Supreme Court on Section 7: ‘May’ Clause Not a Valid Arbitration Agreement in BGM v. Eastern Coalfields

aaditya.bhatt — Thu, 24 Jul 2025 13:43:15 +0000

The Supreme Court’s Landmark Ruling

The Indian Supreme Court’s recent judgment in BGM and M-RPL-JMCT (JV) vs Eastern Coalfields Limited has provided much-needed clarity on what constitutes a valid arbitration agreement under the Arbitration and Conciliation Act, 1996[1]. The Court’s unequivocal ruling that a contract clause stating disputes “may be” referred to arbitration does not amount to a binding arbitration agreement has significant implications for commercial contracting and dispute resolution practice in India.

Understanding Section 7 of the Arbitration and Conciliation Act, 1996

Section 7 of the Arbitration and Conciliation Act, 1996, forms the cornerstone of arbitration law in India. The section 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][3]

The statutory requirements under Section 7 mandate that:

An arbitration agreement must be in writing
It may be in the form of an arbitration clause in a contract or a separate agreement
It must demonstrate clear intention to refer disputes to arbitration

The Critical Distinction: Enabling Clauses vs. Binding Agreements

What the Supreme Court Said

In the BGM case, the Supreme Court examined Clause 13 of a contract between Eastern Coalfields Limited and a joint venture. The relevant portion of the clause read:

“In case of parties other than Govt. Agencies, the redressal of the dispute may be sought through Arbitration and Conciliation Act, 1996 as amended by Amendment Act of 2015″[1]

The Court observed that this phraseology created merely an enabling clause rather than a binding arbitration agreement. Justice PS Narasimha and Justice Manoj Misra held:

“It is just an enabling clause whereunder, if parties agree, they could resolve their dispute(s) through arbitration. The phraseology of clause 13 is not indicative of a binding agreement that any of the parties on its own could seek redressal of inter se dispute(s) through arbitration”[1][4][5]

Legal Principles Established

The Supreme Court established several crucial principles:

Language Matters: The use of “may be sought” implies no subsisting agreement between parties to arbitrate[1]
Mandatory vs. Permissive: An enabling clause requiring future consent differs fundamentally from a binding arbitration agreement[6]
Intention Test: The clause must demonstrate unequivocal intention to refer disputes to arbitration without requiring further consent[7][8]

Global Perspective on “May” vs. “Shall” in Arbitration Clauses

The International Approach

Courts worldwide have grappled with the interpretation of permissive language in arbitration clauses. The distinction between mandatory and permissive arbitration clauses has evolved differently across jurisdictions:

United States: Most American courts hold that language providing a party “may” submit disputes to arbitration creates mandatory arbitration once invoked[9][10]. The rationale is that without this interpretation, arbitration clauses would become meaningless since parties could always voluntarily arbitrate[11].

United Kingdom: The Privy Council in Anzen Ltd v. Hermes One Ltd held that “may” language creates an option to arbitrate, exercisable by either party, rather than a binding obligation[12][13]. English courts require “shall” or “must” for binding arbitration agreements[12].

India: The Supreme Court’s approach aligns more closely with the English position, requiring clear mandatory language for valid arbitration agreements.

Essential Elements of a Valid Arbitration Agreement

Based on judicial precedents and statutory requirements, a valid arbitration agreement must contain[7][8]:

1. Clear and Unambiguous Intention to Arbitrate

The agreement must demonstrate an unequivocal intention of parties to refer disputes to arbitration without leaving the decision to future consent or negotiation.

2. Obligation to Submit Disputes

The Supreme Court in Jagdish Chander v. Ramesh Chander held that an arbitration agreement cannot require further agreement for reference to arbitration[7][8].

3. Reference to Neutral Tribunal

The agreement should provide for resolution by an impartial arbitrator or arbitral tribunal.

4. Defined Scope

The agreement must clearly specify which disputes are covered by the arbitration clause.

