This article is written by Ishanvi Mishra, pursuing a Certificate Course in Arbitration: Strategy, Procedure and Drafting from lawsikho.com.
Due to the time bound adjudication which gives high levels of confidentiality to parties, more and more parties are shifting from resolving disputes in the Courts to arbitral proceedings. Almost all the commercial contracts in contemporary times have clauses for Arbitration in them. But now, these clauses go one step further by providing for a pre-arbitration amicable resolution mechanism to trigger the arbitration, commonly known as Multi-tier dispute resolution clauses[i].
A close look into multi-tier dispute resolution clauses
Multi-tier dispute resolution clauses provide for an additional mechanism, at each stage which otherwise would finally escalate to arbitration. The principle of arbitration has been that people want to arbitrate, i.e. find a solution or come to some kind of consensus; therefore, these clauses are premised on necessity to look for alternate resolution mechanisms. Such clauses have a pre-requisite condition of first going through an alternate form of dispute resolution, namely mediation and/or conciliation and/or negotiations before the parties can invoke arbitral proceedings, in order to first try to amicably resolve the dispute. These clauses are based on the understanding that multiple disputes do get settled and that parties will at least try to reach for a solution before the arbitration proceedings. However, the contour of application of law becomes more complicated when these multi-tier dispute resolution clauses are not complied with and the erring party proceeds with invocation of arbitration. The judicial view is divided on the enforceability of such clauses in such circumstances[ii]. Let us look at different jurisdictions to understand each of their stances on this aspect.
England and Wales on enforceability of Multi-tier resolution Clause
Walford v. Miles[iii] was the first landmark judgement by the House of Lord, in which Lord Ackner held that just an agreement to negotiate the dispute was unenforceable in court of law as it is a mere ‘agreement to agree’. Historically speaking the English courts due to lack of clear language to constitute jurisdictional conditions precedent to arbitration have been reluctant to uphold steps in multi-tier dispute resolution clauses.
In Sulamerica CIA Nacional de Seguros v. Enesa Engenharia[iv], the Court of Appeal decided on a contract with a multi-tier clause that required that ‘prior to a reference to arbitration, the parties will seek to have the Dispute resolved amicably by mediation’, and that:
“If the Dispute has not been resolved to the satisfaction of either party within 90 days of service of the notice initiating mediation, or if either party fails or refuses to participate in the mediation, or if either party serves written notice terminating the mediation under this clause, then either party may refer the Dispute to arbitration.”[v]
The major issue in this case was regarding whether the mediation was a binding condition as a pre-arbitral procedure. It was held by the courts, that it is due to absent clarity in language to that effect, that it would not import obligation to mediate with certainty. Further, the multi-tier clause “does not set any defined mediation process, nor does it refer to the procedure of a specific mediation provider”[vi]. The clause only created the impact of that undertaking to seek to have the dispute resolved amicably through mediation, but there were no provisions made for the process to be undertaken. In accordance to that, the court held that mediation was not an essential pre-condition precedent to arbitration[vii].
High Court (Commercial Court) recently in, Emirates Trading Agency LLC v. Prime Mineral Exports Pvt Ltd[viii] established a precedent by the English courts. The contract contained a multi-tier clause which bound the parties to sit in a 4week negotiation before commencing the arbitral proceedings. But the claimant initiated the proceedings against the respondent, and the respondent ultimately challenged the jurisdiction of the tribunal at the High Court which ultimately found that in the given case the parties had negotiated enough for particular purpose to confer jurisdiction on the tribunal. But, in a clear contradiction to Sulamerica, it held that the negotiation was a ‘condition precedent to the right to refer a claim to arbitration’ but since necessary negotiations have taken place the application was denied[ix].
United States on whether multi-tier resolution clauses are binding
Similar to the opinions of the English courts, in the States, the prevalent view is that unless and until the multi-tier clause in the contract does not expressly include language to constitute jurisdictional conditions precedent to commencement of arbitration, they will not be binding.
In the 2014 judgement of BG Group plc v. Republic of Argentina[x], the United States Supreme Court opined that when there is a failure to comply with pre-arbitral steps prescribed in multi-tier clauses, it will not deprive an arbitral tribunal of jurisdiction to adjudicate a dispute, without clear language to the contrary[xi].
Notwithstanding the foregoing, there have been multiple cases in the US where without express reference to ‘condition precedent’ the courts have ruled multi-tier clauses to constitute jurisdictional conditions precedent to arbitration. In Red Hook Meat Corp v. Bogopa-Columbia Inc[xii], the Supreme Court of New York similarly held in this case that even though the clause did not use the term ‘condition precedent’ or any other mandatory phrase. The pre-arbitral steps in a multi-tier clause constituted jurisdictional conditions precedent.
Also, in Kemiron Atlantic Inc v. Aguakem International Inc[xiii], the parties did not use clear language in their multi-tier dispute resolution clause, but the Court of Appeals for the Eleventh Circuit held that the pre-arbitral steps in the clause constituted jurisdictional conditions precedent to arbitration[xiv].
Thus, the US seems to be of the opinion that when the clauses do not have a clear language constituting jurisdictional condition precedent to arbitral proceedings, the multi-tier clauses are non-binding, but in recent times it has upheld otherwise. How US courts will deal with this issue in the future, remains to be seen[xv].
India’s stance on multi-tier resolution clause
Amongst the earliest judgement to address similar questions in India was delivered by the apex court in M.K. Shah Engineers v. State of MP[xvi], which analyzed the challenge to an award if “procedural pre-requisites” were not achieved. In this case the dispute was first supposed to be referred to a “superintending engineer” and if either party is dissatisfied with his adjudication, they could move to arbitral proceedings. The principal issue was “what is the effect of absence of decision by the Superintending Engineer proceeding the demand for reference and commencement of the arbitration proceedings” SC held that such conditions were “essential” and cannot be skipped in order to take up different dispute resolution mechanism. However, in this particular case, the parties had waived this procedural pre-condition through their conduct.
Kerala High Court gave a very similar judgement, (in a case with similar facts) in the case of Nirman Scindia v. Indal Electromelts[xvii]. It was specified in the contract between the parties that before moving to arbitration in case of conflict, the parties would first have to refer their conflict to an expert, either party may contact the adjudicator, and if the matter is still not resolved they will proceed to arbitration. But since the Respondent unilaterally and illegally terminated the contract, the Claimant argued that the clause for referring the dispute to an engineer also came to an end, and therefore filed a request for the appointment of an arbitrator in the Court without first exhausting the alternative mechanisms. However, the Court observed that the parties can not skip the other step or final step to the dispute resolution mechanism without taking up the first level of the agreed dispute resolution mechanism. Petitioner’s application was rejected and pronounced that the Applicant’s failure to follow previously agreed upon, compulsory procedure laid down in the contract made request to appoint an arbitrator premature[xviii].
A full bench of Bombay High Court in S Kumar Construction Anr vs. Municipal Corporation[xix] decided on the issue of prior compliance with pre-arbitration procedures as negative. The Court was of opinion that such cases depend on how the contract is worded, and therefore should be decided on case to case and fact to fact basis. Interestingly, it did not specifically hold that all pre-arbitration procedures are optional, instead opining that it could be essential if the tribunal felt so depending on the language of the clause.
In Visa International Ltd. v. Continental Resources (USA) Ltd[xx]. The agreement between the parties in this case provided vide its multi-tiered dispute resolution clause that, “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 Court held that the pre-requisite step for referring any dispute to arbitration in the contract between the parties was that the parties could not settle the dispute, amicably. The learned counsel for the respondent argued that in order for a dispute to have been settled amicably, there must be formal negotiation/conciliation between the parties and that the agreement was contingent upon the failure of such resolution mechanism. He further contended that since the applicant had not formally initiated conciliation proceedings, therefore the application for the appointment of arbitrator was premature and thus it ought to be dismissed[xxi]. The Court was of the opinion that there have been several correspondences between the parties, over a period of months, which clearly establishes that the dispute between the parties could not have been amicably settled. Therefore, the request for arbitration was granted.
Whenever a dispute arises between parties in any case, they make several attempts to resolve them by communicating and conversing in order to find an effective solution for both of them before deciding to go for more formal means of dispute resolution. In such cases, where does the Court, in all probability, come to a conclusion that the clause has been complied with. For instance, in contracts such as the Swiss Timing case[xxii], the clause specifically provides that a party has to give the opposite party a notice containing the exact nature of the dispute and within 10 days of the receipt of such dispute, the parties have to use their best endeavor to negotiate the dispute. In such a case, whether the Court was right in giving a go-by to a strict compliance of the clause in favor of negotiation efforts, is a question of great introspection and finds no response, at least in the law prevalent in India. Thus, in this particular class of cases, the pre-arbitration mechanism, although enforceable, has not been strictly complied with and the standard of compliance has been held to be valid by courts[xxiii].
The Delhi High Court, however, took a divergent view from these landmark judgments in Ravindra Kumar v. BPTP Limited[xxiv] and held that these pre-arbitral measures would not establish a floor for arbitration to be filled for the matter. The explanation given for this was the damage caused to the party seeking to invoke arbitration, because under any of the terms of the Limitation Act , 1963, time spent in such preconditions is not exempted. This can ultimately make the arbitration clause null and void due to the bar of limitation being unable to be invoked. Secondly, the Court relies on Article 77 of the 1996 Arbitration and Conciliation Act, which states that ‘through conciliation proceedings, the presence of these proceedings does not preclude either of the parties from exercising their rights under the constitution.’ The Court held that prior requirements are “only directory and not mandatory” before referring a dispute to arbitration; The Ravindra Kumar Verma Court followed earlier decisions of the Delhi High Court in Sikand Construction and Saraswati Construction Company which held that “the procedure/pre-condition has to be only taken as a directory and not a mandatory requirement”. Following Ravindra Kumar Verma, the Delhi High Court in Baga Brothers, Siemens Limited, and Sarvesh Security Services has reaffirmed that pre-arbitration procedures are not mandatory[xxv].
Arbitration in India can be an extremely expensive form of dispute resolution mechanism so the parties prefer to opt for such multi-tier dispute resolution clauses. Besides this, some contracts and conflicts require professional knowledge of the matter, rather than legal, which is difficult to bring into arbitration, this issue may be solved if the parties are required to settle the conflict among themselves in pre-arbitral procedural measures with the aid of an expert. What may be more realistic is for the Indian courts to follow the approach adopted by the Singapore Court of Appeal in International Research Corp PLC v. Lufthansa Systems where the Court held that, if the preconditions are specified with adequate clarity and specificity, they are mandatory in nature whereas, if they are vague and of a general nature, they cannot be compulsorily imposed.
As disputes are more commonly resolved through arbitration in the commercial world, the importance and need of multi-tier dispute resolution clauses is only growing, and the absence of enforcement is a threat to ADR growth in India. In order to facilitate the parties, the Court should give much-needed clarity on the compliance standard required to satisfy the conditions of pre-arbitration. These determinations should be taken on a case-by – case basis and with an overarching goal of preserving the interests of the parties. This could help in a less time-consuming and cost-effective way to achieve the true objective behind such voluntary settlement clauses.
[i] Lakhawat, M. (2018, June 22). Multi-Tier Arbitration Clauses: Directory Or Mandatory? – Litigation, Mediation & Arbitration – India. Retrieved July 31, 2020, from https://www.mondaq.com/india/arbitration-dispute-resolution/712978/multi-tier-arbitration-clauses-directory-or-mandatory
[ii] Supra i
[iii]  1 All ER, at 460
[iv] Sulamerica CIA Nacional de Seguros v. Enesa Engenharia,  EWCA Civ 638
[v] Ibid at para 23
[vi] Ibid at para 53
[vii] Ibid at para 36
[viii]  EWHC 2014 (Comm)
[ix] Ibid at para 26
[x] BG Group PLC v. Republic of Argentina, 572 _ (2014) (slip op.)
[xii] Red Hook Meat Corp v. Bogopa-Columbia, Inc, 31 Misc 3d 814 at 819 (NY Sup Ct 2011)
[xiii] 290 F 3d 1287 (11th Cir 2002)
[xiv] Ibid at 1291
[xv] Multi-Tier Dispute Resolution Clauses as Jurisdictional Conditions Precedent to Arbitration. (n.d.). Retrieved July 31, 2020, from https://globalarbitrationreview.com/chapter/1142626/multi-tier-dispute-resolution-clauses-as-jurisdictional-conditions-precedent-to-arbitration
[xvi] (1999) 2 SCC 594
[xvii] 1999 SCC OnLine Ker 149
[xviii] MULTI-TIERED DISPUTE RESOLUTION CLAUSES AND THEIR ENFORCEABILITY IN INDIA. (2018, December 30). Retrieved July 31, 2020, from https://ijlpp.com/multi-tiered-dispute-resolution-clauses-and-their-enforceability-in-india/
[xix] 2016 SCC OnLine Bom 13324
[xx] (2009) 2 SCC 55
[xxi] Editor, Saba, Devika, Radhey, C, A., Tripathi, A., & Bhumika. (2020, July 20). Tiered Dispute Resolution Clauses: The Indian Picture. Retrieved July 31, 2020, from https://www.scconline.com/blog/post/2016/02/03/tiered-dispute-resolution-clauses-the-indian-picture/
[xxii] (2014) 6 SCC 677
[xxiii] Ibid xxi
[xxiv] 2014 SCC Online Del 6602
[xxv] Ibid iv
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