Pre-arbitral Procedure In Arbitration Agreements
Several agreements today have arbitration clauses that provide for a particular mechanism to be followed prior to initiation of arbitration proceedings and reference of the dispute to the arbitrator. The agreements may have pre-conditions being, inter alia, exploring amicable settlement of all or specific issues, or, reference of disputes to a mediator or an officer for holding an inquiry, or a stage-wise escalation of the issue with time limits stipulated therein. Usually, the clauses also provide one of the parties to escalate the matter or initiate arbitration proceedings if the grievance continues post the inquiry or decision by the officer. The pre-conditions are usually restricted through time limits, basis which, arbitration can be initiated by a party. Such procedure to be followed prior to initiation of arbitration is referred to as pre-arbitral procedure or pre-condition for initiation of arbitration proceedings.
The clause may provide for an optional pre-condition or a mandatory pre-condition which can be asserted from the language of the clause and the conduct of the parties to the arbitration agreement. The courts in India including the Hon’ble Supreme Court and High Courts of various states have interpreted pre-arbitration conditions and pre-arbitral procedures to determine its mandatory nature. The views held by the courts have differed on a case to case basis and has led to certain decisions where the courts have held such clauses to be mandatory, while in certain cases the clauses have been held to be directory or have been waived or conditional compliance on merits. In order to understand the principles applied by the courts to determine the mandatory nature of pre-arbitral procedure, brief of certain cases along with the interpretation of the arbitration clauses involved therein are discussed below.
A. Supreme Court of India
1. MK Shah Engineers & Contractors v. State of M.P (“MK Shah Case”)
The Hon’ble Supreme Court, in the MK Shah Case, analysed the following clause in a dispute arising from an agreement executed by the State of MP for the construction of a dam -
“3.3.29: DECISION OF SUPERINTENDING ENGINEER TO BE FINAL EXCEPT WHERE OTHERWISE SPECIFIED IN THE CONTRACT
The decision of the Superintending Engineer of the Circle for the time being in respect of all questions and disputes relating to the meaning of the specifications designs drawing and, instructions here-in-before mentioned and as to the quality of workman ship or material used on the work or as to any other question, claim, right, matter or thing whatsoever in any way arising out of or relating to the contract, designs, drawings, specifications estimates, instructions orders or those conditions or otherwise concerning the work of execution or failure to execute the same, whether arising during the progress of the work or after the completion or abandonment thereof , shall be final.
Provided that if any party to the contract is dissatisfied with the final decision of the Superintending Engineer, in respect of any matter, he may, within 28 days after receiving the notice of such decision give notice in writing to the Superintending Engineer, requiring that the matter may be referred to arbitrator and furnishing detailed particulars of the dispute or difference and specifying clearly the point at issue, if any party fails to give such notice within 28 days as stipulated above, the decision of the Superintending Engineer, already given shall be conclusive, final and binding on the parties. In case an arbitration is to be held it shall be effected by an arbitrator to be appointed by the State Government out of panel of three names suggested by the State Government to the contractor, who shall give concurrence within a period of one month from the date of the communication. In case the contractor does not communicate the concurrence, the State Government shall appoint an arbitrator whose decision shall be conclusive final and binding on the parties.
If the work under the contract has not been completed when a dispute is referred to arbitrator work shall continue during the arbitration proceedings if it is reasonably possible and no payment due to contractor should be withheld on account of arbitration proceedings unless it is required by the arbitrator.”
According to the clause, any dispute as mentioned was required to be referred for the decision of the superintending engineer whose decision was to be treated as final, and if any of the parties was aggrieved by such decision, then a letter for reference to arbitration could be sent within a period of 28 days from date of receipt of the decision. The Hon’ble Court held that basis the language mentioned in the clause, reference to arbitration is required to be preceded by a decision of the superintending engineer and a challenge to such decision within 28 days by the party feeling aggrieved therewith. The pre-condition as mentioned in the clause was held to be necessary to be followed due to the manner in which the clause was structured, i.e., the right for appointment of arbitrator would arise upon dissatisfaction of the superintending engineer. However, the Hon’ble Court, in this particular case, observed that the party raising an objection with regard to the pre-condition not being complied with, was the same party that initiated the arbitration proceedings, and accordingly held that the pre-condition was waived by the parties by conduct and such act precluded the party to take advantage of its own fault of non-compliance with the pre-conditions.
