Drafting arbitration clauses with precision: - Takeaways from the Supreme Court’s BGM Judgement

For critical and high stakes commercial dispute resolution, arbitration is emerging as the preferred choice for India’s corporates. However, an often-ignored aspect of arbitration is the wording of the arbitration clause. What would appear as harmless language in a contractual clause can be the cause for protracted litigation. A recent case in point is the apex court’s decision in BGM and M-RPL-JMCT (JV) vs Eastern Coalfields Limited [1] (“BGM Judgement”). In this case, the Supreme Court considered the distinction between the term “may” and “shall” to ascertain if a valid arbitration agreement existed between the parties. This article will examine the evolving jurisprudence on arbitration clauses and seeks to offer some practical insights into drafting such clauses which can serve the twin objectives of withstanding judicial scrutiny and safeguarding parties’ commercial interest.

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“May” vs “Shall” conundrum: The BGM Judgement

A bench of the Supreme Court examined clause 13 of the General Terms and Conditions of a contract, reproduced below:

“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”

It was contended that the use of the word “may” would merely indicate that the parties had an option to refer the dispute to arbitration and the exercise of this reference would then create a binding obligation. However, the Court held that when the parties have chosen to use the phrase “may be sought”, it means that there exists no subsisting arbitration agreement between the parties and that the clause is a mere enabling provision through which the parties may agree (or not) to refer the dispute to arbitration. In essence, the Supreme Court has differentiated between two contractual clauses i.e., those that mandatorily provide for arbitration and those that make arbitration contingent upon the parties’ future choice or discretion.

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Historical Evolution

TThe BGM Judgement seems to be in line with the evolving jurisprudence on strict textual interpretation of dispute resolution clauses. In 2007, the Supreme Court in Jagdish Chander vs Ramesh Chander [2] considered a clause which stated that any dispute arising between the parties “shall” be mutually decided by the parties or shall be referred to arbitration “if the parties so determine”. The Court held that the qualifying phrase in the agreement meant that there was no mandate to arbitrate at the moment and any reference to arbitration would require a fresh agreement. Moreover, the use of the word(s) arbitration/ arbitrator in a particular clause in the agreement will not automatically render it a binding arbitration agreement. Furthermore, in 1998, the Supreme Court in K.K Modi vs K.N Modi ^[3] laid down the essentials of an arbitration agreement which inter alia included (a) a valid agreement between the parties to concede the matter to a private tribunal; (b) mutual agreement for the decision to be final and binding (c) ability of the tribunal to determine rights and obligations of the parties etc.

In this background, it is also important to note that the 2015 amendment to the Arbitration and Conciliation Act, 1996 which added sub-clause 6A to Section 11 was planned to restrict the intervention of the courts at the referral stage to the mere existence of an arbitration agreement and not examine its validity. Ironically though, this has rather strengthened judicial examination of the precise language used in reference clauses as the courts have the duty to make the determination of whether the arbitration agreement exists or not.

The Way Ahead – Achieving Linguistic Precision.

Based on the interpretation of the arbitration agreements by the courts especially considering the BGM Judgement, drafting arbitration clauses in a way that is commercially and legally sound assumes utmost importance. Merely replacing the word “may” with “shall” in templatized arbitration clauses might not meet the test of judicial scrutiny. Hence, below are pointers for drafting arbitration clauses for commercial contracts:

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1.              Usage of clear mandatory language – Instead of usingthe term “shall”, clauses may be framed in a way that makes the referencemandatory and unequivocal. For example, the clause may be framed as “theparties to this agreement agree to refer all disputes to arbitration withoutexception”.  

2.             Eliminating qualifying phrases – When theintention is to be bound by arbitration, an endeavour should be made to avoidany qualifying phrases (such as “if the parties were to agree” or “subjectto the mutual consent of the parties”) in the arbitration clause that mightotherwise suggest that the reference is contingent upon future consent.

3.             Multi-tier dispute resolution clauses to be structured clearly – If it is commercially agreed between the parties to first try and resolve the dispute through negotiation or mediation then the incorporation of the mechanism (including the signal of its failure) should be clearly worded. For example, “The parties shall first attempt to resolve disputes through good faith negotiation which shall be initiated at the instance of either party by a written notice. If the parties fail to resolve the dispute within 30 days of the notice through negotiation, then either party shall be entitled to finally refer the matter to arbitration by way of a written notice.”.

4.             Industry-tailored drafting – Specific industries (like wind power production) often require technical understanding. In this regard, detailed dispute resolution clauses especially those addressing technical disputes (through expert determination) differently from legal disputes (through arbitration) will be more effective.

Conclusion

Party autonomy is the cornerstone of alternative dispute resolution, especially arbitration^[4]. The BGM Judgement reinforces this principle and serves to ensure that both parties have genuinely consented to arbitration. Boilerplate arbitration clauses need to be looked at with the same level of attention as other commercial terms. It would be advisable for practitioners to err on the side of caution even if this results in more elaborate arbitration clauses.

References

[1] 2025 SCC OnLine SC 1471 – judgement dated 18 July 2025

[2] 2007SCC OnLine SC 570

[3] 1998 SCCOnLine SC 745

[4] Central Organization for Railway Electrification vs ECI SPIO SMO MCML (JV) – 2024 SCCOnLine SC 3219

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