Introduction
Today’s business world involves complex, high-value, and often international transactions. Because of this, companies focus not just on making good deals, but also on having clear and efficient ways to resolve disputes if problems arise. Many see court litigation as slow, public, and rigid, so they often choose arbitration instead, which offers privacy, more control for the parties, and usually faster results. For these reasons, arbitration clauses are now a common part of commercial contracts, added as a risk-management step early on, well before any dispute comes up.
The effectiveness of this risk-management tool depends on how clearly the arbitration clause is written. While the law requires a clear and binding agreement to send disputes to arbitration, many clauses are drafted carelessly or simply copied from other contracts. The choice of words is especially important, particularly when deciding between mandatory terms like “shall” and permissive terms like “may” or “can.” If a clause says the parties “can” or “may” refer disputes to arbitration, it raises a key question whether have they agreed in advance to use arbitration, or have they just kept it as an option for later?
This uncertainty has real legal effects. If the clause is seen as offering only an option, either party can still choose to go to court, and the other may not be able to force arbitration. But if the clause is viewed as a requirement, courts usually have to step aside and send the dispute to arbitration when requested. The Supreme Court’s recent focus on these clauses is central to commercial certainty. It decides whether a word like “can” creates a binding path to arbitration or leaves parties free, and possibly unexpectedly vulnerable, to full litigation.
What Constitutes a Valid Arbitration Agreement as per the Arbitration and Conciliation Act, 1996?
Section 7 of the Arbitration and Conciliation Act, 1996, sets out what is needed for a valid Arbitration Agreement. The agreement must show that both parties clearly and firmly agree “to submit” their disputes to arbitration, whether their relationship is based on a contract or not. This agreement can be part of a contract or a separate document, but it must always be in writing. It can be recorded as a signed document, through an exchange of communications, or in pleadings where one side claims the agreement and the other does not deny it. The focus on “to submit” means the parties have chosen arbitration as the way to resolve their disputes, not just as one of several options they might consider later.
When looking at the law, clauses that use permissive language like “disputes can be referred to arbitration” create a question, i.e., do they actually require arbitration, or just allow it as an option? If the wording suggests that arbitration is only one possible way to resolve disputes, alongside going to court or using other methods, it does not meet Section 7’s requirement for an agreement “to submit” disputes to arbitration. In this case, there is no true “arbitration agreement” under the law, so Section 8 cannot be used to force a court to send the parties to arbitration. On the other hand, if the clause, even without using strict “shall” language, makes it clear that disputes will be settled by arbitration instead of through the courts, it becomes a binding agreement. This means the court must refer the matter to arbitration if a proper and timely request is made under Section 8.
How Courts Interpreted Arbitration Clauses in the Past
To make a fair decision, the Supreme Court reviewed several landmark judgments that set the standards for writing arbitration agreements. One of the important cases was K.K. Modi vs. K.N. Modi [AIR 1998 SC 1297][1]. In that decision, the court said that for a clause to count as a valid arbitration agreement, there must be certain features. The most important is that both parties must clearly intend for the arbitrator’s decision to be final and binding. It should not be just a suggestion, but a definite legal promise.
Another important case the court looked at was Jagdish Chander vs. Ramesh Chander [(2007) 3 SCC 874][2]. This case is famous because it warned against using unclear language in legal documents. The court decided that just putting the word “arbitration” in a heading is not enough. If the main text says things like “parties can, if they so desire, refer their disputes to arbitration” or “in the event of any dispute, the parties may also agree to refer the same to arbitration”, it does not create a binding contract. The law from this case says that an arbitration agreement must clearly show a decision to go to arbitration, not just a hope or wish. In short, if the other party’s permission is still required after a dispute starts, then the original clause was not a binding agreement to arbitrate.
The court also looked at cases such as Visa International Ltd. vs. Continental Resources USA Limited [AIR 2009 SC 1366][3] and Enercon (India) Ltd. vs. Enercon GmbH [AIR 2014 SC 3152][4]. In those cases, the courts took a more flexible view. They decided that if it was clear both parties wanted arbitration, the agreement should not fail just because some words were missing or the process for picking an arbitrator was unclear. This practical approach supported sending cases to arbitration when possible to save time and ease the workload of regular courts.
