Introduction
Arbitration agreements commonly include clauses which mention specific actions for redressal of grievance before initiating the Arbitration process. A party may be required to engage in other measures such as conciliation, negotiation, and mediation to resolve disputes. All these procedures or measures are commonly termed as “Pre-Arbitral Steps” and such clauses are called “Multi-tiered Agreements” or “Multi-Tiered Dispute Resolution Clauses.”
The legal opinion related to Pre-arbitration processes in India remains uncertain. Examination of various precedents reveals that the courts have frequently dealt with this issue, resulting in conflicting decisions. Broadly, two predominant views have emerged. The majority of courts have upheld the literal interpretation of the arbitration clause, asserting that pre-arbitration procedures are obligatory. Conversely, some courts have, categorized pre-arbitration steps as discretionary and non-mandatory.
Pre-Arbitral Procedure – Mandatory
In Nirman Sindia v. Indal Electromelts Ltd, Kerala HC ruled that if parties in a contract mutually agree to a specific method for resolving disputes arising from the agreement, they are obligated to adhere to the prescribed mode outlined in the agreement. It is impermissible for a party to bypass the initial step and proceed directly to the next step without completing the first, as outlined for settlement of dispute [¶6]. Similarly, in Sushil Kumar Bhardwaj and Ors. vs. Union of India (UOI) and Ors, the Delhi High Court, emphasized that before seeking the court’s intervention for the appointment of an arbitrator, a party must diligently fulfil the stipulated process or the one mandated by the law. [¶15]
The HC of Rajasthan and the Bombay High court in the judgement delivered in Simpark infrastructures [¶29] and Tulip Hotels Private Limited vs. Trade Wings Limited [¶26] respectively, supported the decisions given in above mentioned cases.
Another approach to ascertain whether pre-arbitral requisites must be followed is by examining the language used in the agreement, specifically the use of the term “shall.” If the agreement employs “shall” in outlining the pre-arbitration steps, it typically signifies a mandatory obligation. This view has been given in the judgement of Haldiram Mfg. Co. (P) Ltd. v. DLF Commercial Complexes Ltd wherein it was stated that the agreement between the parties stipulated that they must engage in discussions for an amicable settlement before initiating arbitration proceedings. Importantly, the agreement used the word “shall” to describe this requirement. The court determined that this use of “shall” made the obligation to engage in discussions mandatory and Non-Negotiable [¶14]. Similarly, in the case of Emirates Trading Agency LLC v. Prime Mineral Exports, it was mentioned that the inclusion of the word “shall” in the clause shows the obligatory nature of undergoing the Pre-Arbitral Procedure [¶64].
Furthermore, as per the ruling in Visa International Ltd. v. Continental Resources (USA) Ltd even though the agreement mandated an attempt at an amicable settlement before resorting to arbitration, this precondition was not strictly followed. The court justified this deviation by highlighting that pursuing an amicable settlement was futile due to both parties maintaining rigid positions. Additionally, the correspondence between the parties demonstrated genuine efforts to achieve an amicable resolution. So, the court concluded that in situations where an amicable settlement is unlikely to succeed, the requirement to attempt it is not mandatory [¶36]. A comparable perspective was presented in the case of Demerara Distilleries (P) Ltd. v. Demerara Distillers Ltd, where the contract stipulated a requirement for mutual discussion before initiating arbitration. Despite this provision, the application was submitted without fulfilling this precondition. The Court rejected the argument that the application was premature, asserting that engaging in discussion at that stage would lack meaningful substance. Therefore, in this particular case, the mandatory nature of the requirement was not upheld [¶5].
Interestingly, in disputes which involve the Indian state or its entities, the courts might scrutinize the validity of the specified preconditions according to the constitution. For instance, the SCI, in the Icomm Tele Ltd case, declared invalid a precondition that required a deposit of 10% of the amount. The court characterized this requirement as “arbitrary,” deeming the process “ineffective” and excessively expensive [¶27].
