This article is written by Ankit Premchandani (Practicing Advocate in Indore, Madhya Pradesh) and Monika Singh (Practicing Advocate in Mumbai, Maharashtra). In this article, the author explains Multi-tier dispute resolution in the process of Arbitration.

Arbitration has become an attractive mode of dispute resolution between parties both due to its expeditious nature, confidentiality, and flexible structure. An arbitration clause has become commonplace in agreements ranging from a simple agreement of sale of goods to complex construction contracts and joint venture agreements. While including a dispute resolution clause in an agreement, the parties prefer to include various pre-arbitral steps to be followed by the parties before invocation of arbitration. These Multi-tier dispute resolution clauses are also known as “escalation clauses” or “filter clauses” or “multi-step clauses” or “ADR first clauses”. In a multi-tiered dispute resolution clause, the parties agree to follow a series of steps/stages comprising various Alternate Dispute Resolution (ADR) techniques prior to invoking arbitration. The purpose of a multi-tier clause is to provide an opportunity to the parties to resolve the disputes outside arbitration thereby avoiding unnecessary additional financial costs and delays. Further, it also enables the parties to protect their business relationship by resolving the dispute in a non-adversarial setup. An example of a multi-tiered dispute resolution clause is as follows:

“All disputes arising out of or in connection with this Agreement shall be resolved by mutual discussions between the parties within 15 days of the said disputes arising, failing which, such disputes shall be referred to conciliation. If the conciliation proceedings fail to resolve the disputes then the disputes will be referred for Arbitration to a sole arbitration being a retired judge of the Supreme Court of India. The procedure of arbitration shall be as per the Arbitration & Conciliation Act, 1996. This Agreement shall be subject to the jurisdiction of Court at New Delhi and the venue of arbitration shall be at New Delhi.”

This article seeks to analyze the validity invocation of arbitration without meeting the conditions precedent as mentioned in the multi-step clause. In addition to this, the question whether the time spent by the parties while pursuing the pre-arbitral steps would be excluded for the purpose of computing limitation in accordance with the Limitation Act, 1963 (hereinafter referred to as the ‘Limitation Act’) read with Section 43 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as the ‘A&C Act, 1996’) has also been dealt with.

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Section 43(1) of the A&C Act, 1996, provides that the provisions of the Limitation Act would apply to arbitrations in the same manner as they apply to claims before the court. In order to compute the limitation period of an arbitration proceeding, the commencement date of the arbitration proceeding is to be determined. As per Section 43(2) of the A&C Act, 1996, “an arbitration is deemed to have commenced on the date referred in Section 21”and Section 21 of the A&C Act, 1996 states that an arbitral proceeding commences on the date on which a request for that dispute to be referred to arbitration is received by the Respondent. 

The Hon’ble High Court of Bombay in the case of Singhal and Brothers and another vs. Mahanagar Telephone Nigam Limited, Mumbai held that “A conjoint reading of Section 21 and Section 43(2) of the Act will indicate that the arbitral proceedings commence on the date on which a request for a dispute to be referred to arbitration is received by the respondents. The limitation of the claim will be considered as of that day. That would be the day which will have to be examined from the date of cause of action to determine whether the claim is within or barred by limitation.”

Just as a plaintiff becomes entitled to institute a suit as soon as a cause of action arises, similarly a claimant becomes entitled to invoke arbitration as soon as the ‘cause of arbitration’ arises. The Hon’ble Supreme Court in the judgment of Panchu Gopal Bose Vs Board of Trustees for Port of Calcutta has observed that the ‘action’ and ’cause of action’ in the Limitation Act should be construed as arbitration and cause of arbitration. The cause of arbitration, therefore, arises when the claimant becomes entitled to raise the question, i.e. when the claimant acquires the right to require arbitration. The limitation would run from the date when cause of arbitration would have accrued, but for the agreement.

Therefore, it can be inferred that the ‘cause of arbitration’ would be same as the ‘cause of action’ in most of the cases, where the claimant becomes entitled to invoke arbitration as soon as a dispute arises. However, it needs to be understood that if an arbitration clause is worded in such a manner that it requires the parties to resort to certain mandatory pre-conditions, the cause of arbitration would only arise once these pre conditions are fulfilled. It can be further construed that since a party gains the right to initiate arbitration only after compliance of these steps (depending on the language of the clause), the period of limitation also starts only upon fulfilling the pre-arbitral procedures.

The answer to the question of limitation depends on the whether the multi-tiered clause is in the nature of a condition precedent or is merely directory in nature.If there are certain conditions that necessarily need to be fulfilled prior to invoking the arbitration clause, a party would normally not be entitled to seek arbitration without complying with these conditions as the ‘Cause of Arbitration’ would not be said to have arisen. However, there is no straight-jacket formula of identifying whether a tribunal or a court would consider the given pre-arbitral steps as mandatory or directory. The two most important elements which will have to be considered by the courts while determining the enforceability of these clauses are, (i) language of the clause and (ii) the conduct of the parties.

While strictly interpreting the language of the dispute resolution clause which specifically provided for ‘mandatory’ conciliatory proceedings between the parties to arrive at an amicable settlement before resorting to arbitration, the Hon’ble High Court of Rajasthan in the case of M/s Simpark Infrastructure Private Limited vs. Jaipur Municipal Corporation, observed that where the agreed procedure of dispute resolution had been made a condition precedent for invoking the arbitration clause, the same was required to be followed. 

With regard to the conduct of the parties, while dealing with a similar dispute resolution clause, the Hon’ble Supreme Court, in the case of Swiss Timing Limited vs. Commonwealth Games 2010 Organizing Committee observed that there were several discussions between the parties and efforts were taken even by the ambassadors of various countries to resolve disputes before going to formal arbitration. Keeping in mind the facts and circumstances of the case, the court observed that it could not be said that the parties had not made their best endeavors to negotiate to resolve the disputes and therefore, the arbitrator had jurisdiction to look into the dispute. 

Further, the Supreme Court in the case of Demerara Distilleries Private Limited vs Demerara Distillers Limited, while dealing with an application to appoint an arbitrator, rejected the plea that invocation of arbitration was pre-mature. Under the contract, the parties had agreed to resolve the dispute first through mutual discussion. In the event the dispute was not resolved through amicable settlement, the parties were to begin mediation and if, in case the mediation failed, the parties would then commence arbitration. However, in this case the Court inferred from the correspondences exchanged between the parties that any attempt at that stage to resolve disputes through mutual discussion and mediation would be an empty formality, and therefore, the Court found it to be a fit case to appoint an arbitrator.

Further, the period of limitation for filing a petition for appointment of an arbitrator should not be confused with the limitation period for making a claim. It is very much possible that even when an application for appointment of an arbitrator is in time, the claims being raised before the arbitrator are not. The Limitation for the claim is to be calculated on the date on which the arbitration is deemed to have commenced. Section 43 of the A&C Act, 1996 provides that for the purpose of the Limitation Act, arbitration is said to have commenced when a party to the arbitration agreement serves on the other party thereto, a notice requiring the appointment of an arbitrator. If the claims are barred as on that date, they ought to be dismissed by the arbitrator. On the other hand, with regards to the petition being filed under Section 11 of the A&C Act, 1996, the cause of action arises when the other party fails to comply with the notice invoking arbitration. 

It was held by the Hon’ble High Court of Delhi in the case of Prasar Bharti vs Maa Communication that “…Under Section 11 of the new Act, even if there is no named arbitrator, the party is not entitled to approach the court straightaway and is required to first issue notice to the other party proposing the names of the arbitrators and is to approach the court only upon the failure of consensus within 30 days of such notice. The procedure prescribed in Section 11 is mandatory. Thus, the question of a party preferring an application under Section 11(4) or under Section 11(6) to the Chief Justice or his designate does not arise unless the procedure of giving a notice is followed and without such procedure being followed and failure thereof, there would be no cause of action for the petition under Section 11(4) or 11(6) of the Act. Thus, the limitation for filing an application under Section 11(4) or 11(6) of the Act cannot but accrue only upon the failure of the procedure prescribed and can possibly have nothing to do with the limitation for preferring the claim….

We, therefore find that the limitation for filing an application under Section 11(4) would commence running only from the expiry of 30 days from the receipt of request mentioned in Section 11(4) (a) or (b) and the limitation for an application under Section 11(6) would commence running from the happening of the contingencies mentioned in sub-clause (a) or (b) or (c) thereof.”

It was further held by the Hon’ble High Court of Delhi in the case of Golden Chariot Recreations Pvt. Ltd. v. Mukesh Panika & Anr., that as per Article 137 of the Limitation Act, the Petitioner was required to file an application to appoint an arbitrator within a period of 3 years from the expiry of the 30 days of the first notice. It was also held by the Court that a party cannot seek to extend its limitation period for the purpose of Section 11 by issuing a second/fresh notice invoking arbitration agitating the same claim.

It is again important to note here that the period of limitation is three years from the date of accrual of a ‘right’. This right to appoint an arbitrator depends on the date when a dispute arises between the parties. If in case the parties are in the process of settlement and are making an attempt to resolve the dispute amicably through negotiations, the cause of action (or arbitration) will only accrue when the settlement terms completely break down; the limitation under Article 137 of the Limitation Act, in such cases cannot be said to have commenced even though the disputes between the parties had arisen, as has been held by the Hon’ble Supreme Court in the case of Hari Shankar Singhania Vs Gaur Singh Singhania that “Where a settlement with or without conciliation is not possible, then comes the stage of adjudication by way of arbitration. Article137, as construed in this sense, then as long as parties are in dialogue and even the differences would have surfaced it cannot be asserted that a limitation under Article 137 has commenced. Such an interpretation will compel the parties to resort to litigation/arbitration even where there is serious hope of the parties themselves resolving the issues.”

A party cannot endlessly write letters, correspondences or reminders in order to postpone the accrual of the cause of action. Therefore, the determination of the date of accrual of this right shall depend on the facts of each and every case. However, it should be noted that it is not open for a party to revive dead and stale claims which are hopelessly barred by limitation by writing correspondences and reminders after the expiry of the limitation period. The parties must show vigilance in pursuing the remedies and must show sufficient cause explaining the delay, if any in approaching the court/ tribunal. 

It is, however, pertinent to mention here that in the instance of a party making an acknowledgement as regards the claim made by the claimant, the period of limitation is impacted accordingly. In such a case, Section 18 of the Limitation Act is attracted and the limitation period starts afresh from the date of the signature of such acknowledgment. Section 18 of the Limitation Act clearly states that “…a fresh period of limitation shall be computed from the time when the acknowledgement was so signed.” The test whether a communication would constitute acknowledgment under Section 18, has been laid down by the Hon’ble High Court of Delhi, in Hansa Industries (P) Limited vs. MMTC Limited, which is as follows:

“We can deduce the following principles from the aforesaid judgments which shall have to be applied in a given case to ascertain as to whether writing constitutes an acknowledgment or not:

  1. Acknowledgement means an admission by the writer that there is a debt owed by him either to the receiver of the letter or to some other person on whose behalf it is received. It is not enough he refers to a debt as being due from somebody. He must admit that he owes the debt.
  2. The statement on which a plea of acknowledgment is based must relate to a present subsisting liability though the exact nature of the specific character of the said liability may not be indicated in words. 
  3. Words used in the acknowledgment indicate the circumstances of jural relationship between the parties such as that of debtor and creditors.
  4. It must appear that statement is made with the intention to admit such jural relationship. 
  5. Such intention can be implied and need not be expressed in words. In construing the words used in the statement, surrounding circumstances can be considered although oral evidence is excluded. 
  6. Although liberal construction is to be given to such statement but where a statement was made without intending to admit the existence of jural relationship, the court cannot fasten such intention on the maker by an involved or far-fetched process of reasoning. 
  7. In deciding the question in a particular case, it is not useful to refer to judicial decision and one has to inevitably depend upon the context in which words are used.”

It is an increasingly growing trend after the recent amendments to the A&C Act, 1996 that the interference of the courts in matters pertaining to arbitration has been confined only to determine whether there is a valid arbitration agreement in an application for appointment of an arbitrator. Therefore, the question of enforceability and compliance of the pre-arbitral steps, and consequently limitation, in accordance to the multi-tiered dispute resolution clause may be left to be adjudicated by the arbitral tribunal. Although the question of limitation is a mixed question of law and fact and the courts cannot go into the detailed specifics, as their role is restricted to merely examining the existence of a valid agreement, it certainly does not absolve the courts of the power to dismiss any application which prima facie appears to be a dead claim hopelessly barred by limitation. 

Depending on the language of the clauses, the conduct of the parties and the peculiar facts of each case, the Hon’ble Supreme Court as well as various High Courts have delivered judgments on the issue of the enforceability of the pre-arbitral steps.

It has been held by the Hon’ble Supreme Court in SBP & Co. vs Patel Engineering Co. that agreed arbitral procedure is required to be followed and a defaulting party cannot be allowed to take advantage of its own wrong. Further, a perusal of Section 11 (6) of the A&C Act, 1996 also reveals that since a party is required to act upon the agreed arbitral procedure for dispute resolution by signing an agreement with open eyes, then it is not open to the party to ignore the same and exercise the right provided under Section 11 (6) of the A&C Act, 1996.

The Hon’ble High Court of Bombay took a similar view in the case of Tulip Hotels Private Limited vs Trade Wings Limited and dismissed a petition for the appointment of an arbitrator wherein the parties failed to comply with the pre-arbitral steps, prior to invoking the arbitration. The Court held that where the parties agree to a specific procedure and mode for settling their dispute by way of arbitration and prescribe certain preconditions and only then can they refer the matter to arbitration. 

However, the Hon’ble High Court of Delhi has taken a different stance on the same issue. It was held in the case of Ravindra Kumar Verma vs BPTP Limited that the clause providing conciliation or mutual discussion before invocation of arbitration was directory and not mandatory in view of Section 77 of the A&C Act, 1996. The Court held that there should be no bar in referring a matter to arbitration, if the same is required to preserve the rights of the parties (for example: limitation). 

Further, in the case of Union of India vs. M/s Baga Brothers, an award was challenged by a party on the ground that pre-condition of conciliation provided under the contract was not resorted to before invoking arbitration. The Hon’ble High Court of Delhi relied upon the case of Ravindra Kumar Verma vs BPTP Limited (Supra) and held that the pre-arbitral steps were directory and therefore, proceeded to appoint the arbitrator. 

The Hon’ble High Court of Delhi in the case of Siemens Limited vs. Jindal India Thermal Power Limited followed the principle laid down in Ravindra Kumar Verma vs BPTP Limited (Supra),“…Any doubt on this aspect as to whether conciliation proceedings as required by an arbitration clause are directory or mandatory is removed when we refer to Section 77 of the Act, and which is the second reason that the precondition of mutual discussion is only a directory requirement and not a mandatory one. Section 77 of the Act states that in spite of conciliation proceedings going on, the existence of the same will not prevent any of the parties to exercise its rights in accordance with the law. Section 77 of the Act reads as under:

“Section 77 Resort to arbitral or judicial proceedings: The parties shall not initiate, during the conciliation proceedings, any arbitral or judicial proceedings in respect of a dispute that is the subject-matter of the conciliation proceedings except that a party may initiate arbitral or judicial proceedings where, in his opinion, such proceedings are necessary for preserving his rights.

Section 77 of the Act specifically uses the expression proceedings which are necessary for preserving rights and therefore if rights are to be preserved on account of limitation expiring, because after expiry of the period of limitation arbitration clause cannot be invoked either by filing of a petition under Section 8 of the Act or under Section 11 of the Act, therefore, existence of conciliation proceedings or mutual discussion should not be a bar for enforcing rights to arbitration either by filing a petition under Section 11 of the Act or by seeking to get the suit dismissed by filing an application under Section 8 of the Act because such proceedings are necessary to preserve rights of getting the disputes decided by arbitration.”

Considering the complexities of commercial transactions, it is always preferable that the parties attempt to arrive at an amicable settlement, rather than directly invoking arbitration. It provides an opportunity to the parties to resolve the dispute at an initial stage itself. It is also true that arriving a mutual settlement may not be an easy task and is certainly time-consuming. This very concern makes an aggrieved party to approach the arbitrator without giving the pre-arbitration negotiations a serious thought. However, the idea of having a genuine claim rejected on the ground of having approached the tribunal with a delay, only because the parties were attempting to arrive at a settlement is haunting to say the least.

The judgment of the Hon’ble Supreme Court in the case of Geo Miller & Co. Pvt. Ltd. Vs Rajasthan Vidyut Utpadan Nigam Ltd. is an important one as it lays down the legal position that the time spent by the parties in pre-arbitration negotiations and settlement talks shall be excluded for the purpose of computing the period of limitation. The Hon’ble Court observed that“…Having perused through the relevant precedents, we agree that on a certain set of facts and circumstances, the period during which the parties were bona fide negotiating towards an amicable settlement may be excluded for the purpose of computing the period of limitation for reference to arbitration under the 1996 Act. However, in such cases the entire negotiation history between the parties must be specifically pleaded and placed on the record. The Court upon careful consideration of such history must find out what was the ‘breaking point’ at which any reasonable party would have abandoned efforts at arriving at a settlement and contemplated referral of the dispute for arbitration. This ‘breaking point’ would then be treated as the date on which the cause of action arises, for the purpose of limitation. The threshold for determining when such a point arises will be lower in the case of commercial disputes, where the party’s primary interest is in securing the payment due to them, than in family disputes where it may be said that the parties have a greater stake in settling the dispute amicably, and therefore delaying formal adjudication of the claim. 

Therefore, it clearly lays down that if the parties enter into bona fide discussions to arrive at a settlement prior to commencement of arbitral proceedings, then the time taken in these negotiations shall be excluded while calculating the period of limitation. The period of limitation has been held to commence from the instant the negotiations reach a ‘breaking point’ i.e. a point when the parties lose all hope of settling the dispute amicably. The breaking point can be ascertained from the conduct of the parties. A party cannot resume writing correspondences after having initially abandoned all efforts to settle the dispute just in order to extend the period of limitation. Furthermore, the ratio in the judgment can be applied regardless of whether the dispute resolution clause is a simple one or is multi-tiered i.e. specifically providing for pre-arbitral attempts to settle. However, it does put a burden on the parties to put evidence on record demonstrating the entire negotiation history between the parties to prove that a bona fide attempt was made to resolve the dispute. 

The objective of including pre-arbitral steps in a dispute resolution clause is to give the parties to the agreement an opportunity to settle the dispute before escalating it to arbitration. The recent amendments to the A&C Act, 1996 also aim at making India an arbitration-friendly country thereby inviting more commercial investments with minimum interference of courts. The multi-tiered clause serves a useful commercial purpose in seeking to promote consensus and conciliation in lieu of adversarial dispute resolution. In such a scenario, it is important that such dispute resolution clauses are drafted properly without any room for vagueness and alternative interpretations. Although there have been different opinions on the issue of their enforceability by various courts in the country, the same depends on the language of the clause and the conduct of the parties. The Hon’ble Supreme court has held that the cause of arbitration accrues when a claimant becomes entitled to raise the claim. If the clause is worded in such a manner that the said cause of action can only be said to have arisen when the pre-adjudicatory steps are followed, then the parties would be naturally inclined towards genuinely trying to settle any dispute at the initial stages itself without having to worry about the question of limitation. The recent judgment in Geo Miller is a welcome change wherein the Hon’ble Supreme Court was pleased to observe that the time spent in pre-arbitral steps shall be excluded while computing the period of limitation. Therefore, along with the legislative amendments, the courts also seem to have adopted a policy of minimum interference while encouraging parties to opt for alternative dispute resolution techniques rather than going for the adversarial approach right away.

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