Open Access Research Article
Enforceability of Pre-Arbitral Dispute Resolution Clauses in India - BY SASWATA ROY
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Article Details
Enforceability of Pre-Arbitral Dispute
Resolution Clauses in India
AUTHORED BY-
SASWATA ROY
Abstract
In this day and
age, arbitration is considered an essential dispute resolution method due to it
being efficient and fast as compared to court proceedings. That is why, almost
all commercial contracts contain an arbitration clause which specifically mentions
that any disputes or differences which might arise will be referred to
arbitration. However, arbitration can be an expensive process. This led to the
use of pre-arbitral dispute resolution clauses in contracts. These clauses
contain steps which the parties need to perform before they can refer the
dispute to arbitration. Here a question arises as to whether such
pre-conditions are considered mandatory or whether the parties can directly
refer the dispute to arbitration without following the steps mentioned in the
contract.
Introduction
Pre-Arbitral
dispute resolution clauses are clauses where the parties in the contract
prescribe a specific process for dispute resolution. The parties decide that if
any dispute or differences arise then they will first try to settle the dispute
in some way and if such fails then they will go to arbitration. These clauses
are also known as multi-tier or escalation clauses.
Such causes are
commonly employed in complex construction contracts, service contracts
requiring specialised know-how, and turnkey contracts. Generally, these clauses
provide for distinct stages, involving separate procedures, for dealing with
and seeking to resolve disputes.[1]
Thus, such a clause requires parties to negotiate, or mediate, as the first
step and only upon failure of efforts taken in the Pre-arbitration Mechanisms
will parties be permitted to resort to the final tier, i.e., arbitration.[2]
This is done in
an attempt to resolve the dispute by a specified and relatively cheap and cost
effective procedure without the necessity of resorting to arbitration, which
proves to be, costly
and
time-consuming in international contracts. The key issues revolving around such
multi-tier clauses are the issues of enforcement, i.e., whether the
Initial-tiers are enforceable.
View of the Supreme Court
In the case of M.K.
Shah Engineers and Contractors vs. State of Madhya Pradesh[3],
it was provided that any dispute will first be referred to Superintending
Engineer and any party if aggrieved with such decision can refer the case to
arbitration. The Supreme Court held that steps preceding the coming into
operation of the arbitration clause are essential. However, in this case, the
Court held that such steps although essential are capable of being waived and
if one party has by its own conduct or the conduct of its officials disabled
such preceding steps being taken, it will be deemed that the procedural
pre-requisites were waived.
In the case of S.K.
Jain v. State of Haryana[4],
the tribunal refused to assume jurisdiction on the basis that the appellant had
not complied with certain “mandatory requirements”. The petition against the
tribunal’s decision was dismissed on the basis that the language of the
arbitration clause required prior satisfaction of certain conditions.
In Oriental
Insurance Company v. Narbheram Power and Steel[5],
the arbitration clauses were viewed to be construed strictly thus requiring
completion of pre-conditions to arbitration. A similar ruling was passed in United
India Insurance Co. v. Hyundai Engineering and Construction Co.[6]
where the agreement was found to be “hedged with conditionality” making
non-fulfilment of the pre-conditions render the dispute “non-arbitrable”. However,
even though the existence of an arbitration agreement was not disputed, the SCI
found that the arbitration agreement could be “activated” or “kindled” upon the
competition of the pre-conditions, and the same was “sine qua non for
triggering the arbitration clause”.
There are
certain cases where the Supreme Court by undertaking a factual investigation
have held that even though pre-arbitral steps are provided in the contract,
such steps are only directory. In the case of Demerara Distilleries Private
Limited v. Demerara Distillers Limited[7],
the agreement between the parties provided that differences between the parties
are required to be resolved first by mutual discussions, followed by mediation
and only on the failure of mediation recourse to arbitration is contemplated.
The Supreme Court held that resolving the dispute by mutual discussion and
mediation would be an empty formality. The Court justified its decision by
placing reliance elaborate correspondences between the parties that has been
placed before the court.
