Words Are Not Enough: Every Clause Containing 'Arbitration' Is Not An Arbitration Agreement

Commercial Contracts are the reflection of the trust parties place in a legal framework to protect their interests. When this trust of parties breaks down, among the many clauses of the commercial agreement ('agreement'), the dispute resolution clause occupies a position of singular importance. In recent times, Arbitration has emerged as one of the most preferred mechanisms owing to its flexibility, confidentiality, procedural efficiency, and party-driven nature. The result has been the reflexive inclusion of Arbitration clause in almost every contract across sectors.

Yet this popularity has bred a dangerous complacency. Parties often assumes that naming a process 'arbitration', or designating someone an 'arbitrator', is sufficient to bring that process within the fold of the Arbitration and Conciliation Act, 1996 ('the Act').^[1] This assumption is not mere sloppy but it is also a legal trap with real consequences. The character of a dispute resolution clause is determined not by the labels attached to it, but by the substance of the agreement. The decisive factor is whether the clause reflects a clear, definite, and mutual intention of the parties to submit disputes to an Arbitral Tribunal whose decision will bind the parties.  If it does not, the court under section 11(6) of the Act will turn the party away, leaving it to litigate through the very civil courts it had hoped to bypass.

This article begins with setting out the statutory framework that give an arbitration agreement its legal character. It then traces the evolution of the judicial test for identifying a valid arbitration agreement. Then, it focuses on the specific principles that shows that the mere use of the word 'arbitration' is insufficient. Finally, it examines recent and significant pronouncements of the Supreme Court. The article argues that Indian arbitration law adopts a substance-over-form approach, under which the existence of an arbitration agreement depends not upon the use of particular terminology, but upon the unequivocal manifestation of the parties' intention to arbitrate.

Statutory Framework: What Makes a Valid Arbitration Agreement?

Arbitration is entirely a creature of contract. The law demands a rock-solid foundation for referring the dispute to Arbitration. The Section 7 of the Arbitration and Conciliation Act, 1996 is not merely a definition; it is the gatekeeper. It is modelled substantially on Article 7 of the UNCITRAL Model Law on International Commercial Arbitration, Section 7 embodies the legislative recognition that arbitration is fundamentally a consensual dispute-resolution mechanism.

Section 7(1) of the Act defines an arbitration agreement as “an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not.” The provision is deliberately broad in respect that it covers both existing disputes and those that may arise in the future, and it extends to legal relationships that are not purely contractual in nature. But this breadth in scope is matched by a stringency in form. Section 7(3) makes it unambiguous that an arbitration agreement must be in writing. It cannot rest on an oral understanding, a course of conduct, or a gentlemen's agreement. Section 7(5) addresses an important practical scenario which is incorporation by reference. Where a contract refers to another document that contains an arbitration clause, that reference can itself constitute an arbitration agreement, provided that the primary contract is in writing and the reference is sufficiently clear to make the arbitration clause a part of it.^[2]

The real controversy in most cases concerns the parties' intention to submit disputes to arbitration. The statutory language does not prescribe any particular form or terminology for creating an arbitration agreement. The mere use of such expressions such as 'arbitration', 'arbitrator', or 'arbitral tribunal' does not automatically transform a dispute-resolution clause into an arbitration agreement.

Therefore, an Arbitration Agreement requires consensus ad idem,^[3] the Latin expression for a meeting of minds, meaning that both parties must have agreed to the same thing in the same sense. This principle drives the entire edifice of contract law. It demands that both parties genuinely and unconditionally agree, at the time of contracting, to submit their disputes to arbitration. An agreement to think about arbitrating, or to possibly arbitrate, or to arbitrate if both parties later consent, does not constitute consensus ad idem. The Supreme Court observed the same in Bihar State Mineral Development Corporation v. Encon Builders (I) Pvt. Ltd.,^[4] that an arbitration agreement requires a clear intention of the parties to submit their differences to a private tribunal and to be bound by its decision.

