Agreement To Explore Conciliation Before Arbitration, Only Directory In Nature: Delhi High Court

The Court took note that as per Section 77 of the Arbitration and Conciliation Act, 1996 (A&C Act), in cases of urgency, arbitral proceedings can be initiated even when conciliation proceedings are pending for preserving the party’s rights.

The bench of Justice Navin Chawla remarked that in order to determine whether it is necessary to immediately invoke arbitration due to an urgency, it is the opinion of the party which is the governing factor.

The Court concluded that, in terms of Section 77, the petitioner was justified in initiating arbitration for preserving its rights, without going through conciliation, despite the fact that the arbitration clause provided for prior conciliation.

The petitioner, M/s Oasis Projects Ltd, and the respondent, National Highway and Infrastructure Development Corporation Ltd (NHIDCL), entered into a Construction Contract. Certain disputes arose between the parties after the respondent issued a “Notice for intention to Terminate the Contract” on the petitioner. Thereafter, the petitioner invoked the arbitration clause and filed a petition under Section 11(6) of the A&C Act before the Delhi High Court, seeking appointment of an Arbitrator.

The respondent, NHIDCL, submitted before the High Court that the petition was not maintainable since under the Dispute Resolution Clause, the parties had specifically agreed to explore conciliation before resorting to arbitration. Since the petitioner had failed to follow the said procedure, the petition was liable to be dismissed on the ground of being premature, the respondent averred.

The petitioner, Oasis Projects, contended before the Court that the process of conciliation mentioned in the Dispute Resolution Clause was directory in nature. It added that such conciliation process cannot, in any manner, affect the right of the petitioner to invoke the Arbitration Agreement.

It added that before invoking arbitration, the petitioner had taken steps to arrive at an amicable settlement with the respondent, however, such attempts had failed.

Referring to the relevant clause contained in the Contract, the Court reckoned that it clearly provided that the parties agreed to explore conciliation before resorting to arbitration. However, the Court ruled that the said stipulation cannot be held to be mandatory in nature.

“Though Article 26.2 clearly states that before resorting to arbitration, the parties agree to explore Conciliation by the Committee, in my opinion, the same cannot be held to be mandatory in nature,” the Court said.

It added: “It needs no emphasis that Conciliation as a Dispute Resolution Mechanism must be encouraged and should be one of the first endeavours of the parties when a dispute arises between them. However, having said that, Conciliation expresses a broad notion of a voluntary process, controlled by the parties and conducted with the assistance of a neutral third person or persons. It can be terminated by the parties at any time as per their free will. Therefore, while interpreting Article 26.2, the basic concept of Conciliation would have to be kept in mind.”

The bench further referred to the Office Memorandum, dated 03.07.2020, published by the respondent, NHIDCL, on its website, which gave details regarding the establishment, constitution and procedure of the Conciliation Committee.

The Court noted that as per the said Office Memorandum, on receipt of a notice from the Contractor/ petitioner, NHIDCL shall “offer” the Contractor to refer the matter to the Conciliation Committee. Thus, it is subject to the consent of the Contractor that the matter would eventually be referred to the Conciliation Committee, the Court concluded.

The Court thus, held that the Office Memorandum clearly evidences that the said conciliation process is voluntary and can be resorted to only where the Contractor/ petitioner agrees to such process after the disputes have arisen between the parties.

The bench further took note that in Ravindra Kumar Verma vs. M/s BPTP Ltd. & Anr. (2014), the Delhi High Court had ruled that the doubt whether the conciliation proceedings, as required by the arbitration clause, is directory or mandatory in nature, is removed once reference is made to Section 77 of the A&C Act.

“Section 77 of the Act as also Clause 16 of the OM state that where, in the opinion of a party, immediate initiation of the arbitral proceedings is necessary to preserve the rights of the said party, the said party may initiate arbitral or judicial proceedings even during the Conciliation proceedings,” the Court observed.

“Therefore, in case of urgency, arbitral proceedings can be initiated even when conciliation proceedings are pending. To determine whether there is such an urgency or it is necessary to immediately invoke arbitration, it is the opinion of the party concerned which is the relevant and the governing factor,” the bench said. It added that the opinion of the party is relevant because Conciliation is a voluntary process and by its very nature directory, which can be terminated at any point of time by any party.

Referring to the facts of the case, the bench said, “In the present case, it is also to be noted that in terms of Article 23.1(v) of the Contract, in case the respondent terminates the Contract, the petitioner shall be deemed to have been debarred for a period of two years and shall not be able to bid any Contract of the respondent. The petitioner also fears the invocation of the performance guarantee. Therefore, in terms of Section 77 read with Clause 16 of the OM, the petitioner is justified in expressing urgency in initiating arbitration for preserving its rights.”

While holding that the petition was not premature, the Court allowed the petition and appointed a Sole Arbitrator.

Case Title: M/s Oasis Projects Ltd versus Managing Director, National Highway and Infrastructure Development Corporation Ltd (NHIDCL)

Citation: 2023 LiveLaw (Del) 143

Counsel for the Petitioner: Mr. Bharat Chugh & Mr. Siddharth Shiva Kumar, Advs.

Counsel for the Respondent: Mr. Debal Kumar Banerjee, Sr. Adv. with Mr. Dharmender Verma & Mr. Vishal Singh, Advs

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