Permissive or Binding? Supreme Court Settles the “Can” vs. “Must” Debate in Arbitration Clauses

Can vs Must in Arbitration Clauses is a decisive issue in Indian contract drafting because the exact words used in an arbitration agreement determine whether arbitration is binding or optional. A recent Supreme Court judgment on arbitration, Nagreeka Indcon Products Pvt. Ltd. v. Cargocare Logistics (India) Pvt. Ltd., 2026 INSC 384, decided on 17 April 2026, clarifies the difference between can/may and must/shall in an arbitration clause. This distinction carries significant implications for businesses, legal practitioners, and parties engaged in commercial contract drafting.

This timely ruling was much needed to clarify the interpretation of arbitration clauses. It reaffirms the principle that courts must ascertain the real intention of the parties, as expressed in the contract itself, before compelling them into arbitration proceedings.

Understanding Arbitration Agreement in India

An arbitration agreement in India is governed by the Arbitration and Conciliation Act, 1996. Section 7 of the Act defines an arbitration agreement and requires it to be in writing, disclosing the parties’ intention to refer disputes to arbitration.

To determine the validity of an arbitration agreement, the parties must clearly evidence their intention, whether they intend to resolve disputes through arbitration or wish to reserve the option of ordinary courtroom proceedings. The terminology used in the clause plays an important role in defining the scope and effect of that agreement.

As per arbitration law in India, courts have consistently emphasised that arbitration rests on the consent of both parties. The wording of the provision is therefore central to determining whether the agreement to arbitrate is mandatory or merely permissive.

“Can/May” vs. “Shall/Must” in Arbitration Clauses: Why the Difference Matters

In Can vs Must in Arbitration Clauses, the words used in the agreement determine the true nature and intent of the parties. This is central to the interpretation of arbitration clause language across Indian jurisprudence.

Clauses using “must” or “shall”

Whenever an arbitration agreement or contract contains language such as “disputes shall be referred to arbitration” or “must be resolved through arbitration,” the clause is treated as mandatory and binding on the parties. Such provisions show the clear intention of the parties. Therefore, if a dispute arises between them, they are bound to proceed with arbitration.

Clauses using “can” or “may”

Whenever an arbitration agreement or contract contains a clause such as “disputes can be settled by arbitration” or “disputes may be settled by arbitration,” it is usually interpreted as permissive rather than mandatory. The parties retain the option of proceeding with arbitration or approaching the courts. Such provisions indicate that the parties are not bound to arbitrate; they may choose to do so, or not. Sometimes, the use of “can” may lead to uncertainty with regard to the intention of the parties.

The Recent Supreme Court Judgment on Arbitration

In NagreekaIndcon Products Pvt. Ltd. v. Cargocare Logistics (India) Pvt. Ltd., decided by a bench of Justices Sanjay Karol and N. Kotiswar Singh, the Supreme Court addressed a vital question in arbitration law in India. The question of law was: Does a clause stating that disputes “can be settled by arbitration” automatically bind the parties to arbitrate? The Court held that this Can vs Must in Arbitration Clauses issue turns on consent, and that permissive wording does not by itself create a binding arbitration clause under Section 7 of the Arbitration and Conciliation Act, 1996.

The dispute arose out of a bill of lading between a manufacturer of aluminium foil products, Nagreeka(appellants), and a logistics company, Cargocare Logistics(respondents), engaged to transport containers to a buyer in the United States. When the logistics company released a container to the buyer without the original bill of lading or payment to Nagreeka, the manufacturer suffered financial loss. The manufacturer, Nagreeka, invoked arbitration under Clause 25 of the bill of lading, which stated that any dispute “can be settled by arbitration in India or a place mutually agreed with each party appointing an arbitrator.” The logistics company resisted, arguing that the clause was optional and lacked the necessary intent required under the law.

With this view, the Supreme Court clarified that where “can” is used in an arbitration clause, that wording does not by itself make arbitration necessary to resolve the dispute. A clear choice remains in the hands of both parties. If there is an absence of a specific agreement between them once a dispute arises, either party remains free to approach the ordinary courts instead. By contrast, where terms like “must” or “shall” are used in place of “may” or “can,” the arbitration clause is enforceable and binding on both parties. In that situation, neither party has the choice of resorting to ordinary court proceedings in place of arbitration.

This judgment applies to “can” the same reasoning long applied to “may”,  both are permissive markers that cannot substitute for the parties’ unambiguous consent to arbitrate.