In the case of VISA
International Ltd. v. Continental Resources (USA) Ltd.[8],
the arbitration clause provided that disputes which cannot be settled amicably
shall be referred to Arbitration. Here also the Supreme Court held that since
that parties have taken rigid stands against each other and made allegations
against each other, the dispute cannot be settled amicably and the dispute has
to be referred to arbitration.
Contradictory Position of Various High Courts
In the case of Saraswati
Construction Co. v. Cooperative Group Housing Society Ltd.[9] as
per the arbitration clause arbitration could only be invoked in a particular
manner by calling upon the architect to refer the disputes to arbitration and
since notice was not given through the architect, it was argued that the
arbitration clause could not be invoked. The learned Single Judge of the Delhi
High Court held that the prior requirement as stated for invoking arbitration
even if not complied with, the same cannot prevent reference to arbitration,
because, the procedure/pre-condition has to be only taken as a directory and
not a mandatory requirement. The learned Single Judge in this case relied upon
the earlier judgment of a learned Single Judge of the Delhi High Court in the
case of Sikand Construction Co. v. State Bank of India[10].
The Delhi High
Court in Ravindra Kumar Verma v. BPTP Limited[11]
held that pre-conditions such as conciliation or mutual discussion or similar
other procedure would not act as a bar to exercise jurisdiction in light of
Section 77 of the Arbitration and Conciliation Act. Section 77 of the
Arbitration Act permits a party to initiate arbitration or judicial
proceedings, notwithstanding the conciliation proceedings, if such proceedings
are necessary for preserving the right of the parties. Accordingly, the court
held that existence of conciliation or mutual discussion procedure or similar
other procedure is directory in nature.
In JK
Technosoft v. Ramesh Sambamoorthy[12],
the arbitration clause provided that disputes shall be settled amicably by
mutual discussion failing which the same shall be settled through arbitration.
The Delhi High Court relied upon the ratio of Ravindra Kumar Verma and
held that the pre-condition was directory and accordingly, ordered the
commencement of Arbitration.
The Court in Union
of India v. Baga Brothers[13],
while relying on the judgement of Ravindra Kumar, reiterated the
directory nature of pre-arbitral steps and held that the appointment of an
Arbitrator can be proceeded with even prior to completion of such steps. A
similar view has been taken by this Court in further cases like Siemens Ltd.
v. Jindal India Thermal Power Ltd.[14]
and Sarvesh Security Services Pvt Ltd v. Managing Director, DSIIDC[15],
reaffirming the stance taken in the previously mentioned judgements and
restating that pre-arbitral steps are merely optional.
However, the
Mumbai High Court has taken a different stance altogether. In Tulip Hotels
Pvt. Ltd. v. Trade Wings Ltd[16],
upheld the enforceability of the multi-tier clause and opined that if the
parties prescribe certain preconditions to be adhered to before referring the
matter to arbitration, the parties are required to comply with such
preconditions and only then refer the matter to arbitration. Accordingly, the
petition seeking appointment of Arbitrators was dismissed. Interestingly, in
the same year as Tulip Hotels another case before the High Court of Bombay, Rajiv
Vyas v. Johnwin Manavalan,[17]
where the parties had filed for the appointment of Arbitrators pursuant to an
Arbitration Clause that contained the pre-conditions of Conciliation before
invoking Arbitration. In this case, the court refused to dismiss the
application and ordered the dispute to be referred to a conciliator, failing
which the matter shall be referred to an arbitral tribunal. Thus, here also the
Court followed the pre-arbitral conditions and ordered the dispute to be
referred to conciliation before referring it to arbitration.
However, again
in the case of S. Kumar Construction v. Municipal Corporation of Greater
Bombay[18], the
Bombay High Court refused to entertain the contention that the pre-arbitral
steps are mandatory. But this refusal was due to the language of the contract.
In this case, Clause 96 of the General Conditions of the Contract provides that
any disputes would first be referred to the Commissioner and if the contractor
is not satisfied with the decision of the Commissioner, then the dispute would
be referred to arbitration. Clause 97 of the General Conditions of the
Contract, on the other hand, provided that all disputes between the parties
shall be referred to arbitration. Thus, in Clause 97 there is no reference to
Clause 96 which can be said to be a defining feature of the agreement. Hence
Clause 97 can be said to be a stand-alone arbitration clause whose invocation
is not contingent upon invocation of Clause 96. Clause 97 being widely worded,
the disputes which have arisen under Clause 96 and their reference to
arbitration can only be one of the facets of Clause 97, but not the only facet.
