Differentiating Jurisprudence On Pre-Condition To Invoke Arbitration

Pre 2015 Amendment:

The Supreme Court of India, in the case of M.K. Shah Engineers and Contractors vs. State of Madhya Pradesh, emphasized on the "essential" nature of fulfilling pre-conditions. However, this approach demonstrates a narrow understanding of pre-conditions and their significance. In Nirman Sindia v. Indal Electromelts Ltd., Coimbatore, the Kerala High Court observed that the parties need to comply with the agreed procedure for dispute resolution and the parties cannot resort to final stage without complying the primary stage of clause. In Simpark Infrastructure Pvt. Ltd. vs Jaipur Municipal Corporation, the Rajasthan High Court observed that the parties need to follow the agreed procedure for invoking the arbitration and if the same is not followed then the application for arbitration will be premature. In Haldiram Manufacturing Company Pvt. Ltd. v. DLF Commercial Complexes, the Delhi High Court emphasized upon the importance of fulfillment to fulfill the pre-condition of mutual discussion before commencing arbitration.

However, a contrasting viewpoint emerged in Ravindra Kumar Verma v.M/s BPTP Ltd & Anr., where non-compliance to pre-conditions was not a barrier for initiating arbitration. The court recognized that strict adherence could prejudice the party seeking arbitration and allowed for exceptions. In Demerara Distilleries Pvt.Ltd. v. Demerara Distillers, the Supreme Court of India observed that took a different stance altogether with respect to the examination of the preconditions and stated that one must also consider whether such preconditions have been complied with by the correspondence of the parties, and the likelihood of success especially in cases where the preconditions are open-ended and do not provide conclusive definitive terms to measure the attempt of satisfying the preconditions. In the instant case, the Court decreed after inferring the correspondence exchanged that the attempts to resolve disputes by mutual discussion and mediation as a precondition is merely an empty formality and not mandatory. It is pertinent to note that the Court itself determined the nature of preconditions without considering whether the Arbitral Tribunal was sufficiently empowered to decide the same.

In SwissTiming Ltd v. Organizing Committee, the Supreme Court acknowledged genuine attempts at negotiation before arbitration, considering pre-arbitral steps as directory rather than mandatory. However, the court emphasized following the agreed-upon conciliation procedure within a reasonable timeframe, striking a balance between amicable resolution and the effectiveness of arbitration. A balanced approach requires considering specific circumstances, allowing reasonable deviations, and striking a balance between amicable resolution and the effectiveness of arbitration.

Post 2015 Amendment:

The Delhi High Court's rulings in Kunwar Narayan vs. OzoneOverseas Pvt. Ltd. and Ors and SiemensLimited vs. Jindal India Thermal Power Limited also raise concerns. By categorizing arbitral steps as directory in nature, the Delhi High Court seems to blur the line between arbitration and judicial proceedings. This not only undermines the autonomy and confidentiality of arbitration but also adds unnecessary procedural complexities. The recent observation by the Delhi High Court in Oasis Projects Ltd. v. Managing Director, National Highway and InfrastructureDevelopment Corporation Limited , the court observed that clauses in contracts requiring parties to first attempt conciliation before resorting to arbitration are merely directory and not mandatory. This interpretation weakens the effectiveness of alternative dispute resolution methods and undermines the importance of following contractual obligations. In the case of M/s.D.P. Construction vs. M/s. Vishvaraj Environment Pvt. Ltd, the Bombay High Court limits the court's jurisdiction under Section 11(6) of the Act to instances where the agreed procedure for appointing arbitrators under Section 11(2) has failed. This restrictive interpretation constraints the court's authority and overlooks situations where immediate intervention may be necessary to ensure a fair and efficient arbitration process.

However, a pertinent question arises when parties choose to engage in these pre-arbitral steps, resulting in a significant loss of time. Can the issue of limitation be raised in such cases? The Supreme Court of India addressed this debate in GeoMiller & Co. Pvt. Ltd. vs. Rajasthan Vidyut Utpadan Nigam Ltd. In this landmark decision, it clarified that the time spent in bona fide negotiations toward an amicable settlement may be excluded when calculating the period of limitation for arbitration reference under the 1996 Act. Subsequently, the Delhi High Court, in cases like Alstom Systems India Pvt.Ltd. vs. Zillion Infraprojects Pvt. Ltd. and WelspunEnterprises Ltd. vs. NCC Ltd., reiterated this principle, emphasizing that when pre-arbitral steps are mandated by the agreement, the time spent on such processes should be excluded from the limitation period calculation.

