Parties to complex business agreements often choose to precede the recourse to arbitration with other methods of dispute resolution, which, in their opinion, could provide a more amicable, efficient and pocketfriendly conclusion to the dispute. Dispute resolution clauses containing a set of hierarchical procedures usually ending with the initiation of arbitral proceedings are becoming increasingly common. Such clause forming the dispute resolution mechanism as a whole is often referred to as ‘multi-tiered dispute resolution clause(s)' (MTDRC). This analysis attempts to delineate the nature of such MTDRCs as mandatory or directory.
THE MANDATORY NATURE OF PRE-ARBITRAL CONDITIONS
In cases of contractual interpretation, as a matter of general principle, every word of a contract has to be given meaning and no part of the agreement or word used therein can be said to be redundant unless it is contrary to a statute.1 The primary interpretation of any clause of an agreement should give effect, if possible, to all the parts, and should not reject any of them.2 In most situations, if the words of the contract are clear, there is very little that the court can do to change their application.3 This especially holds where arbitration is the subject matter.
The aforementioned principles apply with the same force to pre-arbitration conditions as they do anywhere else. Given that the wording of the clause calls for it, the courts have given due importance to adhering to the procedure prescribed in a dispute resolution clause.4
Here, reference to the judgment of the Hon'ble Supreme Court in United India Insurance Co. Ltd. v. Hyundai Engineering and Construction Co. Ltd.,5
becomes pertinent. As per the relevant arbitration clause, no dispute was to be referred to arbitration if the insurance company disputed its liability. Interpreting these words as a condition precedent to invocation of the arbitration clause, the Court found that non-fulfilment of the same rendered the dispute non-arbitrable.
Similarly, in Simpark Infrastructure Pvt. Ltd. v. Jaipur Municipal Corporation,6 the Rajasthan High Court held that, where, by the wordings of the contract, a procedure for dispute resolution has been provided in the agreement, proper invocation of the arbitration clause requires that the parties mandatorily follow the same.
Specifically with reference to MTDRCs, the Hon'ble Supreme Court has considered the issue in M. K. Shah Engineers & Contractors v. State of Madhya Pradesh, 7 where the parties were to approach the ‘Superintendent Engineer' before invoking the arbitration clause. The Court opined that the pre-conditions had to be observed mandatorily as being essential to the agreement when read as a whole. However, in the relevant factual matrix, the court found that the conduct of the respondent was such that it amounted to a waiver of the right to take a plea of non-compliance of the pre-conditions.
Internationally, the courts in England and Singapore have found this perspective to be correct. Given enough clarity as to the intention of the parties, the Courts have found that tiered-dispute resolution clauses have to be complied with mandatorily.8 The Singapore High Court9 has observed that such MTDRCs require actual, and not just substantial, compliance, while the England and Wales High Court10 has found that even a clause that provides for a precondition of a ‘friendly discussion for four weeks' requires to be complied with, in a ‘fair, honest, and genuine' manner.
Thus, as a general rule, the courts, both nationally and internationally, lean towards mandatorily enforcing the preconditions to the invocation of arbitration clauses.
MTDRCS: MANDATORY OR DIRECTORY?
Pre-arbitration ‘dispute resolution procedures' under MTDRCs, being a specific set under the umbrella of ‘pre-arbitral procedures', have been accorded distinct treatments depending on a plethora of factors. The general rule of mandatory applicability of pre-arbitral procedures does not uniformly apply to MTDRCs in all cases. Various determinants have been considered by the courts while deciding the nature of pre-arbitration procedures under MTDRCs as mandatory or directory conditions to initiate arbitration proceedings.
The Hon'ble Supreme Court of India in Demerara Distilleries Pvt. Ltd. v. Demerara Distilleries Ltd.,11 while deciding an application for appointment of arbitrator under Section 11(6) of the Arbitration and Conciliation Act, 1996 (‘Act'), held that the correspondence between the parties indicate that any attempt to resolve the disputes by mutual discussions and mediation would be an ‘empty formality'. The Court therefore allowed the petition and referred the parties to arbitration despite the existence of an MTDRC.
