The complicated nature of pre-arbitration mechanisms

Pre-arbitration mechanisms are dispute resolution/prevention steps embodied in contracts between parties providing for an attempt at amicable resolution of the dispute. Parties have to abide by these provisions before resorting to arbitration.

Modern commercial contracts often include multi-tier dispute resolution clauses, requiring parties to attempt mutual talks, conciliation, mediation, or internal dispute resolution before resorting to arbitration. These clauses are widely adopted globally, with major arbitration institutions incorporating them into their rules.

The outlined steps offer several advantages, including cost-efficiency, time-bound resolution, fostering amicable relationships, reducing litigation risks and easing case backlog. However, their enforcement lacks judicial consensus. Understanding the types of these mechanisms is crucial, as divergences in judicial opinions often stem from their variations.

First and most common are clauses providing conciliation or mediation as a pre-condition to arbitration. The second type includes reference to any internal dispute resolution body as a pre-condition to arbitration. These bodies are generally referred to as Dispute Resolution Board (DRB), Dispute Review Committee (DRC), Dispute Adjudication Board (DAB), Joint Experts Committee (JEC), Chief/Superintending Engineer etc. These types of clauses are more common in construction and energy disputes.

While interpreting or enforcing the former clauses, Indian courts have taken diverging views. In some cases, it has been held that non-compliance with the clauses would result in dismissal of the application seeking reference to arbitration as premature. In others, the clauses have been held to be merely directory in nature, the non-compliance of which would have no effect on the arbitration between the parties.

There seems to be less divergence amongst the courts when it comes to the enforcement of the second type. Most of the courts have held that the clauses providing for reference to an internal dispute resolution body are mandatory.

1. Mutual talks/Negotiation/Conciliation/Mediation clauses

i) Mandatory

The High Court of Delhi in Haldiram Manufacturing Company v. Anil Sapra was dealing with a clause that mandated the parties to resolve the dispute amicably by mutual discussions, and it is only when the mutual talks failed that the parties could invoke arbitration. The Court held that the clause used the word ‘shall’; therefore, the requirement was of mandatory nature. The Court placed reliance on the wording of the clause to arrive at the conclusion.

In Sanjay Iron and Steel v. SAIL, the High Court of Delhi dealt with a clause which that provided for pre-arbitration conciliation, designated a forum/institution to administer the conciliation and further provided a time limit for the same. The Court held the clause to be mandatory and directed the parties to exhaust the pre-arbitration remedy before invoking the arbitration.

The High Court of Bombay in Tulip Hotels v. Trade Wings held the prerequisite of referring the dispute to conciliation before invoking arbitration to be a mandatory requirement. However, at the same time, it observed that if the conciliation is avoided by one party, the other party cannot be rendered a helpless spectator and it would then be within its right to invoke arbitration despite the non-satisfaction of the pre-condition.

ii) Directory

Although it did not directly comment upon the nature of pre-arbitration steps, the Supreme Court has on two occasions appointed an arbitrator despite non-compliance with the pre-arbitration mechanisms by observing that looking at the communication exchanged between the parties, any attempt at amicable settlement would be an empty formality (Visa International v. Continental Resources and Demerara Distilleries v. Demerara Distillers Ltd).

The High Court of Delhi in Ravindra Kumar v. BPTP Ltd, while disagreeing with the view taken by the coordinate bench in Haldiram Manufacturing, held the pre-condition of mutual talks to be just a directory requirement, the non-compliance of which would have no consequence on an application seeking appointment of arbitrator. It held that if the pre-condition of conciliation is made mandatory, it can possibly result in grave injustice to a party that is touching on limitation for its claims as the time spent in conciliation is not excluded from the period of limitation. Moreover, Section 77 of the Arbitration and Conciliation Act allows the parties to invoke arbitration during the pendency of the conciliation proceedings, and thus conciliation cannot be a bar to invocation of arbitration. However, it held that despite the non-binding nature of such pre-arbitral steps, the parties should be first directed to satisfy those conditions before the formal arbitration begins.