2. Municipal Corporation, Jabalpur & Ors. v. Rajesh Construction Co. (“Municipal Corporation Case”)
The Hon’ble Supreme Court, in the Municipal Corporation Case, while deciding appeal arising against orders passed in petition under Section 11 of the Arbitration and Conciliation Act, 1996 (“Act”), analyzed the following clause in a tender floated for construction pertaining to a road project.
“Except as otherwise provided in this contract all questions and disputes relating to the meaning of the specifications, drawing and instructions herein before mentioned and as to thing whatsoever, in any way arising out or relating to the contract, designs, drawings, specifications, estimates concerning the works or the execution or failure to execute the same, whether arising during the progress of the work or after the completion or abandonment there of shall be referred to the City Engineer in writing for his decision, within a period of 30 days of such occurrence. Thereupon the City Engineer shall give his written instructions and/or decisions within a period of 60 days of such request. This period can be extended by mutual consent of the parties.
Upon receipt of written instructions of decisions, the parties shall promptly proceed without delay to comply such instructions or decisions. If the City Engineer fails to give his instructions or decisions in writing within a period of 60 days or mutually agreed time after being requested if the parties are aggrieved against the decision o f the C. E., the parties may within 30 days prefer an appeal of the M.P.L., Com. who shall afford an opportunity to the parties of being heard and to offer evidence in support of his appeal. The M.P.L. Com. will, give his decision within 90 days. If any party is not satisfied with the decision of the M.P.L. Com, he can refer such disputes for arbitration by an Arbitration Board to be constituted by the Corporation which, shall consist of three members of whom one shall be chosen from among the officers belonging to be Urban Administration and Development Department not below the rank of B.E. one Retired Chief Engineer of any Technical Department and City Engineer Nagar Nigam Jabalpur. The following are also the terms of this contract, namely:
a) No person other than the aforesaid Arbitration Board constituted by the Corporation (to handle cases of all Technical Departments) shall act as Arbitrator and it for any reason that is not possible the matter shall not be referred to Arbitration at all.
b) The Corporation may at any time effect any change in the personnel of the Board and the new members or members appointed to the Arbitration Board shall be entitled to proceed with the reference from the stage it was left by his or their predecessors.
c) The party invoking arbitration shall specify the dispute or disputes to be referred to arbitration under this clause together with the amount or amounts claimed in respect of each such dispute(s).
d) Where the party invoking arbitration is the contractor no reference for arbitration shall be maintainable, unless the contractor furnishes a security deposit of a sum determined according to the table given below, and the sum so deposited shall on the determination of arbitration proceeding, be adjusted against the cost, if any awarded by the Board against the party and the balance remaining after such adjustment or in the absence of the such cost being awarded the whole of the sum shall be refunded to him within one month from the date of the award….”
Upon analyzing the clause, the Hon’ble Supreme Court interpreted it to state that, if any dispute arises between the parties, the party seeking invocation of the arbitration clause shall first approach the chief engineer and on his failure to arbitrate the dispute, the party aggrieved may file an appeal, failing which, the corporation shall constitute an arbitration board to resolve the disputes in the manner prescribed. However, before doing so, the party invoking arbitration clause is required to furnish security of a sum to be determined by the corporation. The Hon’ble Supreme Court observed that the security was not furnished by the respondent to the corporation and such being the position, the obligation of the corporation to constitute an arbitration board to resolve disputes between the parties could not arise because of failure of the respondent to furnish security as envisaged in the said clause. The Hon’ble Supreme Court, therefore, held that the pre-requisites were mandatory to be performed. It is pertinent to note that the present clause specifically provided for performance of the pre-conditions as mandatory process before initiation of arbitration.
