat arbitration as mandatory because the clause uses mandatory language. Rather, they view the parties as having agreed in advance that a unilateral election by either party will bind both.
The Indian method is based on a textual interpretation of consent. Beginning with Jagdish Chander v Ramesh Chander and reaffirmed in Nagreeka, the Supreme Court has repeatedly maintained that an arbitration agreement arises only when the parties have clearly agreed to submit matters to arbitration. Any provision that requires fresh agreement or consensus before arbitration may begin is treated as an agreement to agree and falls outside the definition of an arbitration agreement under Section 7 of the Arbitration and Conciliation Act, 1996.
This is not to argue that the Supreme Court’s interpretation of “can” is incorrect. From a linguistic perspective, it is completely justifiable; the challenge is not in the semantic analysis but rather in the interpretive approach that is used. The Court prioritizes textual clarity over commercial context by adopting the operative verb’s usual dictionary meaning as determinative of contractual intention. In contrast, the comparative authorities view arbitration clauses as commercial risk-allocation mechanisms that serve as a final forum for resolving disputes. They ask what reasonable commercial parties would have objectively intended the clause to accomplish rather than just what “may” or “can” mean in isolation.
This divergence, in turn, raises the larger question of whether Indian arbitration jurisprudence, in its treatment of such clauses, is advancing or undermining the pro-arbitration regime that it seeks to cultivate. Whether Indian arbitration law should continue to subscribe to this textual approach to consent, especially in the context of international commercial and maritime transactions, is an open question, and one of increasing significance as India seeks to establish itself as an arbitration-friendly jurisdiction while becoming more active in cross-border commerce.
*Harsh Khanchandani is an Associate in the Disputes practice at Trilegal, Mumbai, focusing on commercial disputes and arbitration. He has represented clients before the Supreme Court of India and Indian High Courts in complex commercial disputes. His research experience spans international arbitration and investment law, including work with British Institute of International and Comparative Law and Prof. Christoph Schreuer. He is a graduate of Symbiosis Law School, Pune.