Closely connected with this requirement is the principle of party autonomy. Party autonomy allows parties not only to choose arbitration as their preferred mode of dispute resolution but also to determine the procedural architecture of the arbitral process. But it is not a licence to mislabel something else as arbitration. A clause that designates a non-neutral person, say, an officer of one of the contracting parties, to resolve disputes, or a clause that imposes no obligation on either party to actually submit to arbitration, cannot be rescued by the principle of party autonomy.

Another critical attribute of a valid arbitration clause is the element of finality. Section 35 of the Act provides that an arbitral award shall be final and binding on the parties and those claiming under them. Therefore, a clause to qualify as an arbitration agreement, it must reflect the parties' acceptance of a binding outcome. A mechanism that concludes with a recommendation that either party may accept or reject is not arbitration. A process that expressly permits the parties to approach civil courts on the merits of the same dispute, after the 'arbitration', is not arbitration either. The Supreme Court has underlined this point in K.K. Modi v. K.N. Modi,^[5] and held that for a clause to be construed as an arbitration agreement, the chosen tribunal must be intended to act judicially, the decision must be intended to be final and binding.

 Judicial Tests for Identifying an Arbitration Agreement

While Section 7 of the Arbitration and Conciliation Act, 1996 provides the statutory definition of an arbitration agreement, its broad language has required judicial refinement. Courts have repeatedly been confronted with dispute-resolution clauses that employ the terminology of arbitration but fail to clearly establish whether the parties intended to submit disputes to a binding arbitral process. In response, Indian jurisprudence has gradually evolved a set of judicial indicators that function as a practical litmus test for determining the existence of an arbitration agreement.

A. Test I: Is There an Intention to Adjudicate, Not Just to Assist?

This concerns the nature of the decision-maker's role. This foundational distinction in Indian arbitration jurisprudence was drawn in K.K. Modi v. K.N. Modi.^[6] The dispute arose from a family settlement embodied in a Memorandum of Understanding (MoU), which provided that disagreements over its implementation would be referred to the Chairman of the IFCI for resolution. The Supreme Court was asked whether this clause constituted an arbitration agreement. The Supreme Court in paragraphs 17 & 18 identified a cluster of attributes that a clause must exhibit to constitute an arbitration agreement. The Court observed that the parties must intend to refer a formulated dispute to a private tribunal; that tribunal must be required to act judicially, which means hearing both sides and deciding on the basis of evidence or argument; and the decision must be final and binding. Where any of these elements is absent, the clause may reflect something else, but it cannot be called an arbitration agreement.

The Court's reasoning rested on a crucial observation that not every third-party intervention in a dispute qualifies as arbitration. There is a fundamental difference between a person who adjudicates, and a person who merely assists parties in arriving at an agreement. The former is an arbitrator. The latter is something closer to a mediator, a facilitator, or an expert. The IFCI Chairman, the Court concluded, was playing the second role, not the first.^[7]

B. Test II: Is the Obligation to Arbitrate Concluded, or Is it Still Contingent?

In Jagdish Chander v. Ramesh Chander,^[8] the Supreme Court drew a distinction between a clause that mandates arbitration and one that merely contemplates the possibility of arbitration. The clause under examination appeared in a partnership deed. It stated that disputes “shall be mutually decided by the partners or shall be referred for arbitration if the parties so determine.” The Supreme Court held that this did not constitute an arbitration agreement. The court observed that the agreement had not been reached at the time the contract was signed; it remained to be reached in the future.

The Court held that the words used in a clause must disclose a determination and obligation to go to arbitration and not merely indicate a future possibility of doing so. Clauses requiring further consent, consensus, or agreement at the stage when disputes arise do not constitute arbitration agreements because they merely amount to agreements to enter into an arbitration agreement in the future. The Court also noted that the mere use of the words 'arbitration' or 'arbitrator' is not conclusive if it requires a fresh or further consent of the parties. 

Recently, in BGM and M-RPL-JMCT (JV) v. Eastern Coalfields Limited,^[9] the dispute resolution clause in that contract provided that redressal of disputes “may be sought through the Arbitration and Conciliation Act, 1996.” The Court's analysis was direct. The word 'may' denote a possibility, not an obligation. A clause that says parties 'may' seek arbitration is not an agreement that they 'shall' do so. The Court described such language as an 'enabling clause', one that opens a door without binding any party to walk through it.