The evolving judicial stance on pre-arbitral steps strikes a balance between their importance and the need to prevent undue prejudice from strict limitations. However, the lack of consistency and coherence in interpreting contractual terms and imposing additional requirements undermines the reliability and effectiveness of arbitration. This uncertain legal landscape poses significant challenges for businesses and individuals seeking efficient dispute resolution. Recent judgments from various Indian courts reveal inconsistencies, lack of clarity, and deviation from arbitration principles. These decisions appear to impede parties' contractual autonomy and introduce unnecessary procedural complexities. Such judicial shortcomings raise concerns about the reliability and effectiveness of the arbitration process in India.

Analysis:

The shift in the Indian arbitration landscape after the 2015 amendment. The amendment made the arbitration regime more pro-arbitration and reduced the power of the courts. In DuroFelguera, S.A. Vs. Gangavaram Port Limited, the Supreme Court stated that the court's role during the appointment stage is limited to determining the existence of an arbitration agreement. This implies that parties approaching the court directly must comply with the pre-condition requirement before seeking the appointment of an arbitrator under Section 11(6) of the Arbitration and Conciliation Act, 1996. In the case of Quick heal Technologies Ltd v. NCS Computech Private Ltd, the Bombay High Court emphasized the significance of differentiating between the use of "may" and "shall" in an arbitral clause. This distinction is crucial as it determines the nature of the requirement imposed. When the clause employs "shall," it indicates a mandatory obligation that parties must comply with. On the other hand, the use of "may" grants parties the discretion to decide whether or not to fulfill the contractual pre-conditions for arbitration. Regarding "May" clauses, which are contractual pre-conditions for arbitration, there is limited flexibility provided in terms of deviating from these pre-conditions compared to the binding nature of "Shall" clauses.

A recent case of the Delhi High Court, M/sVindhya Vasini Construction Co v. M/s Bharat Heavy Electricals Ltd, emphasized that exclusive appointment of a particular person as an arbitrator being a pre-condition in the arbitration clause, constitutes conditional acceptance of arbitration. Parties should comply with such a condition; otherwise, the arbitration clause will cease to operate, and parties would need to pursue civil remedies. However, in Mahalakshmi InfraProjects Private Ltd vs NTPC Ltd, the Delhi High Court appointed an arbitrator despite a similar pre-condition for exclusive appointment. These contrasting rulings indicate the importance of distinguishing between admissibility and jurisdiction in interpreting pre-deposit or pre-condition clauses. Under Section 11 of the Act, the court's power to appoint an arbitrator is a matter of jurisdiction, while the non-fulfillment of pre-deposit and pre-conditions relates to admissibility.

Furthermore, international cases provide additional insights. In International Research Corp PLC v Lufthansa Systems, the Singapore Court of Appeal considered pre-conditions as mandatory only if they are clearly and specifically defined. Conversely, vague, and general pre-conditions cannot be enforced mandatorily. Similarly, in Vnesheconombankv. Ukraine, the tribunal recognized that the conditions for accessing arbitration, as stated in Article 9 of the Russia-Ukraine BIT Treaty, were satisfied. Even, the International Court of Justice, in the Democratic Republic ofthe Congo v. Rwanda, also recognized this distinction, stating that conditions attached to the consent in a compromise clause are limits to the court's jurisdiction, not matters of admissibility.

The issue of whether pre-condition clauses in arbitration agreements in India are mandatory or directory in nature remains complex and continues to evolve. The 2015 amendment to the Arbitration and Conciliation Act, 1996, marked a shift towards a more pro-arbitration stance, limiting the court's role and emphasizing compliance with pre-conditions. However, the interpretation of these clauses still lacks consistency and coherence within the Indian judiciary, creating uncertainty for parties involved in arbitration.

Views are personal.