Ambiguity Regarding the Mandatory Nature of Pre-Arbitral Steps

Ishika Singhal | September 8, 2021
SAROD Rules

There persists an uncertainty about whether pre-arbitral steps/procedures are mandatory conditions to be complied with and followed prior to invocation of arbitration or are they to be construed in a directory manner. The Courts in India have delivered several conflicting and varying judgements over the years, adding to this uncertainty.

The recognition of the enforceability of pre-arbitral procedures in India dates back to the year 1999 where the Kerala High Court, in Nirman Sindia vs. Indal Electromelts Ltd, observed that when the parties have agreed to a specific mode of dispute resolution, they are bound to comply with the same without escalating to the next or final step without complying with the initial step. A similar view was adopted by the Rajasthan High Court in M/s Simpark Infrastructure Pvt. Ltd. vs. Jaipur Municipal Corporation and also by the Supreme Court in SBP & Co. vs. Patel Engineering Co.,/ reiterating the need to mandatorily follow the agreed procedure that is to be complied with as a precedent condition to invoking arbitration.

Supreme Court’s position

The majority view observed in Supreme Court judgements indicates the mandatory and jurisdictional nature of pre-arbitral procedures. One such instance is M.K. Shah Engineers and Contractors vs. State of Madhya Pradesh where the possibility of setting aside an award where certain “procedural pre-requisites” were not achieved was considered. The Supreme Court ruled by giving effect to the language of the clause that such pre-requisite conditions were essential and were thus to be complied with necessarily. A similar stance was taken in S.K. Jain vs. State of Haryana & Anr. where upon non-compliance with certain “mandatory requirements”, the tribunal refused to assume jurisdiction due to the language of the clause requiring prior satisfaction of certain conditions.

Further, in Oriental Insurance Company vs. M/s Narbheram Power and Steel, the arbitration clauses were viewed to be construed “strictly” thus requiring completion of pre-conditions to arbitration. A similar ruling was passed in United India Insurance Co. vs. Hyundai Engineering and Construction Co. where the agreement was found to be “hedged with conditionality” making non-fulfilment of the pre-conditions render the dispute “non-arbitrable”.
The Supreme Court judgements discussed so far have been heavily/majorly guided by the parties’ intention, i.e., the language of the arbitration/pre-arbitration clause. However, in some cases, the Court might also consider the likelihood of the success of pre-arbitral procedures instead of just the parties’ intentions. By doing so the Courts have also recognised that there might be a requirement to take a more nuanced stance w.r.t certain clauses, ruling that the requirement of pre-arbitration consultation can be dispensed with, in certain scenarios, due to their directory and non-mandatory nature.

One such instance can be observed in Demerara Distilleries (P) Ltd v. Demerara Distilleries Ltd. where the Supreme Court took a different approach. Here, the language of the clause called for parties to engage in mutual discussion, followed by mediation and only in the absence of a resolution, to refer the disputes to arbitration. The appointment of application filed was contended of being “pre-mature” but according to the Court that claim did not merit “any serious consideration” leading to the decision that various correspondence between the parties indicates that any mutual discussions or mediation would just be an “empty formality”.

Contrary Views of High Courts

There also exist some instances where the same Court has delivered judgements expressing divergent views relying on the facts of the concerned case. This suggests that there is, to some extent, some subjectivity at play when the Courts are faced with the contentious question about the mandatory nature of pre-arbitral steps. A full bench of the Bombay High Court, in S Kumar Construction Co and Anr. vs. Municipal Corporation of Greater Bombay and Ors,, placed reliance on Municipal Corporation of Greater Mumbai vs. Atlanta Infrastructure Ltd & Anr. and held that since the language of the Clause along with the facts of the case do not suggest that pre-arbitral steps were to be mandatorily followed, they were not obligatory preconditions for invoking arbitration. However, all pre-arbitral procedures were not pronounced to be optional as a general rule, rather it was held that these procedures being mandatory or optional could vary depending on the language of the arbitration clause. This led to a divergent view being expressed, a year later, in Tulip Hotels Pvt. Ltd. vs. Trade Wings Ltd., where the pre-arbitral procedure, here conciliation, was held to be a mandatory precondition since the Pre-Arbitration Clause strictly reflected the binding nature of pre-arbitral conciliation.

On the flip side, the Delhi High Court adopted a distinct position with its ruling in Ravindra Kumar Verma vs. M/S. BPTP Ltd. & Anr. by overruling the previous judgement in M/s Haldiram Manufacturing Company vs. M/s DLF Commercial Complexes Ltd. which stated that application invoking arbitration submitted to the Court, prior to complying with the pre-arbitral steps must be dismissed. The High Court in Ravindra Kumar, while relying on earlier decisions of the Delhi High Court in Sikand Construction Co. and Saraswati Construction Co. held that pre-arbitral steps stated in a pre-arbitration clause are directory in nature and not mandatory. The Court in Union of India vs. M/s Baga Brothers, while relying on the judgement of Ravindra Kumar, reiterated the directory nature of pre-Arbitral steps and held that the appointment of an Arbitrator can be proceeded with even prior to completion of such steps. A similar view has been taken by this Court in further cases like Siemens Ltd. vs. Jindal India Thermal Power Ltd. and Sarvesh Security Services Pvt Ltd vs Managing Director, DSIIDC, reaffirming the stance taken in the previously mentioned judgements and restating that pre-arbitral steps are merely optional.

The most recent case which dealt with this question was Quick Heal Technologies Limited vs. NCS Computech Private Limited & Ors. where the Bombay High Court examined the nature of pre-arbitration clauses. The Court, while acknowledging the mandatory nature of the pre-arbitration mediation clause, ruled in reliance to the judgement rendered by the Supreme Court in Visa International Limited vs. Continental Resorts (USA) Limited. It was held that if from the correspondence exchanged between the parties, “it is clear that there was no scope for amicable settlement” then the mandatory/binding nature of the pre-condition requiring amicable discussion for resolution would no longer hinder the furtherance of dispute resolution process. Thus, by relying on facts and circumstances of the case it was decided that in such cases invocation of arbitration without complying with pre-arbitration mediation clauses was not fatal.

Conclusion

Therefore, as can be gathered from the above discussion, the Supreme Court and High Courts have taken several divergent stances over the years when it comes to deciding the nature of pre-arbitral steps as either mandatory or merely directory. It can be concluded that due the reliance placed on factors like the parties’ intentions, i.e., the language of the clause in question and the likelihood of success of pre-arbitration procedures, there is no certain answer to that question yet. Here, the subjectivity at play makes it so that some level of judicial discretion can be observed. Although the majority view seems to be in favour of mandatory compliance with pre-arbitral procedures, the Courts on several occasions have recognised the need for a more nuanced position where such procedures may be treated as non-mandatory.

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