One of the mistakes in corporate drafting today is to include “can” or “may” in a clause that addresses the dispute resolution mechanism, with the intention of improving out-of-court options. However, the Supreme Court of India in Nagreeka Indcon Products Pvt. Ltd. v. Cargocare Logistics (India) Pvt. Ltd. (Nagreeka) dealt a decisive blow to contract drafters by strictly enforcing a textualist approach to interpreting arbitration agreements. This approach dictates that courts must prioritise the literal, ordinary grammatical meaning of the explicit words chosen by the parties over any unexpressed commercial intentions. Applying this, the Court emphasised that no intention to be bound by an arbitration agreement can be derived from the permissive verb ‘can’ as required in Section 7 of the Arbitration and Conciliation Act, 1996 (‘the Act’).
The Supreme Court’s judgement clarifies the literal meaning of the law, but also reveals gaps in its conceptual foundations. The decision effectively means that a permissive clause is a dead letter and thus vitiates the prima facie need for judicial review as provided under Section 11 of the Act. In practice, the ruling forces commercial parties into protracted court litigation, forgoing the faster resolution that ADR promises. This systemic shortcoming requires the development of an accurate and well-tuned interpretive system that accounts for party autonomy while respecting the State’s pro-arbitration policy.
Factual matrix
The question before the Supreme Court was whether a court exercising jurisdiction under Section 11 of the Act may appoint an arbitrator where the dispute resolution clause uses permissive phrasing such as ‘can’ or ‘may’ rather than mandatory language The dispute was based on a contract of affreightment that the respondent logistics company had entered into, to transport goods to the USA, but delivered the fifth consignment to the buyer without production of the original bill of lading, causing the appellant financial loss. The appellant relied upon Clause 25, which provided that “…[a]ny difference of opinion or dispute thereunder can be settled by arbitration in India or a place mutually agreed with each party appointing an arbitrator”. The appellant subsequently approached the Bombay High Court under Section 11. The High Court rejected the application on the ground that there was no ‘mandatory intent’ to arbitrate.
In the appeal, the Supreme Court upheld the literal interpretation and stated that Clause 25 is not a valid or binding arbitration agreement under Section 7 of the Act. However, the Court noted that the word “can” is a modal verb that in its normal usage indicates only a capability, a permission, or a future possibility that is factual, but not a mandatory obligation as indicated by the word “shall”. The Supreme Court pointed out that an option clause is simply a draft provision that considers the possibility of trying other avenues. It is not judicially enforceable, since fresh consent to arbitrate is required once a dispute ripens.
The Supreme Court’s literal interpretation raises serious structural issues in the Indian pro-arbitration regime. The Supreme Court found that the word “can” indicates “the power or option to do something” rather than “a thing that is legally required.” The Supreme Court relied on Jagdish Chander v. Ramesh Chander [(2007) 5 SCC 719] and determined that such an expression of permissiveness would indicate a future, but not a present, right to arbitration, which would mean that fresh consent has to be obtained when a dispute arises. The Court further underscored that courts may not add mandatory intent absent from the text.
The Supreme Court decided to consider Clause 25 a non-binding “agreement to agree” because it placed the formal grammar of the contract ahead of any commercial significance and took into account the structural problems, such as the absence of a mechanism for appointing a presiding third arbitrator — a requirement under Section 10 of the Act. This two-pronged finding (permissive language plus structural defect) distinguishes Nagreeka from cases like Enercon (India) Ltd. v. Enercon GmbH [(2014) 5 SCC 1], where the intent to arbitrate was unambiguous.
Loopholes and Challenges
The Supreme Court’s analysis of “can” and willingness to override an arbitration clause is a departure from the clear legislative intent behind the Act. This directive is, in essence, a broken alternative dispute resolution mechanism, in which an option-oriented clause is treated as a nullity. This approach does not acknowledge the principles of party autonomy and judicial non-intervention that are envisaged by Section 5 of the Act. This is in contrast to Smt. Rukamanibai Gupta v. Collector, Jabalpur [(1980) 4 SCC 556], where the mandatory intent to exclude civil courts was established not by grammatical precision, but by the overall structure and tenor of the dispute resolution clause.
