[This guest post is authored by Anjali Busar and Khushboo Sharma. Anjali is a fifth-year B.A. LL.B (Hons.) student at National Law University, Lucknow and Khushboo is a third-year B.A. LL.B (Hons.) student at National Law University, Lucknow]
Discussing the Validity of Pre-conditions for Invocation of Arbitration Proceedings
The incorporation of a multi-tiered dispute resolution clause within an arbitration agreement is a regular phenomenon. Such clauses require parties to take certain steps before invoking the arbitration clause. Typically, these steps include time-bound mediation, amicable settlement through friendly discussions, cooling-off periods.
In India, there is considerable debate about the legality of a multi-tiered clause. Courts have taken a varied stance regarding the validity and binding nature of such pre-arbitral dispute resolution clauses. While the majority of the Courts have made the pre-arbitration procedures mandatory in nature, others have characterised pre-arbitration steps as voluntary and non-mandatory. In this post, we seek to address the ambiguity regarding the mandatory nature of the pre-conditions to arbitration and whether their non-fulfilment bars the jurisdiction of the arbitral tribunal.
Are preconditions mandatory?
To understand the intention of the parties, Courts primarily consider the nature and language of the clause. If the clause is mandatory in nature regarding the steps preceding arbitration, then the procedure ought to be followed. In International Research Corp PLC v. Lufthansa Systems, (Lufthansa Systems) the Singapore Court of Appeal held that ‘if the pre-conditions are defined with sufficient clarity and specificity, then they should be construed as mandatory in nature.’ In contrast, they cannot be mandatorily enforced if they are vague and general in nature.
Similarly, in Emirates Trading Agency LLC v. Prime Mineral Exports Pvt. Ltd, the English High Court held that in cases where the word “shall” is used, the pre-arbitration clause becomes mandatory in nature and parties are obligated to follow the same, unlike the use of terms such as “may”. In such cases where terms like “shall” is used, pre-arbitral dispute resolution clauses are consistent with a mandatory obligation and are “hedged with conditionality.”
In Haldiram Manufacturing Company Pvt. Ltd. v. DLF Commercial Complexes, theDelhi High Court held that when parties agree to resolve the dispute first through mutual discussion and then through arbitration, then they are bound to comply with the such particular prescribed under the agreement. However, the same High Court in Ravindra Kumar Verma v. M/s BPTP Ltd & Anr., held that non-compliance with pre-conditions indicated in the arbitration agreement does not exclude the parties from initiating arbitration proceedings since it can result in substantial and grave prejudice to the party seeking to invoke arbitration.
In M.K. Shah Engineers & Contractors v. State of M.P., the arbitration clause required the parties to originally submit their disputes to the Superintending Engineer. If not satisfied with the Superintending Engineer’s decision, the party in question could submit to the arbitration tribunal. Going by the literal interpretation of the clause, the Supreme Court of India held that such conditions were “essential” and necessarily had to be observed unless (i) it has been waived or (ii) the person attempting to establish it has somehow precluded himself from doing so.
Indian Courts have also given due consideration to the likelihood of success of the pre-arbitration dispute resolution clauses to reach an amicable settlement. In Demerara Distilleries Pvt Ltd v Demerara Distillers, the Supreme Court of India held that the likelihood of success of the preconditions to arbitration must be considered especially in the cases where the pre -conditions are open ended and do not provide conclusive definite terms to measure the attempt of satisfying the pre-conditions. Indian courts have also given a very wide ambit to the term ‘friendly discussions’ as a pre-condition to arbitration and have even accepted its substantial compliance. In Swiss Timing Ltd v Organizing Committee, several discussions and efforts were taken solely by the petitioner to reach an amicable settlement before commencing arbitration. The Supreme Court observed that the parties had made their best efforts to negotiate to resolve the dispute and, as such, the tribunal has jurisdiction over the dispute. Hence, even if one party makes every effort without the participation of the opposing party, such efforts have been recognised by Courts to satisfy pre-arbitral conditions.
Do pre-conditions affect a tribunal’s jurisdiction?
Failure to comply with mandatory pre-arbitration procedural requirements is arguably a jurisdictional defect that can prevent a party from validly initiating arbitral proceedings. In Lufthansa Systems, the Singapore Court of Appeal found that an arbitral tribunal would not have jurisdiction before the condition precedent to the commencement of arbitration is not adhered to strictly. If a request for arbitration is before preconditions are complied, it would be premature and should be dismissed.
In S.K. Jain v State of Haryana, (SK Jain) the Supreme Court was dealing with a dispute where the arbitral tribunal had refused to assume jurisdiction on grounds the claimant had not complied with the requirement to deposit 7% of the total claim before invoking the arbitration clause. The arbitral tribunal in question relied on the Supreme Court’s decision in Municipal Corporation, Jabalpur v. M/s Rajesh Construction Company to find that:
“In view of the decision of the Supreme Court, referred to above, as suggested on behalf of the respondent, the claimant is directed to deposit Rs. 1,81,14,815/- i.e 7% of the amount claimed in the statement of claim with the respondent and further arbitration proceedings would proceed only thereafter. The claimant was to comply with the above condition in agreement before steps could be taken to start arbitration proceedings. Hence, at this stage Arbitrators cannot assume jurisdiction to proceed with the arbitration. While allowing objection petition filed under Section 16 of the Arbitration and Conciliation Act, it is so ordered as above, accordingly.” (Emphasis added)
The Supreme Court upheld the tribunal’s decision whilst finding that the parties clearly required parties to comply with the deposit requirement before invoking arbitration. In a later judgment, however, the Supreme Court of India, in the case of Icomm Tele Ltd. v. Punjab State Water Supply & Anr., invalidated a pre-condition requiring a deposit of 10% of the claimed amount before the Arbitral Tribunal. The Court found this obligation to be arbitrary, excessive, and contrary to the object of de-clogging courts – rendering the arbitral process ineffective and expensive. The Court did not, however, discuss whether non-compliance with a valid precondition is grounds for a tribunal to refuse jurisdiction under Section 16 of the Arbitration Act.
Most courts outside India have been reluctant – particularly in recent times – to interpret pre-conditions as being jurisdictional bar to the arbitral tribunal. For instance, the English High Court in Republic of Sierra Leone v. SL Mining Ltd. has categorically observed that any purported non-compliance with the provisions of a multi-tiered dispute resolution clause is to be considered an exclusive question of admissibility for the arbitral tribunal rather than jurisdiction.
While courts in India and across the globe have shared varied standpoints, the prevailing view supports mandatory compliance with the pre-arbitral steps when they are written precisely. That said, a majority of courts and scholars across the world agree that non-compliance with the pre-conditions is a matter of admissibility – and not the tribunal’s jurisdiction. It would be interesting to see how Indian courts, particularly the Supreme Court, deals with and settles this dichotomy.