3. Visa International Limited v. Continental Resources (USA) Ltd. (“Visa International Case”)
The Hon’ble Supreme Court, in the Visa International Case, while deciding a petition under Section 11 of the Act analyzed the following clause in a memorandum of understanding executed between the parties.
“Any dispute arising out of this agreement and which cannot be settled amicably shall be finally settled in accordance with the Arbitration and Conciliation Act, 1996.”
The clause provides that disputes arising out of the agreement which could not be settled amicably shall be finally settled in accordance with the provisions of the Act. The Hon’ble Supreme Court was adjudicating a contention seeking rejection of the Section 11 petition stating that no attempt whatsoever was made to amicably settle the matter which was a precondition to invoke the later part of the clause. The Hon’ble Supreme Court interpreted the clause to state that parties intended to settle disputes finally in accordance with the provisions of the Act in case of failure to arrive at an amicable settlement. After analyzing the documents submitted on record, the Hon’ble Supreme Court observed that from the correspondence exchanged between the parties it was clear that there was no scope for an amicable settlement as both the parties had taken a rigid stand, and that attempts were made for an amicable settlement but without any result leaving no option but to invoke the arbitration clause. The Hon’ble Supreme Court accordingly referred the dispute to arbitration by rejecting the contention that the pre-requisites have not been satisfied in the said case. In this case, the Hon’ble Supreme Court determined the pre-condition on the basis of the conduct of the parties, and accordingly proceeded with its decision.
4. Oriental Insurance Company Limited v Narbheram Power & Steel Pvt. Ltd. (“Oriental Insurance Case”)
The Hon’ble Supreme Court, in the Oriental Insurance Case, analysed the following clause in a dispute arising from a fire insurance policy.
“13.If any dispute or difference shall arise as to the quantum to be paid under this policy (liability being otherwise admitted) such difference shall independently of all questions be referred to the decision of a sole arbitrator to be appointed in writing by the parties to or if they cannot agree upon a single arbitrator within 30 days of any party invoking arbitration, the same shall be referred to a panel of three arbitrator, comprising of two arbitrators, one to be appointed by each of the parties to the dispute/difference and the third arbitrator to be appointed by such two arbitrators and arbitration shall be conducted under and in accordance with the provisions of the Arbitration and Conciliation Act, 1996.
It is clearly agreed and understood that no difference or dispute shall be referable to arbitration as hereinbefore provided, if the Company has disputed or not accepted liability under or in respect of this policy.
It is hereby expressly stipulated and declared that it shall be a condition precedent to any right of action or suit upon this policy that the award by such arbitrator/arbitrators of the amount of the loss or damage shall be first obtained.”
The Hon’ble Supreme Court interpreted the said clause and held that the terms of the clause and the condition mentioned therein was a pre-requisite for initiation of arbitration. The Hon’ble Supreme Court observed that the clause is quite limpid that once the insurer disputes the liability under or in respect of the policy, there can be no reference to the arbitrator, and held that, “it does not need special emphasis that an arbitration clause is required to be strictly construed. Any expression in the clause must unequivocally express the intent of arbitration. It can also lay the postulate in which situations the arbitration Clause cannot be given effect to. If a Clause stipulates that under certain circumstances there can be no arbitration, and they are demonstrably clear then the controversy pertaining to the appointment of arbitrator has to be put to rest.” The conditions in the present clause were analyzed along with principles applicable to insurance policies and accordingly stated that the terms of the insurance policy are strictly to be complied with and accordingly the recourse available to the party was decided.
5. Municipal Corporation of Greater Mumbai v. S. Kumar Construction & Ors.; AND S. Kumar Construction & Ors. v. Municipal Corporation of Greater Mumbai & Ors. (“S Kumar Construction Case”)
The Hon’ble Supreme Court has dismissed the special leave petition filed against the order passed in the S Kumar Construction Case by the Hon’ble Bombay High Court upholding the decision taken by a full bench of the Hon’ble High Court. In the S Kumar Construction Case, the Hon’ble High Court was involved with interpreting dispute resolution clause in a general condition of contract executed between the party and Municipal Corporate of Greater Mumbai. The relevant clause is reproduced herein below.
