19 November 2021

The Ambiguous State Of Pre-Arbitration Procedures In Multi-Tiered Dispute Resolution Clauses

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Dispute resolution clauses containing a set of hierarchical procedures usually ending with the initiation of arbitral proceedings are becoming increasingly common.
India Litigation, Mediation & Arbitration
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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.


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.


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


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.


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.

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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