A similar ratio formed the basis of the decision in VISA International Ltd v. Continental Resources (USA) Ltd.,12 and Siemens Ltd. v. Jindal India Thermal Power Ltd.13 This stream of judicial pronouncements suggests that an important consideration for the courts to determine the mandatory applicability of pre-arbitral dispute resolution procedures is the ‘likely prospect' of resolution of the dispute through such procedures. The Hon'ble Bombay High Court in S. Kumar Construction Co. v. Municipal Corporation of Greater Bombay,14 emphasised on the language of the MTDRC as a consideration for determining the nature of the clause.
Another important judgment was rendered by the Hon'ble Delhi High Court in Ravindra Kumar Verma v. BPTP Ltd.,15 wherein it crystallised the view that prearbitral procedures under MTDRCs are merely directory. The Court provided a two-pronged reasoning for the same. Firstly, if these steps are considered as mandatory, it can result in serious and grave prejudice to a party seeking to invoke arbitration because the time consumed in pre-arbitral proceedings is not exempted from limitation under the Limitation Act, 1963. Therefore, these proceedings may not conclude till the time the limitation to initiate the arbitration expires, thereby nullifying the arbitration clause.
Secondly, Section 77 of the Act provides that “the parties shall not initiate, during the conciliation proceedings, any arbitral or judicial proceedings in respect of a dispute that is the subject-matter of the conciliation proceedings except that a party may initiate arbitral or judicial proceedings where, in his opinion, such proceedings are necessary for preserving his rights.” Therefore, if rights are to be preserved on account of limitation expiring, existence of conciliation proceedings should not be a bar for enforcing rights to arbitration.
The Court concluded that a petition under Section 8 or Section 11 should not be dismissed due to the existence of pre-arbitral procedures under an MTDRC, rather the parties should be directed to take up the agreed prearbitral proceedings in a ‘time bound reasonable period'. If the parties fail to resolve the dispute, they shall be entitled to invoke the arbitration clause.
The ratio of the above judgment was extensively relied on by the Delhi High Court in Union of India v. Baga Brothers.16 Further, where the parties fail to comply with the MTDRC, the courts have directed the parties to resolve the dispute amicably as prescribed in the MTDRC even during the pendency of the arbitral proceedings.17
CONCLUSION
It is trite from the above analysis that pre-arbitral procedures stipulated by the contract are required to be mandatorily complied with. However, as the jurisprudence discussed above suggests, Indian courts seem to have carved out some exceptions to this principle in cases where these pre-arbitral procedures constitute distinct dispute resolution mechanisms (i.e., in MTDRCs).
The mandatory character of such pre-arbitral procedures is diluted and remains only directory when (a) the language of the MTDRC suggests so; (b) the likely prospect of the dispute getting resolved through such pre-arbitral procedures is bleak; (c) in the opinion of the court, the dispute cannot be resolved through such procedures within ‘reasonable time' (or before the expiry of the limitation period to invoke the arbitration clause); or (d) the party objecting to non-compliance with the MTDRC has, through its own conduct, waived the pre-arbitral procedures (as observed in M.K. Shah Engineers). Be that as it may, the nature of MTDRCs cannot be said to be written in stone in India, and have to be determined as mandatory or directory on caseto-case basis.
Footnotes
1 M. Arul Jothi v. Lajja Bal (Deceased) (2000) 3 SCC 723.
2 Purnananthachi v. T.S. Gopalaswami Odayar, AIR 1936 PC 281.
3 Thomas v. A.A. Henry, 2008 SCC OnLine Ker 43.
4 Iron & Steel Co. Ltd. v. Tiwari Road Lines, (2007) 5 SCC 703.
5 AIR 2018 SC 3932
6 2012 SCC OnLine Raj 3833.
7 1999 (2) SCC 594.
8 Cable & Wireless Vs IBM United Kingdom, [2002] EWHC 2059 (Comm); HSBC Institutional Trust Services (Singapore) Ltd (trustee of Starhill Global Real Estate Investment Trust) Vs Toshin Development Singapore Pte Lt, [2012] SGCA 48.
9 International Research Corp Plc Vs Lufthansa Systems Asia Pacific Pte Ltd., [2013] 1 SLR 973.
10 Emirates Trading Agency LLC Vs Prime Mineral Exports Private Ltd, [2014] EWHC 2104.
11 (2015) 13 SCC 610.
12 (2009) 2 SCC 55.
13 2018 SCC OnLine Del 7158.
14 2017 (2) MhLJ 718.
15 2015 (147) DRJ 175.
16 MANU/DE/1880/2017.
17 Rajiv Vyas v. Johnwin, 2010 (6) MhLJ 483.
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