C. Test III: Does the clause, read in its entirety and in context, reflect a clear and mutual intention to refer disputes to arbitration?

Arbitration is fundamentally consensual. In Bihar State Mineral Development Corporation v. Encon Builders (I) Pvt. Ltd,^[10] the Supreme Court held that the existence of an arbitration agreement requires the parties to have an unambiguous intention to refer their disputes to a private tribunal and to be bound by the result.

The judgment set the tone for what courts would later describe as the 'substance-over-form' approach. A clause may be structured as an arbitration agreement, formatted as one, and even labelled as one, but if its substantive content does not reflect a clear, mutual commitment to submit disputes to binding arbitral adjudication, it will not be treated as one. 

D. Test IV: Is the Absence of Technical Language Fatal?

This is perhaps the most significant principle that the courts prioritise substance over form and the presence or absence of specific terminology is not decisive. In Visa International Ltd. v. Continental Resources (USA) Ltd.,^[11] the Supreme Court observed that the validity of an arbitration agreement cannot be determined solely by the presence or absence of particular expressions. What matters is that, reading the clause as a whole, the parties' intention to resolve their disputes through binding private adjudication is clear.

E. Test V: Does the process end in a final and binding decision, with no residual right to a civil court?

The Arbitration is not merely a process of discussion or negotiation; it is an adjudicatory mechanism intended to produce a binding determination of rights and liabilities. The importance of finality was reaffirmed in Jagdish Chander v. Ramesh Chander, where the Court in paragraph 8(iii) observed that a clause cannot qualify as an arbitration agreement if it expressly permits a dissatisfied party to seek a fresh adjudication before a civil court. If the contractual mechanism does not produce a final and binding determination, it indicates that the parties never intended to create an arbitral process.

Principle that Mere Use of the Word “Arbitration” Is Insufficient

The cases surveyed in the preceding section converge on a single proposition that can now be stated plainly that the presence of the word 'arbitration' in a contract clause is neither necessary nor sufficient to make that clause an arbitration agreement. It is neither necessary because, as Visa International case confirms, a clause can qualify as an arbitration agreement without ever using the word. It is not sufficient because, as K.K. Modi, Jagdish Chander, Bihar State Mineral and BGM and M-RPL-JMCT (JV) case demonstrate in their own way, a clause that uses the word but lacks the substance will not be enforced as one.

The law is therefore not about terminology. It is about intention. Intention that is not vague, it is about what the parties privately had in mind when they signed the contract. It is an objective assessment of what the language of the clause, read as a whole and in context, actually commits the parties to do. 

Recent Reaffirmation by the Supreme Court

The Supreme Court's recent decisions demonstrate that despite India's pro-arbitration approach, courts continue to insist upon the existence of a genuine agreement to arbitrate before compelling parties to arbitral proceedings.

A. Alchemist Hospitals Ltd. v. ICT Health Technology Services India Pvt. Ltd.:^[12] Arbitration in Name, Not in Substance

In Alchemist Hospitals Ltd. v. ICT Health Technology Services India Pvt. Ltd., the Supreme Court was called upon to determine whether a dispute-resolution clause repeatedly employing the expressions 'arbitration' and 'arbitrator' constituted a valid arbitration agreement. The clause envisaged a multi-tier mechanism whereby disputes would first be addressed through negotiations and, failing resolution, would be placed before the Chairmen of the respective companies. Significantly, the clause further contemplated that if the dispute remained unresolved, either party could pursue legal remedies before competent courts.

Examining the clause, the Court refused to be guided merely by the nomenclature employed by the parties. Instead, it analysed the substantive characteristics of the mechanism created by the contract. The Court observed that the designated decision-makers were not intended to function as independent adjudicators and that the process lacked the essential attributes of an arbitral proceeding, particularly finality and binding effect. The clause did not evidence an intention to submit disputes to a private tribunal for adjudication; rather, it contemplated an internal dispute-management process aimed at facilitating settlement.

The Court reiterated that the repeated use of the words 'arbitration' and 'arbitrator' cannot be treated as determinative of the parties' intention. The true inquiry remains whether the clause creates a binding obligation to submit disputes to arbitration and accept the resulting decision as final. Since those essential characteristics were absent, the clause was held not to constitute an arbitration agreement.