Implications for Enforceability of Arbitration Clauses

This judgment has significant implications for the enforceability of arbitration clauses. Following this ruling, courts are likely to:

1. Closely scrutinise the specific wording of the clause.
2. Examine whether the operative verb, ‘shall’, ‘must’, ‘will’, ‘may’, or ‘can’, signals obligation or mere possibility.
3. Determine whether the arbitration agreement is mandatory or optional based on that wording.
4. Assess whether the clause requires a further act of agreement before arbitration can begin.
5. Consider the clause’s heading and commercial context, though these alone cannot cure a fundamentally permissive clause.
6. Consider the overall intention of the parties as expressed in the contract, rather than as asserted afterwards.

For businesses, this means that every party should carefully check the language of the dispute resolution clause before entering into a contract. Corporate counsels drafting commercial agreements must evaluate these words closely, since courts might interpret them literally to determine the real intention of the parties.

Importance for Commercial Contract Drafting and Arbitration Clause Draft

This principle plays a very important role in commercial contract drafting. During the drafting of commercial agreements, parties typically include a dispute resolution mechanism covering “any dispute that may arise in the course of the contract.” This principle is central to understanding the true purpose of that clause, whether the parties intend to resolve disputes by arbitration or merely wish to keep that option available should a dispute arise. Precise wording at the drafting stage removes ambiguity and clearly reflects the intention of the parties.

When preparing an arbitration clause draft, parties and their counsel should:

• Use “shall” or “must” wherever arbitration is intended to be mandatory.
• Avoid “may” or “can”unless the parties genuinely wish to keep arbitration optional.
• Specify the seat, number of arbitrators, and applicable rules so the clause is workable once invoked.
• Review standard-form contracts and bills of lading carefully, since boilerplate language is often carried forward without review.

Arbitration as a Preferred Dispute Resolution Mechanism

Arbitration remains a preferred dispute resolution mechanism for Indian businesses because it offers confidentiality and a faster, binding resolution compared with prolonged litigation. This is closely connected to the ethical considerations that arise during arbitration proceedings, particularly where arbitrator neutrality and disclosure obligations come into question.

The growth of alternative dispute resolution India-wide reflects the judiciary’s commitment to easing courtroom congestion and promoting efficient, party-driven dispute settlement.

Steps in Arbitration Proceedings in India

Understanding the steps in arbitration proceedings in India is important for businesses and contracting parties. The steps are discussed below:

1. Invocation of Arbitration – A party issues a notice invoking the arbitration clause, calling upon the other party to refer the dispute to arbitration, often termed as Request for Arbitration or RFA. According to Section 21 of the Act, the date of commencement of proceedings is often determined with reference to the receipt date of the RFA by the receiving party.
2. Appointment of Arbitrator – Parties appoint arbitrators according to the contract or, failing agreement, through the court under Section 11 of the Act.
3. Preliminary Hearing – Once the arbitral tribunal is constituted, a preliminary hearing is held where procedural timelines, the seat and language of arbitration, and other preliminary matters are determined.
4. Filing of Claims and Defence – The claimant files its statement of claim along with supporting documents, following which the respondent submits its statement of defence (and any counterclaim, if applicable) under Section 23 of the Act.
5. Evidence and Hearings – The parties present documentary evidence, examine witnesses, and advance oral arguments before the tribunal during hearings conducted in accordance with the principles of natural justice and party autonomy, subject to the provisions of Section 24 of the Act.
6. Arbitral Award – The arbitral tribunal delivers a reasoned arbitral award deciding the dispute. The award is final and binding on the parties and enforceable as a court decree, subject to a limited right of challenge for setting aside the award under Section 34 of the Arbitration and Conciliation Act, 1996.

Conclusion

The recent Supreme Court judgment in Nagreeka clarifies the core rule in Can vs Must in Arbitration Clauses: permissive wording leaves the choice of forum in the hands of the parties. They may proceed with arbitration or with ordinary court proceedings, since the arbitration law in India is founded on the consent of the parties.

For businesses, lawyers, and contract drafters, this judgment is an important lesson in commercial contract drafting. Company lawyers and agreement drafters must carefully review clauses relating to arbitration agreements at the drafting stage, so as to reduce jurisdictional disputes and strengthen arbitration’s effectiveness as a favoured dispute resolution mechanism.

References

1. NagreekaIndcon Products Pvt. Ltd. v. Cargocare Logistics (India) Pvt. Ltd., (2026 SCC OnLine SC 630.
2. Arbitration and Conciliation Act, 1996 (as amended), Section 7.
3. Vidya Drolia v. Durga Trading Corporation, (2021) 2 SCC 1.
4. Supreme Court of India, judgments on arbitration available at: https://main.sci.gov.in/
5. Law Commission of India, 246th Report on Amendments to the Arbitration and Conciliation Act, 1996 – https://lawcommissionofindia.nic.in/reports/Report246.pdf
6. Damodar Das v. State of Bihar, (2019) 3 SCC 640.