Supreme Court Clarifies the Parameters of an Arbitration Agreement Under Section 11 of the 1996 Act

In its recent judgment in BGM and M-RPL-JMCT (JV) v. Eastern Coalfields Limited[1], dated 18^th July 2025, the Supreme Court addressed a recurring legal conundrum in arbitration jurisprudence, whether a clause containing the option to seek arbitration, rather than an unequivocal reference, constitutes an “arbitration agreement” within the meaning of Section 7[2] of the Arbitration and Conciliation Act, 1996 (“A&C Act”). The judgment affirms the necessity of mutual consensus ad idem and reinforces the restricted scope of judicial examination under Section 11[3] post the 2015 Amendment.

Brief Facts of the Case

The Appellant, BGM and M-RPL-JMCT (JV) (“JV”) and the Respondent, Eastern Coalfields Limited, (“ECL”) entered into a contract for the transportation and handling of goods. Disputes arose during the course of execution. Relying on Clause 13[4] of the General Terms and Conditions (“GCC”) appended to the e-tender, JV filed an application under Section 11(6)[5] of the A&C Act, before the Calcutta High Court, seeking the appointment of an arbitrator. Clause 13, titled “Settlement of Disputes,” provided a tiered dispute resolution mechanism, ultimately stating:

“In case of parties other than Government Agencies, the redressal of the dispute may be sought through Arbitration and Conciliation Act, 1996, as amended.”

The High Court vide order dated 19^th January 2024, rejected the application, holding that the clause did not amount to an arbitration agreement under Section 7. In dismissing the application under Section 11, the High Court placed significant reliance on the use of the word “may” in the concluding portion of Clause 13. It observed that such language lacked the mandatory character necessary to constitute a binding arbitration agreement. Citing the Supreme Court’s decisions in Jagdish Chander v. Ramesh Chander[6] and Mahanadi Coalfields Ltd. v. IVRCL AMR Joint Venture[7], the High Court held that the use of discretionary language indicates the absence of a definitive intent to arbitrate, thereby rendering the clause insufficient to support the appointment of an arbitrator. JV challenged this High Court’s decision before the Hon’ble Supreme Court[8].

 This blog is a part of our Global Arbitration Services.

The Issues Raised Before the Supreme Court

1. Whether the Referral Court must prima facie determine the existence of an arbitration agreement or leave the matter to the arbitral tribunal under the doctrine of kompetenz-kompetenz.
2. Whether Clause 13 of the contract satisfies the requirements of an arbitration agreement under Section 7 of the A&C Act.
3. Whether Clause 32 of the “Instructions to Bidders” negates the presence of an arbitration agreement.

The Supreme Court’s Analysis and Observations

The Court relied on a catena of precedents, including:

1. Interplay Between Arbitration Agreements under Arbitration Act, 1996 & Stamp Act, 1899, In re[9]: wherein the Supreme Court reaffirmed that under Section 11(6A)[10], the Referral Court’s jurisdiction is confined solely to a prima facie examination of whether an arbitration agreement exists, as contemplated under Section 7 of the Act. The term “examination” implies a limited, non-adjudicatory scrutiny, not a detailed or contested inquiry, to weed out manifestly non-existent arbitration agreements. The burden of proof lies on the party invoking the arbitration clause, who must establish, at least on a prima facie basis, that such an agreement exists. However, the Referral Court is not required or permitted to conduct a mini-trial into the agreement’s substantive validity, that power is reserved for the arbitral tribunal under Section 16[11], which may fully adjudicate its jurisdiction, including questions relating to the existence or validity of the arbitration agreement. Importantly, any prima facie view formed by the Court at the referral stage does not bind the arbitral tribunal or the enforcement court.
2. Jagdish Chander v. Ramesh Chander[12]: Wherein the Supreme Court authoritatively outlined the essential attributes of a valid arbitration agreement under Section 7 of the A&C Act. It held that a clause in a contract can be construed as an arbitration agreement only when there is a clear and binding intention of the parties to refer disputes to arbitration and to be governed by the decision of a private adjudicatory forum. The Court emphasised that:

