Pre-Arbitral Procedures: To be mandatory or not?
This article has been authored by Ritwik Sharma & Ishani Chakraborty, 3rd year law students at Rajiv Gandhi National University of Law, Patiala.
Introduction
Multi-tiered dispute resolution clauses (“MDR”) require parties to fulfill mandatory pre-adjudicatory requirements before the commencement of arbitral proceedings. So far, Indian courts have generally upheld a pro-arbitration stance, treating such pre-arbitral steps to be directory rather than mandatory. However, the recent decision by the Delhi High Court (the “Court”) in Centaurus Green Energy Private Limited v. Rajshree Educational Trust (“Centaurus”) has added a jurisprudential nuanced to this trend.
In Centaurus, the Court ruled that the inclusion of conciliation as a pre-condition in an arbitration clause does not bar the filing of an application under Section 11 of the Arbitration and Conciliation Act, 1996 (“The Act”). At the same time, in paragraph 11 of the judgement, the court emphasized that prior to the commencement of arbitration proceedings, the parties should be “directed to take up the agreed procedure for conciliation as provided in the agreed clause for conciliation in a time bound reasonable period.” This dichotomy highlights the dilemma of whether the contractual autonomy of parties should take precedence over swift resolution through arbitration, particularly when the time lost in following the pre-arbitral steps risks the expiration of the limitation period, effectively nullifying the right to arbitrate.
Parties favouring arbitration over contractually mandated pre-arbitral steps often cite the Supreme Court’s ruling in Demerara Distilleries (P) Ltd v. Demerara Distilleries Ltd (“Demerara Distilleries”), which treated pre-arbitral steps as directory despite the arbitration clause requiring such procedures before arbitration. Similarly, the Delhi High Court’s decision in Ravindra Kumar Verma v. BPTP Ltd (“Ravindra Kumar”) has been widely relied upon to challenge the enforceability of such clauses. These judgments have diluted party autonomy and rendered MDR clauses largely redundant.
This blog delves into the rationale behind courts treating pre-arbitral steps as directory rather than mandatory and critiques the rigid, generalized pro-arbitration approach that has emerged post-Demerara Distilleries. It argues that until the Supreme Court conclusively defines the legal status of pre-arbitral steps in MDR clauses, courts in India should adopt a more nuanced approach, refraining from negating the mandatory nature of these steps altogether.
Rationales Behind The Pro-Arbitration Approach So Far
The most prominent example of arbitral proceedings being barred due to contractually mandated pre-arbitral steps is the case of Haldiram Mfg. Co. (P) Ltd. v. DLF Commercial Complexes Ltd.(“Haldiram”), wherein an application under Section 8 of the Act included an agreement mandating negotiation to ensure amicable settlement, before arbitration could be requested. However, the said mandate entailed the usage of the word ‘shall’, which was a point of contention. The Delhi High Court held the requirement to be mandatory, and the application was dismissed since the defendant had not previously called upon the plaintiff to follow the procedure of amicable settlement and thus could not seek to refer the matter to arbitration.
However, Haldiram was held to be per incuriam in Ravindra Kumar wherein the Delhi High Court held the pre-arbitration procedure clause to be not mandatory on two grounds – (i) on the pretext that holding the clause to be mandatory would shorten the period of limitation, and (ii) relying on Section 77 of the Act.
Elaborating on the first ground, the Court observed that if a clause mandates pre-arbitration discussions for a specified period, parties must initiate them well in advance of the limitation period. Failure to do so could severely prejudice a party intending to invoke arbitration, as the time spent in conciliation proceedings is not excluded from the limitation period under the Limitation Act, 1963. Thus, treating such pre-conditions as mandatory could result in the unintended extinguishment of a party’s right to arbitration. Applying this rationale, the Delhi High Court in Jhajharia Nirman Ltd v. South Western Railways further extended the directory interpretation of pre-arbitration clauses to scenarios requiring urgent adjudication.
The Court in Ravindra Kumar supported its conclusion using the second ground by invoking Section 77 of the Act, which ensures that conciliation proceedings do not bar a party’s right to pursue other legal remedies. Section 77 of the Act bars parties from initiating arbitral proceedings while conciliation is ongoing with respect to that matter, provided that arbitration is not “necessary for preserving their rights.” It hence allows a party to initiate such proceedings if they believe it is necessary to protect their rights.
A third rationale accepted by courts is the redundancy in following empty formalities if there is evidence of parties taking a rigid, irreconcilable stance. In Visa International Ltd. v. Continental Resources (USA) Ltd., the Supreme Court held the escalation clause to be directory, reasoning that since the parties had adopted rigid positions, the correspondence between them demonstrated unsuccessful attempts at conciliation, and thus insisting on further settlement efforts would serve no practical purpose, thereby rendering the clause directory.
