Overview

Multi-tiered dispute resolution clauses prescribing pre-arbitral steps are common in commercial contracts in order to allow parties to:

  • resolve their disputes in a non-adversarial set up;
  • preserve commercial relationships; and
  • save costs.

On the other hand, prolonged negotiation may not only cause delays, but also allow an unscrupulous party to evade its contractual obligations.

The most common pre-arbitral procedural mechanisms include:

  • amicable and good-faith negotiation between the parties;
  • meetings between the parties' key executives and representatives, to arrive at a settlement;
  • mediation; or
  • submitting the dispute to an expert or a non-binding decision-making person or body.

Almost all contracts require performance of such pre-arbitral steps as a condition precedent to arbitration, but are they specifically enforceable? In other words, are pre-arbitral steps mandatory or directory in nature?

Case law

Supreme Court opinions In view of the recent amendments(1) to the Arbitration and Conciliation Act 1996, the Supreme Court held that it would confine its examination only to the existence of an arbitration agreement in an application seeking the appointment of an arbitrator under Section 11.(2) It is therefore likely that the courts may leave the arbitral tribunal to answer the question of compliance with pre-arbitral steps.(3)

Indian courts, including the Supreme Court, have dealt with the question of enforceability of pre-arbitral steps before the 2015 amendment. In particular, the Supreme Court has emphasised the importance of the parties' conduct before initiating arbitration. For example, if based on the parties' conduct, the court believes that relegating them to pre-arbitral mechanism would be an empty formality, it will be reluctant to interpret pre-arbitration requirements to be mandatory in nature.

In Visa International Limited v Continental Resources (USA) Limited(4) – a case where the clause provided amicable settlement before reference to arbitration – the Supreme Court referred to letters exchanged between parties and inferred that attempts were made for amicable settlement with no result, leaving no option but to invoke arbitration. A similar view was taken by the Supreme Court in Swiss Timing Limited v Commonwealth Games 2010 Organising Committee.(5)

In Demerara Distilleries Private Limited v Demerara Distillers Limited(6) the Supreme Court had, while dealing with an application seeking appointment of an arbitrator, rejected the plea that invocation of arbitration was premature. Under the agreed mechanism, the parties had decided that the differences would be resolved first by mutual discussions, followed by mediation, and only if mediation failed would they arbitrate. The court inferred from the correspondence between the parties that any attempt at that stage to resolve disputes by mutual discussions and mediation would be an empty formality and proceeded to appoint an arbitrator.

Delhi High Court opinions The Delhi High Court(7) has held the clause providing for conciliation or mutual discussion before invocation of arbitration to be directory and not mandatory in view of Section 77 of the act. The court held that there should be no bar on filing proceedings to refer a matter to arbitration if this is necessary to preserve the parties' rights (eg, limitation). However, in certain cases, there may be an effective need for conciliation. In such cases, the parties should be directed to take up the agreed procedure for conciliation and mutual discussion in a time-bound and reasonable period before proceeding with arbitration.

In another case before the Delhi High Court,(8) a party had challenged an award on the grounds that the pre-condition of conciliation provided under the contract was not resorted to before invoking arbitration. The court dismissed the contention while relying on Ravindra Kumar Verma (supra), holding the said pre-arbitral step to be directory. The Delhi High Court has followed this decision by holding similar clauses to be directory and has proceeded with the appointment of an arbitrator.(9) Both the Allahabad(10) and Rajasthan(11) High Courts have taken a view similar to that of the Delhi High Court.

Bombay High Court opinions On the other hand, in Tulip Hotels Private Limited v Trade Wings Limited(12) the Bombay High Court dismissed a petition for the appointment of an arbitrator where the parties had failed to follow the prescribed pre-arbitral step of conciliation. The court held that where the parties agree to a specific procedure and mode for settling their dispute by way of arbitration and prescribe certain preconditions for referring the matter to arbitration, they must comply with those pre-conditions and only then can they refer the matter to arbitration. It is noteworthy that the specified pre-arbitration step in this case was conciliation under the act. However, in Rajiv Vyas v Johnwin(13) the Bombay High Court refused to dismiss the application seeking the appointment of arbitrator and chose to refer the disputes to a conciliator while simultaneously constituting an arbitral tribunal to which the disputes would be referred in the event that the conciliation failed.

Comment

In order to avoid disputes over dispute resolution clauses, it is essential that they be drafted with the utmost care and caution. Pre-arbitral steps entailing a time-bound process, mediation before a specific authority or conciliation under the act are more likely to stand the test of judicial scrutiny instead of open-ended and vague pre-arbitral steps. As the law stands, it is unlikely for an arbitral tribunal to dismiss the arbitration when faced with the issue of enforcing a pre-arbitral step. Just like the courts, the tribunal will consider the parties' conduct leading up to the invocation of arbitration and if it concludes that a direction to follow pre-arbitral steps will be an empty formality, it will proceed with arbitration. The other option for the tribunal would be to direct the parties to follow the specified pre-arbitral process within a fixed timeframe and suspend arbitration in the meantime. This would allow the parties to meet the desired objective of exploring an amicable resolution without compromising the arbitration.

For further information on this topic please contact Rajat Jariwal or Sahil Narang at Khaitan & Co by telephone (+91 11 4151 5454) or email (rajat.jariwal@khaitanco.com or sahil.narang@khaitanco.com). The Khaitan & Co website can be accessed at www.khaitanco.com.

Endnotes

(1) Section 11(6A) inserted by the Arbitration and Conciliation (Amendment) Act 2015.

(2) Duro Felguera, SA v Gangavaram Port Limited (2017) 9 SCC 729.

(3) This issue has yet to come up for consideration before the Supreme Court.

(4) (2009) 2 SCC 55.

(5) (2014) 6 SCC 677.

(6) (2015) 13 SCC 610.

(7) Ravindra Kumar Verma v BPTP Limited (2015) 147 DRJ 175.

(8) Union of India v M/s Baga Brothers 2017 SCC OnLine Del 8989.

(9) JK Technosoft v Ramesh Sambamoorthy 2017 SCC OnLine Del 10813.

(10) Sun Security Services v Babasaheb Bhimrao Ambedkar University MANU/UP/2994/2014: Arbitration Case 4/2013, decided on December 19 2014.

(11) M/s JIL-Aquafil (JV) v Rajasthan Urban Infrastructure Development Project, 2016 SCC OnLine Raj 3814: AIR 2016 (NOC 671) 313.

(12) 2010(1) Mh LJ 73.

(13) 2010 (6) Mh LJ 483.

This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.