Drafting Best Practices: Avoiding Pathological Clauses

Recommended Language

For Mandatory Arbitration:

“Any dispute, controversy or claim arising out of or relating to this contract shall be settled by arbitration in accordance with [applicable rules]”

Avoid:

“Disputes may be referred to arbitration if parties agree”

“The parties can resolve disputes through arbitration”

Key Drafting Principles

Use Mandatory Language: Employ “shall,” “will,” or “must” rather than “may,” “can,” or “might”[12][14][15]
Be Specific: Clearly define the scope of disputes covered[15]
Avoid Ambiguity: Ensure the clause leaves no room for interpretation regarding the parties’ obligation to arbitrate[15]
Include Essential Details: Specify the seat of arbitration, applicable rules, and method of appointing arbitrators[14][15]

Section 11 and Judicial Intervention

Section 11 of the Arbitration and Conciliation Act empowers courts to appoint arbitrators when parties cannot agree. However, the 2015 Amendment restricted judicial intervention through Section 11(6A), which limits courts to examining only the “existence” of an arbitration agreement[16][17].

The Supreme Court in BGM confirmed that courts must confine their examination to whether a valid arbitration agreement exists, without delving into the merits of the dispute[1][5].

Recent Judicial Trends

The Pro-Arbitration Stance

Recent Supreme Court decisions demonstrate a pro-arbitration approach while maintaining strict standards for what constitutes a valid arbitration agreement:

Tarun Dhameja v. Sunil Dhameja: The Court held that arbitration cannot be “optional” requiring mutual consent of all parties[18][19][20]
N.N. Global Mercantile v. Indo Unique Flame: A seven-judge Constitution Bench held that unstamped arbitration agreements remain valid[17]

Evolution of Jurisprudence

Indian arbitration law has evolved significantly since the BALCO case (2012), which restricted judicial intervention in international arbitrations[21]. The 2015 amendments further strengthened this approach by limiting court interference[16].

Practical Implications for Commercial Practice

For Businesses

Review Existing Contracts: Companies should audit their dispute resolution clauses to ensure they contain mandatory arbitration language
Standardize Language: Adopt model arbitration clauses from recognized institutions
Legal Consultation: Engage experienced counsel when drafting arbitration agreements

For Legal Practitioners

Careful Drafting: Pay close attention to the language used in arbitration clauses
Client Education: Inform clients about the difference between enabling clauses and binding arbitration agreements
Precedent Awareness: Stay updated with evolving jurisprudence on arbitration agreements

Comparative Analysis: Different Types of Arbitration Clauses

Type	Language	Effect	Enforceability
Mandatory	“shall,” “must,” “will”	Binding obligation to arbitrate	Fully enforceable[12][14]
Permissive/Optional	“may,” “can,” “might”	Creates option, not obligation	Limited enforceability[9][22]
Enabling	“may be sought,” “can be resolved”	Requires further consent	Not enforceable as standalone agreement[1][6]

The Doctrine of Separability and Arbitration Agreements

The doctrine of separability, codified in Section 16(1) of the Arbitration Act, treats arbitration clauses as separate agreements independent of the main contract[23]. This principle ensures that even if the main contract is void, the arbitration agreement can survive, provided it meets the requirements of Section 7[24][23].

Future Outlook and Legislative Developments

The establishment of the Arbitration Council of India under Part IA of the Act (Sections 43A-43M) represents a significant step toward institutionalizing arbitration in India[2]. The Council’s role in grading arbitral institutions and accrediting arbitrators will likely influence how arbitration agreements are interpreted and enforced.

Conclusion

The Supreme Court’s decision in BGM v. Eastern Coalfields Limited provides essential clarity on the distinction between binding arbitration agreements and mere enabling clauses. The ruling reinforces that intention matters in arbitration law – parties must demonstrate clear, unambiguous commitment to resolve disputes through arbitration.

For the legal community and business practitioners, this judgment serves as a crucial reminder that words matter in contract drafting. The difference between “may” and “shall” can determine whether a dispute ends up in arbitration or faces prolonged litigation over the validity of the arbitration clause itself.

As India continues to strengthen its position as an arbitration-friendly jurisdiction, understanding these fundamental principles becomes increasingly important for all stakeholders in the dispute resolution ecosystem. The key takeaway is clear: if parties genuinely intend to arbitrate their disputes, their agreement must reflect that intention in mandatory, unambiguous language that creates binding obligations rather than mere possibilities.