“Clause 96: Any dispute or difference to be referred to Commissioner:-
If any doubt, dispute or difference arises or happens between the Engineer or any other officer on the one hand and the Contractor on the other hand, couching or concerning the said works or any of them, or relating to the quantities, qualities description or manner of work done and executed by the Contractor, or to the quantity or quality of the materials to be employed therein, or in respect of any additions, deductions, alterations, or deviations made into or from the said works or any part of them, or touching or concerning the meaning or intention of this contract or of any part thereof or of any plans, drawings, instructions or directions referred to therein or which may be furnished, or given during the progress of the works, or touching or concerning any certificate, order, or reward which have been made or in any way whatsoever relating to the interests of the Municipal Corporation or of the Contractor in the premises, every such doubt, dispute and difference shall from time to time be referred to the Commissioner who shall give his decision within a period of 90 days and if the contractor is not satisfied with the decision of the Commissioner or the Commissioner fails to give the decision within the period of 90 days, such dispute may be referred to arbitration as per condition No. 97."
Clause 97 :-Arbitration :-
All disputes or differences whatsoever which shall at any time arise between the parties hereto touching or concerning the works or the execution or maintenance thereof or this contract or the construction, execution, or maintenance thereof or this contract thereof or, to the rights or liabilities of the parties or arising out of or in relation thereto whether during or after completion of the contract or whether before or after determination, foreclosure or breach of the contract (other than those in respect of which, the decision of any person is by the contract expressed to be final and binding) shall after written notice by either party to the contract to the other of them specify the nature of such dispute or difference and call for the point or points at issue to be referred to the arbitration. Arbitration shall be effected -
i] by an Arbitrator agreed upon by the parties or failing agreement upon such an Arbitrator,
ii] by an Arbitrator appointed by the President for the time being of the Institute of Engineers (India) or by the President of the Bombay Centre of the Institute of Engineers (India), or failing such appointment.
iii] By an Arbitrator appointed by the Chief Engineer, Buildings and Communication Department, Government of Maharashtra, or failing such appointment
iv] By an Arbitrator appointed in accordance with the provisions of the Indian Arbitration Act which law governs the contract...”
The Hon’ble High Court, while deciding on the issue of the pre-condition being mandatory or not, proceeded with analyzing several precedents including decisions by the Hon’ble Supreme Court and various High Courts. While discussing the nature of clauses in several of the cases, the Hon’ble High Court held that not all pre-arbitral procedures are mandatory and it depends on the language of each clause, and distinguished several other cases, on the basis of the manner in which the clause in case was structured and that the clause in this case was worded in a manner which made it essential and mandatory for the pre-condition to be followed. The Hon’ble High Court interpreted scope of clauses 96 and 97 of the contract and held that “the clauses 96 and 97 are worded differently and though it is mentioned in clause 96 that if the contractor is not satisfied with the decision of the commissioner or the commissioner fails to give his decision within the period of 90 days, then the dispute may be referred to arbitration as per Clause 97, in the instant case, there is nothing in Clause 97 to suggest that it is only in respect of the disputes or differences raised under Clause 96, that the arbitration can be invoked under Clause 97.”
The Hon’ble High Court while reviewing the scope and structure of each of the clauses, held that clause 97 was widely worded and the disputes which have arisen under clause 96 and reference to arbitration can only be one of the facets of clause 97, but not the only facet. Clause 97 can be said to be a stand alone arbitration clause whose invocation is not contingent upon invocation of Clause 96. In light of the same, the Hon’ble High Court held that invocation of clause 96 is not a must for invoking clause 97 and that a claim for the first time can be made before the arbitrator by following the procedure laid down in clause 97.
