Arbitration Clause Legal Test 2026: Supreme Court Ruling on Binding Agreement Language

On April 17, 2026, the Supreme Court held that an arbitration clause employing the word 'can' does not constitute a binding arbitration agreement. The ruling clarifies a longstanding ambiguity in commercial contract interpretation: what language is necessary to create a mandatory obligation to arbitrate disputes? This judgment has direct implications for thousands of commercial contracts that use ambiguous or discretionary language in arbitration clauses and for dispute resolution strategy in business.

The Distinction Between Can, Shall, and May

In contract law, words matter precisely. 'Shall' imposes a mandatory obligation. 'May' grants a discretionary right. 'Can' occupies uncertain middle ground. In the April 2026 judgment, the Supreme Court clarified that 'can' does not suffice to create a binding arbitration agreement. If a contract states parties 'can' resolve disputes through arbitration, it is not an arbitration agreement but merely a permissive statement. Either party retains the right to proceed to court instead.

The Legal Standard Under the Arbitration Act 1996

The Arbitration and Conciliation Act, 1996, requires a valid arbitration agreement to bind parties to arbitration. Section 7 defines what constitutes an arbitration agreement. Courts have long applied a test: does the clause reflect the genuine intent of the parties to resolve disputes exclusively through arbitration? Discretionary language like 'can' fails this test because it does not evidence exclusive intent.

Why This Matters for Existing Contracts

Many older commercial contracts, particularly standard terms and conditions, use permissive language. Clauses reading 'disputes may be resolved by arbitration' or 'parties can refer disputes to arbitration' are now potentially unenforceable as binding arbitration agreements. The April 2026 ruling means a party faced with such a clause can likely still elect to sue in court rather than arbitrate.

Drafting and Contract Review Implications

The ruling has immediate consequences for contract drafting and negotiation. Any party wishing to make arbitration mandatory must use clear, binding language: 'disputes shall be resolved by arbitration' or 'all disputes must be referred to arbitration before any court proceeding.' Parties reviewing existing contracts should examine arbitration clause language to determine enforceability under the new standard.

Key Takeaways

Parties reviewing contracts with arbitration clauses should examine whether the language is mandatory ('shall,' 'must,' 'will') or discretionary ('can,' 'may'). If discretionary, the arbitration clause may not be enforceable, and either party can elect court litigation. Contract drafters must use clear, mandatory language to create binding arbitration agreements. In disputes, parties should raise this language-based argument early in proceedings. Arbitration institutions should update model clauses to align with this judgment.