Similarly, the Bombay High Court in Rajiv Vyas v. Johnwin, reaffirmed that parties cannot be compelled to adhere to a escalation clause when such adherence amounts to an “empty formality.” However, the Court added an important procedural nuance by holding that, in such cases, the appropriate course of action would be to pass an order under Section 11 of the Act, contingent upon the parties complying with any stipulated preconditions.
Is The Trend To Consider Pre-Arbitral Steps Directory Justified?
The first and the second grounds accepted in Ravindra Kumar demonstrate a legitimate attempt at safeguarding parties’ right to dispute resolution under Section 77 of the Act where urgent adjudication is absolutely necessary. However, reliance on other rationales is misplaced and disregards pivotal elements of MDR clauses such as party autonomy and mutual consent. For instance, proceeding to arbitration directly under the pretext of avoiding an empty formality jeopardizes the sanctity of contractual agreements, and curtails party autonomy by coercing arbitration without due regard to the parties’ original intentions. Such a permissive approach also presents ample opportunity for parties to exploit the subjective interpretation of “empty formalities” to circumvent contractual pre-arbitral prerequisites, rendering them ineffectual. This problem was highlighted in the Ravindra Kumar, wherein the Delhi High Court emphasized the importance of adhering to the agreed-upon conciliation procedure within a reasonable, time-bound framework.
In this regard, a string of pre-Demerara Distilleries precedents, such as Nirman Sindhia v. Indal Electromelts Ltd., Coimbatore, asserts that parties to a contract must adhere to any special dispute resolution mechanism prescribed therein, obligating them to exhaust the prescribed mode before resorting to subsequent steps. The Delhi High Court, in Sushil Kumar Bhardwaj and Ors. vs. Union of India (UOI) and Ors., reiterated this principle, affirming that parties must exhaust the agreed procedure before resorting to arbitration.
In Singapore, the judiciary accords primacy to the parties’ selection of dispute resolution mechanisms and enforces such agreements with utmost regard. The Singapore Court of Appeal in International Research Corp PLC v. Lufthansa Systems Asia Pacific Pte Ltd. unequivocally established that strict adherence to pre-arbitral procedures stipulated in dispute resolution clauses constitutes a binding precondition to arbitration. Non-compliance with these procedures could potentially divest a tribunal of its jurisdiction.
This rationale safeguards party autonomy by honoring the contractual intentions of the parties and giving effect to their choices. A potential critique of this approach is the possible delay incurred before requisite pre-arbitral steps are completed, raising concerns about the applicability of limitation periods. However, this issue has been addressed in cases such as Alstom Systems India Pvt. Ltd. v. Zillion Infraprojects Pvt. Ltd. where it was established that time spent in pre-arbitral procedures stipulated by the agreement is to be excluded from the limitation period. Hence, the courts must exercise caution while considering the nature of pre-arbitral steps, and must clarify that such procedures are not meant to be directory in all cases.
The Way Forward
In the midst of a series of purely pro-arbitration judgements, the decision in Centaurus Green Energy Private Limited v. Rajshree Educational Trust offers a more balanced approach. By introducing a crucial caveat to the directory nature of pre-arbitral that “parties should be directed to take up the agreed procedure” as provided in the agreed clause for conciliation in a time-bound, reasonable period, Centaurus entitles parties to proceed with arbitration proceedings only if such a procedure fails.
The most prudent legal position under Section 77 is to recognize the right of parties to file an application under Section 11 of the Act to seek the appointment of an arbitrator in cases where preserving the right to arbitrate is necessary to prevent the expiration of the limitation period. However, in all other circumstances where a time-bound adherence to pre-arbitral procedures is feasible, even if perceived as an “empty formality,” compliance with such steps should be mandatory, provided the MDR clause prescribes it and that there is a scope of communication between the parties. Hence, as rightly held in Rajiv Vyas v. Johnwin, the correct procedure would be to allow orders under Section 11, subject to the parties complying with conditions precedent thereto as provided in the agreement.
Additionally, the Supreme Court must establish clear guidelines on the criteria for cases where pre-arbitral steps in MDR clauses are both enforceable and mandatory. In this regard, the landmark English case of Holloway v. Chancery Mead Ltd. offers valuable insight by outlining three essential criteria for such clauses to be enforceable: (i) the process must be sufficiently certain, (ii) it must define a mechanism to select a person for dispute resolution, and (iii) it must explicitly set out the procedural model or framework to be followed.
Adopting a similar approach in India would come a long way in both safeguarding the rights of parties under Section 77 of the Act, and upholding party autonomy through contractual adherence and ensuring that the arbitration process remains free from unnecessary delays.