A further concern is how courts ought to calibrate their response to textually deficient arbitration clauses. Proportionalitycalls for first using process-compatible, curative tools to resolve drafting ambiguities, and only invalidating the entire contract if there is a “total absence of any intent to arbitrate”. However, Nagreeka permits any referral to be disrupted on a single contested word. The Supreme Court declined to go beyond the clause in Section 11 and adopt a more-than-grammatical, resolution-oriented approach.
Finally, the use of “can” as meaning “agreement to agree” in the future demonstrates a proportionality concern as well. The Supreme Court’s reasoning in the case is contrary to the approach taken in In re: Interplay Between Arbitration Agreements under the Arbitration and Conciliation Act, 1996 & the Stamp Act, 1899 [(2024) 6 SCC 1], which characterised contractual validity risks as process-internal issues. Under Interplay, a prima facie visual check sufficed; yet the Court conducted granular textual analysis of “can”, effectively elevating a stylistic question into a threshold jurisdictional bar.
The Act provides for the resolution of doubts arising from the interpretation of the arbitral provisions by giving the tribunal the power to determine its own jurisdiction in Section 16. Interpretation of an arbitration clause should work towards maintaining the “procedural continuity” of the arbitral tribunal – and not by a Section 11 court acting prematurely, in keeping with the principle of Kompetenz-Kompetenz.
The entanglements of international shipping and logistics regulations, in which commercial enterprises find themselves caught, illustrate the transaction costs imposed by this judgment. In Jagdish Chander v. Ramesh Chander [(2007) 5 SCC 719], cited above, the Supreme Court held that words such as “parties can, if they so desire, refer their disputes to arbitration” do not constitute a binding arbitration agreement as they contemplate a further, fresh consent. The Supreme Court in Nagreeka applied this directly to Clause 25 as this case was the respondent’s primary authority, not a pro-arbitration proposition. If the arbitral option is terminated at the Section 11 stage, those systemic protections are lost, and commercial parties face the protracted civil proceedings that ADR was meant to alleviate.
Way Forward
The tension between the contrasting goals of text-centric gatekeeping and contractual continuity must be mitigated through an innovative and nuanced approach to interpreting laws that takes into account the shortcomings in the contracts, while not hindering other mechanisms of dispute resolution. The answer is to establish a multi-layered review system for permissive clauses in Section 11 of the Act based on the approach of established international arbitral seats such as London and Singapore. This strict literalist reading of “can” should be replaced by an option-mutation approach drawing on comparative jurisprudence. The Privy Council in Anzen Ltd v Hermes One Ltd [2016] UKPC 1 held that such wording as “may” creates a unilateral option to elect arbitration, not a binding agreement to arbitrate in the first instance — either party could commence litigation. Once either party makes an unequivocal election to arbitrate, the clause becomes operative and litigation is stayed — without requiring fresh consent from the other party. This reframing — from outright invalidity to curative election — would allow a tribunal to resolve drafting ambiguities without defeating the parties’ shared intent to arbitrate.
This option-mutation approach fits into the existing statutory structure of the Act, and can be implemented through three process-integrated safeguards. First, the fact that Section 7(1) imposes an obligation to submit disputes to arbitration does not imply that the obligation must be unconditional at the time the contract is signed. An optional clause satisfies Section 7 once one party unilaterally issues an invocation notice electing arbitration. Lastly, it is important to remember that the inquiry of the Section 11 court should be limited to the prima facie visual existence of the clause as per the legislative objective of the 2015 and 2019 amendments. Complex issues, including interpretation of “can” or “may” in an arbitration agreement or the true intent of the parties, should be left to the specialised skill of the arbitral tribunal as required by the “Kompetenz-Kompetenz” mandate in Section 16.
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Koinos 