Citations:

[1] Contract clause saying disputes ‘may be’ referred to arbitration is not an arbitration agreement: Supreme Court https://www.barandbench.com/news/litigation/contract-clause-saying-disputes-may-be-referred-to-arbitration-is-not-an-arbitration-agreement-supreme-court

[2] Arbitration agreement – India Code: Section Details https://www.indiacode.nic.in/show-data?actid=AC_CEN_3_46_00004_199626_1517807323919&orderno=7

[3] Arbitration and Conciliation Act, 1996 – India Code https://www.indiacode.nic.in/bitstream/123456789/1978/3/a1996-26.pdf

[4] COMMERCIAL ARBITRATION ACT 2011 – SECT 11 Appointment of arbitrators (cf Model Law Art 11) http://www8.austlii.edu.au/cgi-bin/viewdoc/au/legis/vic/consol_act/caa2011219/s11.html

[5] V101- Arbitration Law -1 || Appointment of Arbitrators in India by High Courts & Supreme Court https://www.youtube.com/watch?v=t322oag6JKU

[6] October 19 2023 https://www.cliffordchance.com/content/dam/cliffordchance/briefings/2023/10/supreme-court-provides-guidance-on-matters-falling-within-scope-of-an-arbitration-agreement.pdf

[7] Arbitration Agreements Outside The Scope Of A Signed Document: An Unconventional Mechanism To Submit https://www.mondaq.com/india/trials-amp-appeals-amp-compensation/1059004/arbitration-agreements-outside-the-scope-of-a-signed-document-an-unconventional-mechanism-to-submit-a-dispute-to-arbitration

[8] Arbitration in 2024: Landmark Rulings and Key Takeaways https://www.scconline.com/blog/post/2025/01/08/arbitration-2024-landmark-cases/

[9] Examining the Validity of Asymmetrical and Optional Arbitration … https://www.scconline.com/blog/post/2022/02/15/examining-the-validity-of-asymmetrical-and-optional-arbitration-clauses/

[10] Arbitration Clauses in Construction Agreements: Mandatory or … https://www.airdberlis.com/insights/publications/publication/arbitration-clauses-in-construction-agreements-mandatory-or-permissive

[11] [PDF] Guide to Drafting ADR Clauses https://sadr.org/assets/uploads/download_file/Guide_To_Drafting_ADR_Clauses_EN.pdf

[12] Drafting an Arbitration Agreement – CMS LAW-NOW https://cms-lawnow.com/en/ealerts/1999/04/drafting-an-arbitration-agreement

[13] [PPT] Drafting Arbitration Clause – University of Delhi https://lc2.du.ac.in/DATA/VI%20Tth%20Semester%20(ADR)%20PPT%20Drafting%20Arbitration%20Clause%20by%20Dr.%20Ashish%20Kumar.pptx

[14] INDIAN SUPREME COURT CLARIFIES APPLICABILITY OF THE … https://www.hsfkramer.com/notes/arbitration/2023-12/indian-supreme-court-clarifies-applicability-of-the-group-of-companies-doctrine-in-cox-and-kings-ltd-v-sap-india-private-ltd

[15] [PDF] ARBITRATION IN INDIA – Lakshmikumaran & Sridharan https://www.lakshmisri.com/Media/Uploads/Documents/L&S_Arbitration_Booklet_Oct2014.pdf

[16] Opening Pandora’s Box: Unpacking the Principles Relating to the Law Governing the Arbitration Agreement Across Various Jurisdictions | Withers https://www.withersworldwide.com/en-gb/insight/read/unpacking-principles-relating-to-law-governing-arbitration-agreement-across-various-jurisdictions

[17] Supreme Court Of India Clarifies ‘What Is Arbitrable’ Under Indian Law And Provides Guidance To Forums In Addressing The Question https://www.livelaw.in/law-firms/articles/supreme-court-clarifies-arbitrable-indian-law-168218

[18] Differential and More Favourable Treatment Reciprocity and Fuller … https://www.wto.org/english/docs_e/legal_e/enabling1979_e.htm

[19] When An Arbitration Clause Sounds Permissive But Is Not — Does “May” Really Mean “Must”? https://natlawreview.com/article/when-arbitration-clause-sounds-permissive-not-does-may-really-mean-must

[20] International Commercial https://www.skadden.com/-/media/files/publications/2014/04/april2014_draftingnotes.pdf

[21] The law of the arbitration agreement – which law applies and why does it matter? https://www.herbertsmithfreehills.com/notes/arbitration/2012-05/the-law-of-the-arbitration-agreement-which-law-applies-and-why-does-it-matter