In the case of M.K. Shah Engineers, the SCI considered whether a decision could invalidate if specific “procedural pre-requisites” were not met. The arbitration clause in question mandated that parties initially to present the dispute to the “Superintending Engineer” and subsequently resort to arbitration if dissatisfied with the Superintending Engineer’s decision. Adhering to the language of the clause giving in the arbitration agreement, the SCI determined that these Condition Precedents were “essential” [¶17].
Pre-Arbitral Procedure – Directory
On the contrary, the Delhi High Court has adopted a distinct stance. In the case of Ravindra Kumar Verma vs. M/S. Bptp Ltd. & Anr, it was asserted that prerequisites prior to referring to arbitration are “only directory and not mandatory.”[¶ 10] It was further stated that before formally commencing arbitration proceedings, parties should be directed to adhere to the agreed conciliation procedure within a reasonable, time-bound period. If they fail to do so, they should then be entitled to proceed with arbitration to resolve their claims or rights [¶11]. There are two key reasons against interpreting arbitration clauses’ pre-conditions as mandatory. Firstly, enforcing mandatory pre-conditions such as conciliation before arbitration could prejudice a party seeking arbitration because time spent in conciliation isn’t exempt from limitation periods. This could nullify arbitration rights if conciliation extends beyond the limitation period. Secondly, if pre-conditions like mutual discussion are considered mandatory, parties may lose their arbitration rights due to impractical timing constraints. Section-77 of the Act supports viewing such pre-conditions as directory rather than mandatory [¶8]. This position aligns with earlier rulings of the Delhi HC in Sikand Construction [¶10] and Saraswati Construction Company [¶4], emphasizing that “the procedure/pre-condition has to be only taken as a directory and not a mandatory requirement.”
The Bombay High Court determined that the decisions declaring such procedures as mandatory were based on arbitration clauses with different wording, allowing for a factual distinction. Crucially, the HC of Bombay did not declare, as a blanket rule, that all pre-arbitration steps are discretionary. Rather, it asserted that the nature of these procedures being mandatory or jurisdictional hinges on the language employed in the arbitration clause [¶22].
Following the precedent set by the judgment in Ravindra Kumar Verma as mentioned above, Delhi High Court, including those in cases such as Kunwar Narayan vs. Ozone Overseas Pvt. Ltd and Ors [¶5], Siemens Limited vs. Jindal India Thermal Power Limited [¶18], Union of India vs. M/s Baga Brothers [¶7], Sarvesh Security Services Pvt. Ltd. vs. Managing Director [¶26] have consistently relied upon and reaffirmed that pre-arbitral steps are of a directory nature.
Analysing the aforementioned cases, it proves challenging to conclusively determine the enforceability of pre-arbitration procedures. However, a pragmatic approach would involve operating under the assumption that Indian courts tend to decipher arbitration clauses rigorously and uphold their literal wordings of the Clause. It’s important to note that the courts haven’t explicitly examined whether pre-conditions to arbitration are issues of “admissibility,” “jurisdiction,” or “procedure.” Essentially, a party only needs to genuinely attempt to exhaust pre-arbitral remedies. If this isn’t feasible and it seems the other party isn’t attempting to settle the matter amicably, then these pre-conditions don’t prevent parties from invoking arbitration.
Examining various foreign jurisdictions, it becomes apparent that there is no definitive ruling provided by any of these jurisdictions. They largely share a similar stance to that of the Indian courts, with no conclusive determination on the enforceability of pre-arbitration procedures.
Indian courts might contemplate embracing a comparable stance as observed in the ruling by Singapore Court in International Research Corp PLC v Lufthansa Systems. In this case, the Court opined that if pre-conditions are clearly and specifically defined, they should be considered mandatory; conversely, if they are vague and general, enforcement as mandatory may not be applicable [¶62]. Moreover, the courts have the opportunity to provide clarification regarding the adherence to fulfil the Pre-conditions referred in arbitration agreement.
Author(s)
Akanksha Saini
Student at UILS, Panjab University