• The agreement must go beyond a mere possibility of referring disputes to arbitration; it must reflect a firm obligation to do so.
• Even where the terms “arbitration” or “arbitral tribunal” are not explicitly used, the clause may still qualify as an arbitration agreement if it reflects the required substantive elements, including: (i) a written agreement, (ii) reference of disputes to a private tribunal, (iii) impartial adjudication, and (iv) binding effect of the tribunal’s decision.
• Conversely, facultative or discretionary language, such as “parties may agree” or “can consider arbitration,” fails to satisfy the legal threshold, as it presupposes a future agreement to arbitrate rather than a present consensus ad idem.
• Clauses that require fresh consent or further determination before arbitration can be invoked are not arbitration agreements under the Act, but at best, agreements to enter into arbitration agreements in the future.

7. Mahanadi Coalfields Ltd. v. IVRCL AMR Joint Venture[13]: Here, the Supreme Court held that notwithstanding the title of a clause, such as “Settlement of Disputes / Arbitration”, what matters is the substantive content of the clause. It was observed that Clause 15, despite its heading, did not amount to an arbitration agreement, as it lacked any binding obligation on the parties to refer disputes to arbitration, either present or future. The Court reiterated that mere reference to arbitration, absent a clear commitment to arbitrate, is insufficient to meet the requirements of Section 7.
8. Cox and Kings Ltd. v. SAP India Pvt. Ltd.[14]: The Constitution bench of the Supreme Court reaffirmed that an arbitration agreement is a contractual undertaking whereby parties agree to resolve their disputes through arbitration, regardless of whether the disputes arise from contractual or non-contractual obligations. It serves as conclusive proof of the parties’ consent to exclude the jurisdiction of domestic courts in favour of a private arbitral tribunal. The enforceability of such an agreement is rooted in the parties’ contractual autonomy to structure their dispute resolution process through mutual consent.

From these, the following principles were reiterated:

• An arbitration agreement must reflect consensus ad idem to resolve disputes through arbitration.
• The expression “may be referred to arbitration” or clauses requiring further agreement are not binding arbitration agreements.
• Under Section 11(6A), the Court’s role is confined to examining whether an arbitration agreement exists prima facie, not to conduct a detailed inquiry or mini-trial.
• Section 7 requires that the arbitration agreement be in writing, record an intention to arbitrate disputes, and must not be contingent upon further mutual consent.

The Judgment

The Court examined Clause 13 and found it to be permissive rather than mandatory. It contained a sequence of dispute resolution steps, ultimately providing that “the redressal of the dispute may be sought through arbitration.” The word “may” was pivotal. The Court reasoned that:

• The clause did not bind either party to resolve disputes through arbitration.
• There was no indication of finality or obligation to arbitrate.
• The clause was merely enabling in nature, providing for the possibility of arbitration if both parties later agreed.

The Court distinguished the clause from a binding arbitration agreement, reaffirming that a mere possibility or future agreement to arbitrate does not satisfy the statutory threshold of Section 7. Consequently, the application under Section 11 was held to be not maintainable.

As regards Clause 32[15], which provided for legal jurisdiction of the civil court, the Court observed that while such clauses do not per se exclude arbitration, in the absence of a valid arbitration agreement, they become operative for dispute resolution.

The Hon’ble Supreme Court concluded:

• The High Court rightly undertook a limited prima facie examination under Section 11(6A).
• Clause 13 was not a valid arbitration agreement as per Section 7.
• There was no pre-existing agreement to refer disputes to arbitration.
• The appeal was accordingly dismissed.

Key Takeaways

1. Clarity on arbitration clauses: Use of permissive language such as “may be referred” or clauses requiring future consent or determination does not constitute valid arbitration agreements.
2. Judicial scrutiny under Section 11: Referral Courts are to undertake a prima facie examination of the existence of an arbitration agreement, not a full-fledged inquiry.
3. Precision in drafting: Drafters must ensure that arbitration clauses unequivocally record mutual consent and do not require further consensus to trigger arbitration.
4. Doctrine of Kompetenz-Kompetenz: Courts can refuse reference to arbitration at the Section 11 stage itself if the existence of the agreement is not prima facie established.
5. Precedential weight: This judgment affirms the position that not all dispute resolution clauses that mention arbitration terms will pass muster under Section 7, reinforcing Mahanadi Coalfields and Jagdish Chander