Similarly, the Bombay High Court in Rajiv Vyas v. Johnwin held the pre-condition of conciliation to be directory, having no effect on the agreement to arbitrate between the parties. It held that the Court exercising power under Section 11 of the Act would not reject the application merely because the condition precedent has not been satisfied. However, the Court should make a conditional order requiring the compliance with the pre-arbitration condition and it is only when this fails that the arbitration would begin. Accordingly, it appointed both a conciliator and an arbitrator who would enter reference only and when the conciliation fails.

2. Internal dispute resolution mechanisms

i) Mandatory

The Supreme Court in MK Shah Engineers v. State of MP held the requirement of pre-condition to arbitration in the form of reference to the Superintending Engineer to be an essential requirement. However, it also held that such a requirement could be waived by the conduct of the parties by not taking the objection to the jurisdiction of the tribunal during the pendency of arbitration. Therefore, the Court held that such a requirement is essential and must be complied with and any objection regarding its non-compliance must be taken at the earliest under Section 33 of the Arbitration Act, 1940 and not in a challenge petition for the first time. The reasoning can be adopted in the Arbitration Act, 1996 Act to mean that pre-arbitration steps can be jurisdictional challenges under Section 16 of the Act.

The High Court of Delhi in Sushil Kumar Bhardawaj v. Union of India examined a multi-tiered arbitration clause that also provided for tiered internal dispute resolution. The clause provided for reference of disputes firstly to the Engineer-in-Charge followed by the Superintending Engineer and finally to the Chief Engineer for its decision. The Court held that it must give effect to the agreed procedure, and held the pre-condition to be mandatory. It also held that in this case, the petitions for appointment of arbitrator were premature.

The Delhi High Court in Ved Prakash v. DDA, while reiterating the view taken in Sushil Kumar, also distinguished between a clause merely requiring the parties to explore the possibility of an amicable settlement with a clause designating an authority to exercise power and providing for a detailed procedure to be followed. The Court held that while the former may be directory, the latter clause will be mandatory. It is important to note that the same judge in another case held conciliation to be directory in nature. Therefore, it is clear that the nature of the clause would depend upon its wording, procedure prescribed and if any authority is named therein.

ii) Directory

The High Court of Delhi in Sikand Construction v. State Bank of India held the requirement of referring the dispute to an architect as a pre-condition to arbitration is only directory for the reason that there was no consequence given under the clause for not following the agreed procedure. Further, the clause empowered the arbitrator to open up, review or revise the decision of the architect.

The Allahabad High Court in Sun Security Services v. Babashaeb Bhimrao Ambedkar University examined a for pre-arbitration mechanism in the form of reference of dispute to the Registrar and the Vice-Chancellor of the university. The Court held that such a requirement is directory in nature and cannot be a ground to reject an application for appointment of arbitrator. It further held that the respondent, not having made any effort to settle the dispute despite the best efforts by the petitioner, cannot object to the maintainability of the petition on the ground of non-satisfaction of pre-requisites.

Judicial interpretations of pre-arbitration mechanisms vary, with courts generally enforcing internal dispute resolution clauses as mandatory. However, opinions are divided on whether conciliation or mediation clauses are binding prerequisites or optional steps before arbitration.

The challenge in enforcing pre-arbitration clauses lies in balancing amicable settlement efforts with avoiding procedural delays that could impact parties' rights, especially concerning limitation periods. This tension highlights the risk of delaying arbitration in contentious cases. In navigating these mechanisms, parties should carefully draft dispute resolution clauses to reflect clear intentions regarding their binding nature. Ultimately, clarity in contractual language and a nuanced judicial approach can facilitate smoother dispute resolution processes and uphold the efficiency and finality that arbitration seeks to offer.

Shubham Tiwaria is an advocate practicing at Delhi.