B. Nagreeka Indcon Products Pvt. Ltd. v. Cargocare Logistics (India) Pvt. Ltd.:^[13] The Significance of a Single Word

This case arose from a dispute between a shipper and a logistics company. The relevant clause appeared in Clause 25 of the Bill of Lading and read as follows: “Any difference of opinion or dispute thereunder can be settled by arbitration in India or a place mutually agreed with each other.” The applicant argued that the heading of the clause and the express reference to arbitration demonstrated an intention to arbitrate. The respondent, however, contended that the word 'can' rendered arbitration merely optional.

The Supreme Court accepted the latter contention. Undertaking a textual and contextual analysis of the clause, the Court held that the word 'can' ordinarily signifies possibility or capability rather than obligation. Consequently, the clause did not create a mandatory commitment to arbitrate but merely left open the possibility that the parties might choose arbitration in the future. The Court emphasised that a valid arbitration agreement must disclose a present determination to arbitrate rather than a future option to consider arbitration. Relying extensively on Jagdish Chander v. Ramesh Chander, the Court reaffirmed that clauses requiring fresh consent at the stage of dispute resolution do not satisfy the requirements of Section 7.

Taken together, these decisions reaffirm three propositions. First, arbitral terminology is relevant but never conclusive. Secondly, courts will examine the substance of the contractual arrangement rather than its label. Thirdly, arbitration remains a consensual jurisdiction whose existence depends upon a demonstrable commitment to arbitrate and not upon the mere possibility of doing so. The recent decisions therefore do not create new law; rather, they reinforce the doctrinal foundations laid down in K.K. Modi, Encon Builders, and Jagdish Chander, while simultaneously providing an important cautionary lesson for commercial drafters.

The jurisprudence on arbitration agreements under Section 7 of the Arbitration and Conciliation Act, 1996 reflects a consistent judicial commitment to the principle that arbitration is founded upon consent rather than terminology. While courts have adopted a liberal and pro-arbitration approach in interpreting commercial contracts, they have remained equally vigilant in ensuring that parties are not compelled to arbitrate in the absence of a clear and binding agreement.

The recurring lesson from these authorities is that arbitral jurisdiction cannot be founded upon ambiguity, aspiration, or a future possibility of agreement. Clauses that merely contemplate arbitration as an option, preserve the need for further consent, or lack the essential attributes of finality and adjudication fall short of the statutory requirements of an arbitration agreement. In this sense, the courts have consistently favoured a substance-over-form approach, examining the legal effect of the clause rather than the labels chosen by the parties.

1. The Arbitration and Conciliation Act, 1996 (No. 26 of 1996). ↑

2. Dr. P.C. Markanda, Law Relating to Arbitration and Conciliation (10^th ed., LexisNexis, 2016). ↑

3. Indian Contract Act, 1872 (No. 9 of 1872), § 13. ↑

4. Bihar State Mineral Development Corporation v. Encon Builders (I) Pvt. Ltd., Civil Appeal No. 2025 of 1997, ¶ 13, 17. ↑

5. K.K. Modi v. K.N. Modi, Civil Appeal No. 614 of 1998, ¶ 17. ↑

6. ibid ↑

7. ibid, ¶ 34. ↑

8. Jagdish Chander v. Ramesh Chander, Civil Appeal No. 4467 of 2002. ↑

9. BGM and M-RPL-JMCT (JV) v. Eastern Coalfields Limited, 2025 INSC 874. ↑

10. Bihar State Mineral Development Corporation v. Encon Builders (I) Pvt. Ltd., Civil Appeal No. 2025 of 1997, ¶ 13. ↑

11. Visa International Ltd. v. Continental Resources (USA) Ltd., Arbitration Petition No. 16 of 2007, ¶ 16, 18. ↑

12. Alchemist Hospitals Ltd. v. ICT Health Technology Services India Pvt. Ltd., 2025 INSC 1289. ↑

13. Nagreeka Indcon Products Pvt. Ltd. v. Cargocare Logistics (India) Pvt. Ltd., 2026 INSC 384. ↑