Why “CAN” is Different From “SHALL”
The Hon’ble Supreme Court of India addressed this main legal issue in Nagreeka Indcon Products Pvt. Ltd. vs. Cargocare Logistics (India) Pvt. Ltd [2026 INSC 384][5]. The court needed to decide whether the word “can” creates a mandatory obligation or just suggests a future possibility that would require both parties to agree again if a dispute arises.
The background of the case was quite simple. A company that makes aluminium foil containers hired a logistics firm to ship products to the US. Most shipments went smoothly, but there was a problem with the fifth container. The logistics firm gave the goods to the buyer without getting payment or the necessary paperwork, causing financial loss to the manufacturer. The manufacturer tried to settle the matter through arbitration, as mentioned in their shipping document, but the logistics firm refused. The document said that any dispute “can be settled by arbitration”. The manufacturer thought this meant arbitration was required, while the logistics firm said that the word “can” made it optional.
In the Nagreeka Indcon judgment, the Hon’ble Supreme Court kept the existing laws unchanged and applied them strictly to the word “can”. The manufacturer, who was the appellant, argued for a pragmatic approach based on the Enercon case. They wanted the court to focus on the contract’s overall purpose and require the parties to go to arbitration. The manufacturer also referred to the Delhi High Court judgment in the case of Panasonic India (P) Ltd. v. Shah Aircon [2022 SCC OnLine Del 3288][6], that suggested “can” might be mandatory. Still, the Supreme Court did not accept his argument in this case.
The Court said that there is a big difference between a clause that does not work and one where the parties never fully agreed to be forced into arbitration. In the Enercon case, both sides wanted arbitration but could not agree on how to choose the third judge. In this case, the logistics company argued that they never promised that arbitration would be the only way to resolve disputes. The Supreme Court explained that the word “can” shows something is possible or allowed, not required. It is like saying “it is possible to do this”, which is not the same as saying “you must do this”.
By using the word “can”, the parties made arbitration just one possible option for the future. However, the rules in Jagdish Chander say that this kind of clause needs a new agreement between the parties once a dispute begins. Since the logistics firm refused arbitration when the manufacturer suggested it, there was no mutual agreement to proceed. The Court confirmed that although it supports arbitration, it cannot require people to use it unless they have clearly and unmistakably agreed to be bound by the same.
Conclusion
This judgment clearly shows that in law, every word counts. The Supreme Court has said that if one wants a guaranteed right to go arbitration, they need to use strong words like “shall” or “will”. Choosing softer words like “can” or “may” might sound friendly in a business deal, but they could leave one unprotected if a dispute comes up ad the other side refuses to cooperate.
The court dismissed the manufacturer’s appeal, making it clear that they could not force the logistics company into arbitration because their contract did not require it. This decision protects party autonomy, meaning people are only bound by what they have actually agreed to. For lawyers and business owners, the takeaway is simple. Be precise. If you want arbitration to be the way you resolve disputes, your contract should say the dispute shall be referred to arbitration, not just that it can be. This small wording change can mean the difference between a quick solution and a long, costly fight over where the case should be heard.
Author: Sachin Sharma, Associates
Co-Author: Pragati Garg (Assessment Intern)
- Judgment Link for K.K. Modi vs. K.N. Modi: https://api.sci.gov.in/jonew/judis/13457.pdf
- Judgment Link for Jagdish Chander vs. Ramesh Chander: https://api.sci.gov.in/jonew/judis/28918.pdf
- Judgment Link for Visa International Ltd. vs. Continental Resources USA Limited: https://api.sci.gov.in/jonew/judis/33218.pdf
- Judgment Link for Enercon (India) Ltd. vs. Enercon GmbH: https://api.sci.gov.in/jonew/judis/41227.pdf
- Judgement Link for Nagreeka Indcon Products Pvt. Ltd. vs. Cargocare Logistics (India) Pvt. Ltd.: https://api.sci.gov.in/supremecourt/2023/23511/23511_2023_11_1501_70192_Judgement_17-Apr-2026.pdf
- Judgment Link for Panasonic India (P) Ltd. v. Shah Aircon: https://delhihighcourt.nic.in/app/case_number_pdf/2022:DHC:4135/PRJ11102022AA6212021_150837.pdf
