This article is written by Shaheen Qureshi.

Introduction

Arbitration has become a favourable choice of dispute resolution owing to the various flexibilities and virtues that come along with it. With the soaring popularity of Arbitration in contractual transactions across the world, layered Arbitration Clauses are now being incorporated in agreements and contracts, known as Multi-tier Arbitration Clauses, also called Escalation Clauses or Step Clauses. Multi-tier Arbitration Clauses are Clauses wherein parties agree that in event of a dispute, they would follow a series of alternative dispute resolution mechanisms for reaching a settlement. These Clauses consist of at least two forms of dispute resolution processes being attempted for resolving a dispute, whereby if one process fails, the issue escalates to the next method or process, gradually reaching the final step of Arbitration. Multi-tier Arbitration Clauses are of two kinds, Pre-Arbitration Clauses, which require parties to attempt to amicably settle a dispute before submitting it to Arbitration and Post Arbitration Clauses, which provide for a second tier of Arbitration proceedings, either in an Appellate capacity or for fresh adjudication.

What are pre-arbitration clauses?

Pre-Arbitration Clauses, like the name suggests, involve parties first attempting to resolve a dispute amicably by following a few pre-arbitral steps prior to invoking Arbitration. Commonly, procedures like Negotiation, Mediation and Conciliation are incorporated in these Clauses as Pre-Arbitration dispute resolution processes. When a dispute arises, the parties resort to these procedures as an endeavour to reach an understanding, failing which the matter is ultimately submitted to Arbitration as a last resort. The primary objective of a Pre-Arbitration Clause is to explore the possibility of arriving at a mutually satisfactory arrangement between the parties through cordial discussions and mediations, before delving deep into complex and resource-consuming proceedings. Pre-Arbitration Clauses offer a number of resourceful advantages that are a catalyst to its increasing incorporation and usage in modern times.

How are pre-arbitration clauses useful?

Arbitration is a cost and time-intensive process. The inclusion of Pre-Arbitration Clauses in the Contract makes a provision for the parties to try to reach a settlement between themselves, saving a lot of finances and time if the attempt is successful. If the attempt fails, the parties consequently get ample of time to prepare for the forthcoming Arbitration proceedings. Besides, upon a dispute arising, when a party attempts to discuss or negotiate the situation before proceeding with legal remedies, such a party is perceived as weak and underconfident. Pre-Arbitration Clauses give a contractual sanction to dispute resolution steps without raising such perceptions. These Clauses are also ideal for parties who want to preserve their commercial relationships beyond the dispute. Pre-Arbitration Clauses are accurately termed as Filter Clauses since only the most crucial and complex issues remain to be arbitrated at the end of the pre-arbitral steps, as the parties find common ground for the relatively simpler issues between themselves. 

What are the drawbacks of pre-arbitration clauses?

However, like every other thing that its pros and cons both, Pre-Arbitration Clauses also come with their own set of cons.  Pre-Arbitration Clauses, while sparing the parties a lot of cost and time if successful, ironically can also be time-intensive and uneconomical if the pre-arbitral discussions fail as a result of the parties not being in the position of having a fruitful discussion due to being engrossed in their own perspectives. This stands as one of the major drawbacks of Pre-Arbitration Clauses, especially when the dispute is time-sensitive. These clauses also result in uncertainty, since the lengthy and elongated process caters confusion in the parties as to the precise time of the birth of the dispute, the commencement and failure of the pre-arbitral steps and also as to the limitation period of the dispute. In most cases, parties resort to Pre-Arbitration Clauses as means of causing delays and laches in the Arbitration Procedure, either by contending that the pre-arbitral steps have not been complied with, or meaninglessly dragging mediations and discussions to avoid submitting the dispute to Arbitration, when such pre-arbitral steps are not time bound. 

Despite these drawbacks, Pre-Arbitration Clauses have gained momentum in countries all around the world. However, different countries have different approaches to the validity and enforceability of these Clauses.

What is the cross-jurisdictional approach to pre-arbitration clauses?

Pre-Arbitration Clauses have been adjudicated differently by different jurisdictions across the world. A careful examination of the language of the Clauses and the intent of the parties is done by Courts to arrive at a conclusion whether the Clause is enforceable and whether pre-arbitral steps can be held as a condition precedent to invoking Arbitration. The English Courts traditionally held Pre-Arbitration Clauses to be unenforceable owing to uncertainty as laid out in multiple cases like Walford v. Miles, Sulamerica CIA Nacional de Seguros v. Enesa Engenharia and Wah v. Grant Thornton, amongst others. However, recently in Emirates Trading Agency LLC v. Prime Mineral Exports Private Limited, the Court deviated from its reluctant approach and upheld a Pre-Arbitration Clause requiring the parties to resort to ‘friendly discussions’ before invoking Arbitration as enforceable and terming the pre-Arbitral steps as mandatory in nature. Courts in the United States lay emphasis on the language of the Clause and are commonly of the opinion that when the Clause does not expressly state so, pre-Arbitral steps cannot be construed as a condition precedent to Arbitration. The same has been held in cases like BG Group PLC v. Republic of Argentina and Int’l Ass’n of Bridge, Structural v. EFCO Corp and Constr. Products Inc. Swiss Courts, while holding a similar view, also state that only Clauses providing for a specific framework of Dispute Resolution and specific time frame can be held enforceable. The Singapore Court of Appeal in 2013, in the case of  International Research Corp PLC v. Lufthansa Systems Asia Pacific Pte Ltd and Another, held that compliance with pre-arbitral steps in a Pre-Arbitration Clause is binding and mandatory on the parties, failing which they can be deprived of an Arbitral jurisdiction. Courts in Australia consider Pre-Arbitration Clauses as enforceable but are reluctant in terming Pre-arbitral steps as mandatory for invoking Arbitration.