The Hon’ble High Court distinguished the present case from the other cases and laid down the principle of a composite scheme and held that in other cases, the clauses provided for a composite scheme being the disputes to be referred to an authority or adjudicator mentioned in the initial clause and, thereafter, initiation of arbitration proceedings. The defining feature of such a scheme contained in the multiple clauses was a specific reference in the arbitration clause made to the authority or adjudicator before whom the party has to go initially and on failure of the dispute or difference being resolved, invocation of the arbitration clause.
Therefore, the Hon’ble High Court held that the defining factor is the manner in which clauses are worded which reflects the intention of the parties and found the same to be absent in the clause under consideration in the present case. It is pertinent to note that the determination of mandatory nature of the clause was discussed and determined on the basis of the language and the scope of both the clauses.
B. High Courts
6. Nirman Sindia v. Indal Electromelts Ltd. & Ors. (“Nirman Sindia Case”)
The Hon’ble Kerala High Court, in the Nirman Sindia Case, while deciding a petition under Section 11 of the Act analyzed the following clauses.
24.1 If the Contractor believes that a decision taken by the Engineer was either outside the authority given to the Engineer by the contract or that the decision was wrongly taken, the decision shall be referred to the Adjudicator within 14 days of the notification of the Engineer's decision."
"25. Procedure for Disputes':
25.1 The Adjudicator shall give a decision in writing within 28 days of receipt of a notification of a dispute.
25.2 The adjudicator shall be paid daily at the rate specified in the Contract Date together with reimbursable expenses of the types specified in the contract data and the cost shall be divided equally between the Employer and the Contractor, whatever decision is reached by the Adjudicator. Either party may refer a decision of the Adjudicator to an Arbitrator within 28 days of the Adjudicator's written decision. If neither party refers the dispute to arbitration within the above 28 days, the Adjudicator's decision will be final and binding.
25.3 The arbitration shall be conducted in accordance with the arbitration procedure published by the institution named and in the place shown in the Contract Data."
The Hon’ble High Court interpreted the above clause to construe that any dispute between the parties with regard to the execution of the work, payments to be made etc. as per the terms of the contract should have been referred to the engineer for his decision and if dissatisfied with the decision of the engineer, it should have been referred to the adjudicator named in the agreement. The Hon’ble High Court held that the procedure to be followed is a pre-requisite and it is mandatory for the parties to comply with the terms prior to initiation of arbitration. The clause in the present case was unequivocal on the procedure and accordingly, the same was held to be valid and binding to be followed.
7. Ravindra Kumar Verma v. BPTP Ltd. (“Ravindra Kumar Verma Case”)
The Hon’ble Delhi High Court, in the Ravindra Kumar Verma Case, while deciding the writ petition filed against an order passed under Section 8 of the Act, analyzed the following clause in an allotment letter for a flat.
"All and any disputes arising out of or touching upon or in relation to the terms of this application and/or Standard Floor Buyer's Agreement including the interpretation and validity of the terms thereof and the respective rights and obligations of the parties shall be settled amicably by mutual discussion failing which the same shall be settled through arbitration. The arbitration proceedings shall be governed by the Arbitration & Conciliation Act, 1996, or any statutory amendments/modifications thereof for the time being in force. The arbitration proceedings shall be held at an appropriate location in New Delhi by a sole arbitrator appointed by the Company. The applicant(s) hereby confirms that he/she shall have or raise no objection to this appointment. The Courts at New Delhi alone shall have the jurisdiction in all matter arising out of/touching and/or concerning this application and/or Floor Buyers agreement regardless of the place of execution of this application which is deemed to be at New Delhi."