Conclusion

The judgment stands as a decisive reaffirmation of the foundational principle that arbitration is rooted in consent, not contingency or conjecture. Through this decision, the Supreme Court has underscored that an arbitration clause must be clear, unequivocal, and reflective of the parties’ mutual intent to exclude the jurisdiction of civil courts. Particularly in contracts involving public sector undertakings and high-value infrastructure works, precision in drafting dispute resolution clauses is not just advisable but essential. This ruling reinforces the legal threshold under Sections 7 and 11 of the A&C Act and serves as a cautionary guide to contracting parties: ambiguity in intention will defeat enforceability. The decision thus not only upholds doctrinal clarity but also fortifies the integrity of arbitration as a binding and autonomous mechanism for dispute resolution.

FOOT NOTES………………………………………………………………….

[1] 2025 INSC 874

[2] “Section 7-Arbitration agreement.” It defines an arbitration agreement as a written agreement between parties to submit existing or future disputes to arbitration arising from a defined legal relationship. It may be incorporated either as a clause within a contract or as a separate agreement. The agreement is deemed to be in writing if recorded through signed documents, exchange of communications (including electronic means), or pleadings where the existence of the agreement is asserted by one party and not denied by the other. Reference in a contract to another document containing an arbitration clause will also constitute an arbitration agreement if it forms part of the contract.

[3] “Section 11- Appointment of arbitrators”. It governs the procedure for the appointment of arbitrators. It empowers the Supreme Court or the High Court, as the case may be, to appoint arbitrators when parties fail to do so as per their agreed procedure. Sub-section (6A) limits the court’s role to examining the existence of an arbitration agreement. The provision aims to facilitate the constitution of the arbitral tribunal without delay and uphold party autonomy, while respecting the principle of kompetenz-kompetenz under Section 16.

[4] “Clause 13 – Settlement of Disputes”: This clause establishes a tiered internal dispute resolution mechanism. It mandates the contractor to avoid litigation and first seek resolution at the company level by making a written request to the Engineer-in-Charge within 30 days of the dispute arising. If unresolved, the dispute proceeds in two stages, first to the Area CGM/GM, and then to a committee chaired by a Director of the company. If the dispute remains unresolved, it may, depending on the nature of the parties, be referred either to the Administrative Mechanism for Resolution of CPSE Disputes (AMRCD) in case of public sector entities, or, in the case of non-government parties, may be sought to be resolved through arbitration under the A&C Act, as amended.

[5] “Section 11(6)”: Where a party, the two appointed arbitrators, or a designated institution fails to act as required under the agreed appointment procedure, and the agreement does not provide an alternative mechanism, either party may apply to the Supreme Court or the High Court (as applicable) to take necessary steps to complete the appointment process.

[6] (2007) 5 SCC 719

[7] (2022) 20 SCC 636

[8] Bench comprising of Justice Pamidighantam Sri Narasimha and Justice Manoj Misra

[9] (2024) 6 SCC 1, decision by a 7-judge constitution bench of the Supreme Court

[10] Section 11(6A): Introduced by 2015 amendment. Limits the scope of judicial intervention at the stage of appointing an arbitrator to a prima facie examination of the existence of an arbitration agreement, notwithstanding any prior judgments or decisions to the contrary.

[11] “Section 16- Competence of arbitral tribunal to rule on its jurisdiction.” This provision affirms the arbitral tribunal’s power to rule on its own jurisdiction, including objections regarding the existence or validity of the arbitration agreement. It recognises the independence of the arbitration clause from the rest of the contract and permits jurisdictional pleas to be raised at the appropriate stage of the proceedings. If such a plea is rejected, the tribunal proceeds to render an award, which may then be challenged under Section 34.

[12] (2007) 5 SCC 719

[13] (2022) 20 SCC 636

[14] (2024) 4 SCC 1

[15] “Clause 32 – Legal Jurisdiction”: This clause provides that any dispute or difference arising out of the tender or the contract awarded pursuant to it shall fall within the exclusive jurisdiction of the District Court where the contractual work is to be executed.