Thus, there is no consistent approach to Pre-Arbitration Clauses in courts around the world. However, the requirement for clarity, defined structure and unambiguous language transcend all borders in the assessment of Pre-Arbitration Clauses and its enforceability, which similarly resonates with the position of Pre-Arbitration Clauses in India.

What is the position of pre-arbitration clauses in India?

Despite the soaring popularity of Pre-Arbitration Clauses in India, the Courts in India are still conflicted over whether pre-arbitral steps are compulsory conditions to be fulfilled before invoking Arbitration. The recognition of enforceability of pre-arbitral steps in the Indian Judiciary was done way back in the year 1999 by Hon’ble Kerala High Court in Nirman Sindia v. Indal Electromelts Ltd. where the Court, while examining an Agreement containing a Pre-Arbitration Clause, observed that when the parties agree to resort to a specific mode of dispute resolution, they are bound to comply with the same. The parties have to follow the agreed order and cannot escalate to the next or final step without first complying with the initial step. The Hon’ble Rajasthan High Court took a similar view in M/s Simpark Infrastructure Pvt. Ltd. Vs Jaipur Municipal Corporation stating that when the parties agree to a procedure that has to be followed as a precedent condition to invoking Arbitration, the agreed procedure has to be mandatorily followed. The decision of the Hon’ble Supreme Court in SBP & Co. vs. Patel Engineering Co. was reiterated in this Judgement where the Apex Court had ruled that an arbitral procedure that has been agreed between the parties has to be followed. Since the parties sign the agreement to arbitration that lays down the agreed arbitral procedure with open eyes, they cannot ignore the same and invoke Section 11(6) of the Act to circumvent the procedure.

In S Kumar Construction Co and Anr. vs. Municipal Corporation of Greater Bombay and Ors, the Hon’ble High Court of Bombay was faced with the contentious question of whether pre-Arbitral steps are mandatory in nature for invoking Arbitration. It was held that based on the language of the Clause which failed to show the mandatory nature of the pre-arbitral steps, as well as the facts of the case, the pre-arbitral steps were not obligatory preconditions for Arbitration. A year later in Tulip Hotels Pvt. Ltd. vs. Trade Wings Ltd., the Hon’ble Bombay High Court took a divergent view when faced with a Pre-Arbitration Clause and ruled the pre-Arbitral step, being Conciliation in this case, was a mandatory condition to be followed before invoking Arbitration, as there was a defined procedure set out in the Agreement as well as the Pre-Arbitration Clause strictly reflected the binding nature of the Pre-Arbitral Conciliation.

The Hon’ble High Court of Delhi, however, has adopted a different approach. Overruling the decision in M/s Haldiram Manufacturing Company Pvt. Ltd v. M/s DLF Commercial Complexes Ltd. which stated that applications for Arbitration submitted to the Court before complying with Pre-Arbitral steps must be dismissed, in Ravindra Kumar Verma vs BPTP Limited, the Hon’ble Delhi High Court held that Pre-Arbitral steps stated in a Pre-Arbitration Clause are directory in nature as opposed to mandatory. In the case of Union of India vs. M/s Baga Brothers, the Hon’ble Court relied on the decision made in Ravindra Kumar Verma and reiterated that pre-Arbitral steps are directory in nature and the appointment of Arbitrator can be proceeded with even before completion of the steps. A similar view has been taken by the Hon’ble High Court of Delhi in further cases like Siemens Ltd. vs. Jindal India Thermal Power Ltd. and Sarvesh Security Services Pvt Ltd vs Managing Director, DSIIDC, restating that Pre-Arbitral steps are merely optional.

Where a dispute was required to be submitted to a Superintending Engineer for adjudication, and subsequently to Arbitration if dissatisfied with the decision of the Superintending Engineer, the Hon’ble Supreme Court of India in M.K. Shah Engineers and Contractors vs. State of Madhya Pradesh, held that such pre-arbitral steps have to be necessarily complied with. However, due to implied waiver of objections by the Respondent, and express waiver by the Petitioner, the pre-arbitral steps were waived off. S.K. Jain vs. State of Haryana and Anr. saw the Apex Court chartering a similar path and ruling that pre-arbitral steps have to be obligatorily completed before resorting to Arbitration, considering the language of the Pre-Arbitration Clause. In Visa International Limited v. Continental Resources (USA) Ltd. and Swiss Timing Ltd. v. Commonwealth Games 2010 Organizing Committee, the Hon’ble Supreme Court decided whether the pre-arbitral steps have been sufficiently complied with and consequentially, whether the subsequent invocation to Arbitration stands valid.