The Hon’ble High Court interpreted the clause and stated that the pre-arbitral clauses of this nature are directory and not mandatory. The Hon’ble High Court observed that there is no specific and particular pre–arbitral mechanism provided in the contract, barring the requirement to explore amicable settlement. The Hon’ble High Court relied upon Section 77 of the Act to state that the conciliation contemplated therein is directory and not mandatory, and the intention of the parties with regard to the pre-arbitral procedure as drafted in the said clause was directory and not mandatory. The language of the clause in the present case is distinguishable from the other clauses in cases discussed above as the present clause does not provide for any specific mechanism, while the previous clauses which have been held to be mandatory are specific and provide for a particular mechanism to be followed by the parties.
8. Sarvesh Security Services Pvt Ltd. v. Managing Director, DSIIDC (“Sarvesh Security Case”)
The Hon’ble Delhi High Court, in the Sarvesh Security Case, while deciding two petitions under Section 11 of the Act, Arbitration and Conciliation Act, 1996, analyzed the following clauses in agreements for security services. The two clauses in separate agreements were –
"28. Except as provided for in the contract, all disputes, differences shall be referred to arbitration of a sole arbitrator to be appointed by the Managing Director, DSIIDC. The arbitrator shall enter into reference and decide the dispute(s) as per the Arbitration and Conciliation Act, 1996."
"60. Dispute Resolution:
(a) Any dispute or difference arising out or relating to this contract will be resolved through joint discussion of the authorities representatives of the concerned parties. However, if the disputes are not resolved by joint discussions then the matter will be referred for adjudication to a sole arbitrator appointed by the competent authority in DSIIDC Limited.
(b) The award of the sole arbitrator shall be final and binding on all the parties. The arbitration proceedings shall be governed by Indian Arbitration and Conciliation Act, 1996 as amended from time to time.
(c) The cost of Arbitration shall be borne by the respective parties in equal proportions. During the pendency of the arbitration proceeding and currency of the contract, neither party shall be entitled to suspend the work/service to which the dispute relates an account of arbitration and payment to the contract shall continue in terms of the contract. Arbitration proceedings will be held at Delhi/New Delhi only."
The Hon’ble High Court, while analysing clause 60 reproduced above, held that the clause merely states that the parties shall endeavour to resolve all disputes through joint discussions of the authorized representatives of the parties. If the disputes are not resolved by the joint discussion, then the matter shall be referred to the sole arbitrator. The clause does not provide for any specific procedure for the pre-arbitration mechanism and in light of the same would be directory in nature and not mandatory. Thus, the Hon’ble Court held that “the language used in the clause indicates that the same is merely directory and in case of failure of the petitioner to abide by those terms, no fault could be found in the act of the petitioner in invoking the arbitration clause and filing of the present petition.” The Hon’ble Court further reviewed the conduct of the parties and observed that in view of a letter exchanged between the parties contemplating settlement, the requirements of a joint discussion were satisfied. The Hon’ble Court in the Sarvesh Security Case relied upon the decision in the Ravindra Kumar Verma Case.
A perusal of some of the relevant cases highlights the importance of pre-arbitral procedure and the mandatory nature of such clauses specially in construction contracts amongst others. The mandatory or directory nature of the clause depends upon various factors. Each clause has to be interpreted basis the manner in which the clause has been drafted, the pre-arbitration procedure that has been described, the dispute that has arisen between the parties and the conduct of the parties. An issue regarding non-compliance of pre-arbitration procedure can have an impact on the remedy being sought including but not limited to severely impacting the timelines in certain cases, where after substantial litigation on this issue, it is determined that the pre-arbitration procedure was mandatory and was not complied. Therefore, it is advisable for the claimant to assess the situation on the factors mentioned above and accordingly make efforts to comply with the pre-arbitral procedures, wherever possible.
Kindly treat this as an information update and the same shall not constitute as an advisory by the firm.
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 (1999) 2 SCC 594  (2007) 5 SCC 344  (2009) 2 SCC 55  (2018) 6 SCC 534  Special Leave Petition Civil Diary Nos. 8296/2018  2017 (2) ARBLR 386 (Bom)  AIR 1999 Ker 440  2015 (147) DRJ 175  Arb. P. 181/2014 and Arb. P. 196/2014 (16.03.2018) – Delhi High Court