India: Multi-Tier Arbitration Clauses: Directory Or Mandatory?

After the recent amendments in the Arbitration and Conciliation Act, 1996, inter alia, regarding fixation of time period within which a dispute must be adjudicated upon, more and more parties are flocking towards arbitration. Arbitration Clauses form part of almost all commercial contractual transactions. Often, these clauses provide for a pre-arbitration step called the process of amicable resolution to trigger the arbitration which are known as Multi-tier dispute resolution clauses.

Multi-tier dispute resolution clauses are also known as escalation clauses or filter clauses. They provide a forum for alternative resolution of disputes at each stage which otherwise finally escalates to arbitration. The inclusion of such clauses in commercial transactions is premised on the necessity to look for amicable modes of dispute resolution. These clauses generally contain pre-conditions of mediation and/or conciliation and/or negotiation before referring the disputes to arbitration. The inclusion of such clauses in today's commercial transactions are governed by recognition of the understanding that a number of disputes do get settled and scripting a multi-tier arbitration clause ensures that parties will at least look for alternative modes of dispute resolution before moving towards the process of arbitration. However, the contour of application of law becomes more complex when these multi-tier dispute resolution clauses are not fulfilled and the defaulting party proceededs with invocation of arbitration. The judicial view is divided on the enforceability of such clauses in such circumstances.

The Rajasthan High Court, in the case of M/s Simpark Infrastructure Pvt. Ltd. Vs Jaipur Municipal Corporation; MANU/RH/1010/2012, stated that where agreed procedure of dispute resolution has been made a condition precedent for invoking the arbitration clause, the same is required to be followed. The Court relied upon the judgment of Hon'ble Supreme Court in SBP & Co. vs Patel Engineering Co. and held that the agreed arbitral procedure is required to be followed and further, a defaulting party cannot be allowed to take advantage of its own wrong. A perusal of Sec.11(6) of the Act of 1996, also reveals that since a party is required to act upon the agreed arbitral procedure for dispute resolution by signing an agreement with open eye,s then it is not open to the party to ignore the same and invoke exercise of power under Sec. 11(6) of the Act.

Whereas the Delhi High Court in the case of Ravindra Kumar Vermavs M/s BPTPltd.& Anr. MANU/DE/3028/2014 held that the existence of conciliation or mutual discussion should not be a bar in seeking to file proceedings for reference of the matter to arbitration and this is necessary for preserving rights as envisaged by Section 77 of the Act. However, since in many contracts there is an effective need of conciliation etc in terms of the agreed procedure provided by the contract, the best course of action to be adopted is that existence of conciliation or mutual discussion procedure or similar other procedure though should not be held as a bar for dismissing of a petition which is filed under Sections 11 or Sec 8 of the Act or for any legal proceeding required to be filed for preserving rights of the parties. However, before formally starting effective arbitration proceedings, parties should be directed to take up the agreed procedure for conciliation as provided in the agreed clause for mutual discussion/conciliation in a time bound reasonable period, in which if they fail, the parties can thereafter be held entitled to proceed with the arbitration proceedings to determine their claims/rights etc.

In view of the above dividing judgments, it can be concluded that where the parties have agreed upon an arbitral procedure of dispute resolution, which has been made a condition precedent for invoking the arbitration clause, then it is required to be followed before filing an application under Sec, 11 of the Act of 1996. Sub-Section (6) of Sec. 11 of the Act of 1996 cannot be invoked directly on expiry of thirty days' notice under sub-sec. (4) of Sec. 11 of the Act of 1996, by the Applicant for appointment of the Arbitral Tribunal, ignoring the agreed arbitral procedure. However, a possible counter argument can be developed that when a party is sure of the stand taken by the other party due to the facts and circumstances then agreed arbitral procedure need not be followed as the same would be futile and mere empty formality.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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