Therefore, invocation of Clause 96 is not a must for invoking Clause 97 and
that a claim for the first time can be made before the arbitrator by following
the procedure laid down in Clause 97. Due to these reasons, the Court held that
pre-arbitral procedures are not mandatory for invoking arbitration.
In Nirman
Sindia v. Indal Electromelts Ltd.[19],
the Kerala High Court held that when the parties to a contract agree to any
special mode for resolution of the disputes arising out of the agreement and
they are bound to comply with the mode prescribed under the agreement without
resorting to the first step provided for the resolution of the dispute in the
agreement, they cannot jump to the second step or to the final step to settle
the disputes between the parties.
The Rajasthan
High Court in Simpark Infrastructure Pvt. Ltd. v. Jaipur Municipal Corporation[20],
opined that in case an amicable settlement as per the conciliation procedure
set forth has been made a condition precedent for invoking the arbitration
clause, it is not open to an Applicant to reject the invitation for
conciliation. Accordingly, the court held that the arbitration was premature
and directed the parties to satisfy the condition precedent for invoking the
arbitration clause before seeking an application under Section 11 of the
Arbitration and Conciliation Act, 1996.
Conclusion
Multi-tier
conflict resolution clauses give parties the chance to reach a customised
resolution that satisfies the unique requirements of their partnership. Such
clauses provide a platform to settle disagreements amicably and protect their
future relationship while also assisting in the resolution of minor financial
issues without resorting to expensive international arbitration. However
Multi-tiered clauses though aimed at providing faster and efficient resolutions
than arbitration have proved to be costly in reality. Such multi-tier clauses
have led to new disputes of their own resulting in undesirable consequences for
the arbitral process on a whole.
Therefore, as
can be gathered from the above discussion, the Supreme Court and High Courts
have taken several divergent stances over the years when it comes to deciding
the nature of pre-arbitral steps as either mandatory or merely directory. It
can be concluded that due the reliance placed on factors like the parties’
intentions, i.e., the language of the clause in question and the likelihood of
success of pre-arbitration procedures, there is no certain answer to that
question yet. Here, the subjectivity at play makes it so that some level of
judicial discretion can be observed. Although the majority view seems to be in
favour of mandatory compliance with pre-arbitral procedures, the Courts on
several occasions have recognised the need for a more nuanced position where
such procedures may be treated as non-mandatory.
[1] Michael Pryles, Multi-Tiered Dispute Resolution
Clauses, 18(2) JIA 159, (2001).
[2] Alexander Jolles, Consequences of Multi-tier
Arbitration Clauses: Issues of Enforcement, 72(4) Arbitration (2006).
[4]
(2009) 4 SCC 357.
[5]
(2018) 6 SCC 534.
[6]
(2018) 17 SCC 607.
[7]
(2015) 13 SCC 610.
[8]
(2009) 2 SCC 55.
[9]
1995 (57) DLT 343.
[10] ILR
(1979) 1 Delhi 364.
[11]
(2015) 147 DRJ 175.
[12]
2017 SCC OnLine Del 10813.
[13]
2017 SCC OnLine Del 8989.
[14]
2018 SCC OnLine Del 7158.
[15]
2018 SCC OnLine Del 7996.
[16]
2009 SCC OnLine Bom 1222.
[17] 2010
SCC OnLine Bom 1321.
[18] 2017
SCC OnLine Bom 130.
[19]
AIR 1999 Ker 440.
[20]
2012 Scc OnLine Raj 3833.
Article Information
Enforceability of Pre-Arbitral Dispute Resolution Clauses in India - BY SASWATA ROY
Authors: SASWATA ROY
- Journal IJLRA
- ISSN 2582-6433
- Published 2022/10/21
- Volume 2
- Issue 7
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International Journal for Legal Research and Analysis
- Abbreviation IJLRA
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