Supreme Court Clarifies: Permissive Language in Dispute Resolution Clause Does Not Amount to a Binding Arbitration Agreement

The Supreme Court of India recently addressed a significant question in the realm of arbitration law: when a contractual dispute resolution clause employs the word "can" in the context of referring disputes to arbitration, does such language create a binding and mandatory obligation on both parties to arbitrate? The answer, as the Court firmly held, is no.

The case of Nagreeka Indcon Products Pvt. Ltd. Vs Cargocare Logistics (India) Pvt. Ltd. (Supreme Court of India) arose from a commercial transportation arrangement and turned on the interpretation of a single clause in a bill of lading. The outcome has significant implications for how arbitration clauses are drafted and interpreted across commercial contracts in India.

Facts of the Case

Nagreeka Indcon Products Pvt. Ltd., a manufacturer of aluminium foil containers and kitchen rolls, had entered into a contract for the purchase of corrugated aluminium foil boxes from M/s American Alupack Industries (AAI), with the final product to be delivered to South Carolina, USA. For this purpose, the appellant engaged Cargocare Logistics (India) Pvt. Ltd. as the transporting party for a total consideration of Rs. 2,23,550/-, covering freight charges, ocean freight, ACD charges, container maintenance charges, and other related costs. The consignment comprised six containers in total.

Four of the six containers were delivered without incident. However, a dispute arose in connection with the delivery of the fifth container. On 21st October 2020, the respondent handed over goods to AAI without insisting on the production of the original bill of lading, and without receiving the requisite payment — a departure from standard practice. As a result, the appellant suffered a financial loss amounting to USD 28,064.86, as it did not receive payment for the goods supplied.

On 10th December 2020, the appellant raised this grievance with the respondent, who denied liability by asserting that a different past practice had been followed. The respondent maintained that delivery without production of the original bill of lading was an established course of dealing between the parties.

The Arbitration Clause in Dispute

The bills of lading issued by the respondent contained Clause 25, a dispute resolution provision, which read as follows:

"25. Arbitration: The contract evaluated hereby or contained herein shall be governed by and construed according to Indian Laws. 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."

By notice of invocation dated 10th March 2022, the appellant sought to refer the matter to arbitration for a claimed amount of USD 13,230.86. The respondent, while responding on merits, also contested the invocation itself — contending that Clause 25 did not impose a mandatory obligation to arbitrate but merely offered arbitration as one possible avenue.

Proceedings Before the Bombay High Court

The appellant filed Arbitration Application No. 168 of 2022 before the High Court of Judicature at Bombay, seeking appointment of a sole arbitrator. The learned Single Judge, by judgment dated 23rd February 2023, dismissed the application. The High Court held:

"…However, in the present case when it is manifestly and ex-facie certain that there is no agreement between the parties to mandatorily refer the disputes that have arisen between them for arbitration, I am unable to be persuade myself by the submission of the learned counsel for the Applicant that the clause involved make arbitration as a compulsory choice for the parties for resolution of disputes.

18] In the wake of above discussion, since I am of the view that Arbitration clause, which had used the word 'can', do not make it imperative for the parties to be referred for arbitration and specifically when the Respondent has refused to be referred for arbitration, in the wake of the choice being available, in terms of the clause contained in the agreement. The Arbitration Application deserve to be dismissed, as it cannot be construed as amounting to 'Arbitration' as the mode of resolving disputes, in absence of affirmation at the end of the opposing party. Hence, Arbitration Application No. 168 of 2022 is dismissed."

The appellant challenged this ruling before the Supreme Court of India.

Arguments Advanced Before the Supreme Court

Appellant's Contentions

The appellant advanced several arguments in support of treating Clause 25 as a binding arbitration agreement: