Precursor To Arbitration: Understanding The Feasibility Of Conciliation As A Pre-Arbitration Mechanism'

Today's commercial dispute resolution landscape is undoubtedly leaning towards out-of-court resolution of disputes, predominantly Arbitration, to evade lengthy and time-consuming litigations. However, from the decades of the advent of the Arbitration mechanism to today, the ADR mechanism has undergone significant changes in law and practice. What had emerged as a one-stop panacea for the stress of litigation has itself been placed in a queue with other forms of alternative dispute resolution, and today, the commercial contracts involve multi-tier dispute resolution clauses requiring parties to undergo the process of being Conciliation and/or Mediation among several others.

As per a report by PwC,¹ 91% of Companies in their survey pool had included a dispute resolution clause in their Contracts, whereas 68% used Arbitration in combination with other mechanisms. The present Article shall restrict its scope to analyses the Arbitration clauses mandating 'Conciliation' that finds space in almost every commercial Contract today to assess its viability and further discuss if the Arbitration mechanism, particularly 'Conciliation', can be made mandatory on Parties, against the very nature of these mechanisms being 'voluntary', and lastly assess the legal position against enforceability of such pre-arbitration clauses in India.

Pre-arbitration procedures can be understood as steps for resolving disputes and preventing them that are included in contracts between parties and allow for an effort to settle the disagreement amicably. There are mainly two kinds- (a) clauses providing Conciliation or Mediation or both as a precondition to Arbitration; (b) Reference to any internal dispute resolution body, namely Dispute Review Committee (DRC), Dispute Resolution Board (DRB), Joint Experts Committee (JEC), Dispute Adjudication Board (DAB) and others.²

Such multi-tier dispute resolution clauses are becoming more commonplace in engineering and construction contracts to maintain long-term agreements where parties want to "continue business relations" and arrive at an amicable solution.

One of the mechanisms made mandatory in such multi-tier dispute resolution clauses is 'Conciliation', a process whereby parties request a third person or persons (the Conciliator) to assist them in their attempt to reach an amicable settlement of their dispute arising out of or relating to a contractual or other legal relationship. The Conciliator does not have the authority to impose upon the parties a solution to the dispute.³

Contracts that include a multi-tier dispute resolution clause as a precursor to Arbitration are usually considered mandatory. In a majority view held by Indian courts of law, a notice to Arbitration without exhausting such 'mandated' mechanisms is considered premature.⁴ However, there exist diverging views in precedents held by Indian Courts on whether such pre-arbitration clauses involving 'Conciliation' are mandatory or directory in nature, which shall be discussed below.

In Visa International Ltd. v. Continental Resources (USA) Ltd.,⁵ Before the arbitration clause was invoked, the requirement to reach a mutually agreeable resolution was not met. The Hon'ble Supreme Court held that the request for Arbitration was not premature for two reasons, namely:

1. there was no room for an amicable settlement because both parties had taken a firm stance and;
2. correspondence indicates that attempts for an amicable settlement.

Thus, the Court believed that the requirement to try to reach an amicable settlement need not be met in situations where there is no chance of success and is, therefore, not mandatory. This reasoning to hold such clauses 'directory' has been furthered in a catena of cases, including Demerara Distilleries Private Limited v. Demerara Distillers Limited.⁶; Bharat Sanchar Nigam Limited v. Nortel Networks India Private Limited ⁷ Among others.⁸

On the other hand, in Halidram Manufacturing Company Pvt. Ltd. v. DLF Commercial Complexes Limited⁹ Before seeking Arbitration, the agreement called for discussion to reach a mutually agreeable resolution. It was decided that this requirement was obligatory. The relevant excerpt is reproduced below.

This view was also followed in several judgements.¹⁰ including Sanjay Iron and Steel Limited v. Steel Authority of India¹¹The Hon'ble Delhi High Court stated that "the very purpose of keeping a conciliation clause in any Agreement is to shorten the path for settlement of disputes between the parties. Therefore, parties in the present petition are directed to first explore the possibility of resolution of disputes through Conciliation in terms spelt out in Clause-10 of the Agreement."

Holding a different view than the previously discussed precedents, in the judgement of Ravindra Kumar Verma v. BPTP Ltd.¹²The Hon'ble High Court of Delhi held that the pre-arbitration clause requiring Conciliation is a directory. However, it also held that the steps outlined in the precondition should be followed before actually initiating the arbitration process, even though the order for appointment of the tribunal was already passed. This is similar to the observation in another judgement of the Bombay High Court, Rajiv Vyas v. Johnwin George Manavalan.¹³

It is thus clear from the above-noted precedents that no uniform opinion exists on the mandatory or directory nature of pre-arbitration clauses requiring Conciliation. In the author's opinion, there exist several paradoxical situations if Conciliation, as a pre-arbitration mechanism, is made a mandatory compliance, which are enumerated below:

1. The provisions of Arbitration and Conciliation Act, 1996¹⁴ ( "The Act"):
   1. Section 62 of the Act, which outlines the process for starting conciliation proceedings, clearly states that these proceedings can only start if the other party accepts the invitation to conciliate.¹⁵ So, in the event that the Court mandates the parties to enter into Conciliation on the basis of Contractual provisions, a contradictory situation appears for a party who violates its obligation to conciliate since the party would not be violating the Act's provisions per se, even though it would be acting against the general principles of contract law.
   2. Secondly, the opinion and view of the Conciliator is not binding on the parties,¹⁶ Unless the Parties enter into a settlement agreement by mutual agreement with the facilitation of the Conciliator.¹⁷ Thus, a mandatory invocation of Conciliation proceedings when one of the parties is willing to invoke Arbitration may only fulfil this obligation without any beneficial outcome, causing further delay to the ultimate resolution of the dispute. 'Whether such 'mandatory' Conciliation would then merely be 'justice seen to be done' rather than 'justice done' is a question that may be best left unanswered.'¹⁸
   3. Lastly, the provision laid down under Section 77 of the Act does not prohibit the parties from invoking Arbitration. At the same time, the conciliation proceedings are still ongoing in the interest of preserving their rights.
2. It takes time to complete any pre-arbitration process. This period cannot be excluded when determining whether the arbitration proceedings were initiated within the statute of limitations. This can be detrimental to the interests of the Parties to the dispute if the mandatory Conciliation fails to arrive at a solution. This issue was rightly discussed in the single bench judgement of the Delhi High Court in Ravindra Kumar Verma v. BPTP Ltd.,¹⁹ Stating that:

"Once there is no provision to exclude the period spent in conciliation proceedings, it is perfectly possible that if conciliation proceedings continue when the limitation period expires, the same will result in nullifying the arbitration clause on account of the same not capable of being invoked on account of bar of limitation, i.e., when proceedings for reference to arbitration are filed in court, the right to seek arbitration may end up being beyond three years of arising of the disputes and hence the petition for reference may be barred by limitation."

The above points do not mean that the Act does not consider using both Arbitration and Conciliation to settle disputes. The Act lays out several safeguards to ensure that, if the parties themselves are willing to explore Conciliation as an ADR mechanism before invoking Arbitration, nothing that happens during Conciliation will harm any party's interests in the Arbitration that follows.²⁰ However, this applies in cases where Conciliation is willingly adopted as a means to address the dispute and not where it is a "necessary" prelude to Arbitration, like a multi-tiered dispute resolution clause, in which case the provisions of the Act are silent.²¹

In the author's opinion, enforcing a mechanism that is inherently consensual regarding mandatory pre-arbitration Conciliation is paradoxical. It goes without saying that when a disagreement emerges between parties, Conciliation should be promoted as a dispute resolution mechanism and one of their initial attempts. Conciliation conveys a broad idea of a voluntary procedure managed by the parties and carried out with the help of one or more impartial third parties. The parties may terminate it at any time and of their own free will.²² The interpretation of the Contract and the Contract itself must not 'impose' Conciliation on the parties, especially given the very nature of such a mechanism.

Footnotes

1. 'Corporate Attitudes & Practices towards Arbitration in India', PWC India, (May 2013) https://www.pwc.in/assets/pdfs/publications/2013/corporate-attributes-and-practices-towards-arbitration-in-india.pdf

2. Shubham Tiwari, 'The complicated nature of pre-arbitration mechanisms', Bar and Bench (Nov 30, 2024) https://www.barandbench.com/columns/the-complicated-nature-of-pre-arbitration-mechanisms

3. UNCITRAL Model Law on International Commercial Conciliation (2002).

4. National Highways Authority of India v. PATI-BEL (JV), 2019 SCC OnLine Del 6793.

5. Visa International Ltd. v. Continental Resources (USA) Ltd., (2009) 2 SCC 55 at Para 38.

6. Demerara Distilleries Private Limited v. Demerara Distillers Limited, (2015) 13 SCC 610.

7. Bharat Sanchar Nigam Limited v. Nortel Networks India Private Limited, (2021) 5 SCC 738.

8. Union of India v. Bharat Engineering Corporation, ILR (1977) 2 Del 57, Saraswati Construction Co. v. Cooperative Group Housing Society Ltd. 1995 (57) DLT 343, Kuldeep Kumar Contractor v. Hindustan Prefab Limited, 2023/DHC/001374, MS Royal Furnishers v. Multitex Filtration Engineers Ltd., 2024 SCC OnLine Del 5571.

9. Halidram Manufacturing Company Pvt. Ltd. v. DLF Commercial Complexes Limited, 2012 SCC OnLine Del 2139 at Para 22.

10. National Highways Authority of India v. PATI-BEL (JV), 2019 SCC OnLine Del 6793, Simpark Infrastructure (P) Ltd. v. Jaipur Municipal Corpn, 2012 SCC OnLine Raj 2738, paras 27-30.

11. Sanjay Iron and Steel Limited v. Steel Authority of India, 2021 SCC OnLine Del 4566.

12. Ravindra Kumar Verma v. BPTP Ltd., 2014 SCC OnLine Del 6602, paras 4-11.

13. Rajiv Vyas v. Johnwin George Manavalan, (2010) 6 Mah LJ 483.

14. Part III, Conciliation of the Act.

15. S. 62(3) of the Act.

16. Justice Dr. M.K. Sharma 'Conciliation and Mediation' Delhi District Courts https://delhicourts.nic.in/mediation-articles#:~:text=His%20opinion%20is%20a%20third,confidence%20of%20both%20the%20parties.

17. S. 73 of the Act.

18. Karishma Amar, 'Conciliation as a necessary Precursor to Arbitration for Better or Worse', Manupatra. https://articles.manupatra.com/article-details/Conciliation-as-a-necessary-Precursor-to-Arbitration-for-Better-or-for-Worse

19. Supra at 12, Para 14.

20. S. 70: 'Disclosure of Information', S. 75: 'Confidentiality'' of the Act.

21. Ketan D. Parikh, 'Pre-Arbitration Procedure: Mandatory or Directory?' SCC Online (Jan 28, 2023) https://www.scconline.com/blog/post/2023/01/28/pre-arbitration-procedure-mandatory-or-directory/

22. M/s Oasis Projects Ltd. Vs Managing Director, National Highway and Infrastructure Development Corporation Ltd., (2023/DHC/000828) at Para 12 and 17.

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.