Thus, in the light of conflicting and varying judgements delivered across Indian Courts, the primary question still remains unanswered as to whether Pre-Arbitration Clauses are enforceable in India and there is no clarity yet on the position of pre-arbitral steps, whether to be construed in a mandatory or directory manner. However, Pre-Arbitration Clauses are still progressively incorporated and used in India, despite the aspects of enforceability, validity and limitation period of such clauses being a complex affair.

How to calculate limitation period in case of pre-arbitration clauses?

Much of the confusion with regards to Pre-Arbitration Clauses in India has been in relation to its limitation period. The Limitation period for Arbitration is said to commence upon a receipt of the notice to invoke Arbitration under section 21 of the Arbitration and Conciliation Act, 1996. However, in the case of Pre-Arbitration Clauses, Limitation period has always been a debatable issue until recently when the Supreme Court put this issue to rest in the case of Geo Miller & Co. Pvt. Ltd. Vs Rajasthan Vidyut Utpadan Nigam Ltd. It was laid down in this judgement that the time spent by the parties in following pre-arbitral dispute resolution steps are to be excluded while calculating the period of limitation for Arbitration. When the parties give up all efforts at reaching a settlement and resolution of the dispute amicably seems impossible to the parties, the period of limitation for Arbitration accrues from that point of time. 

In simple terms, the period of limitation starts from the point in time when the parties acquire a right to invoke Arbitration. However, in case of Pre-Arbitration Clauses, such a right arises only when the pre-arbitral steps are fulfilled and the pre agreed mechanisms fail at reaching a solution. Therefore, period of limitation for such clauses start when the pre-arbitral steps fail and disputes cannot be settled amicably. In a bid to find out the point in time when the parties hopelessly stopped making an effort to reconcile, the trail of discussions and negotiations between the parties has to be carefully examined. In Hari Shankar Singhania Vs Gaur Singh Singhania, the Hon’ble Supreme Court of India held that the limitation period for Arbitration cannot start as long as the parties are still in dialogue. However, sending letters and correspondences continually in order to cause delay in the commencement of Limitation period is strictly prohibited by Courts. The Clause should, also, be drafted in a manner that complements and demarcates various processes to facilitate the limitation period unambiguously, as it is the manner in which the Clause is drafted is what is looked at by Courts to decide on factors like Enforceability and Limitation.

What should be considered while drafting a pre-arbitration clause?

The drafting of Pre-Arbitration Clauses is a process that entirely makes or breaks the Clause. Even though the position of enforceability of Pre-Arbitration clauses has not been stabilised in most jurisdictions yet, most Courts are of the consistent opinion that language of the Clause is the most important factor in construing whether the Pre-Arbitration Clause is enforceable in nature. Courts of traditional approaches have been forced to deviate and declare pre-arbitral steps as obligatory preconditions because the language of the Clause mandated so. Therefore, the way a Pre-Arbitration Clause is worded plays the most significant role in the determination of its validity and enforceability.

To avoid complexities and needless court intervention in the process, the Pre-Arbitration Clause should be precisely structured and should provide for a timeline for each stage of Dispute Resolution. It should clearly state when a stage takes place as well as the time period when it supposedly ends. Clarity is one of the key elements in a Pre-Arbitration Clause and should be incorporated in all aspects of the clause. Based on the facts of the particular transaction, Pre-Arbitration Clauses should be drafted to express the intention of the parties in a distinct manner. To do away with any confusion, the Clause should provide whether the Pre-Arbitral steps are mandatory in nature and a prerequisite for invoking Arbitration. A detailed Clause helps in minimising procedural misunderstandings and also cannot be used as a means of tactical delay by the parties.

Conclusion

Give the resourcefulness of such Clauses, it is no wonder that they are increasingly being sought after in Contracts and Agreements. Despite being a common characteristic in modern commercial transactions, there is no consistent and established view on the position of Pre-Arbitration Clauses today. However, most Courts in India willingly hold it enforceable as long as the language of the clause, as well as the conduct and intention of the parties, reflect the same view in unison. Therefore, Pre-Arbitration Clauses should be included in Agreements after careful consideration and thought, with due care and deliberation given on the drafting of such Clauses. If a Pre-Arbitration Clause is to be included in an Agreement, it should be drafted in a cautious manner to avoid extra layers of Court processes being added in the dispute resolution process. 

References

1. https://globalarbitrationreview.com/chapter/1142626/multi-tier-dispute-resolution-clauses-as-jurisdictional-conditions-precedent-to-arbitration#_ftn35
2. http://racolblegal.com/enforceability-of-multi-tier-arbitration-clauses/#_ftnref12
3. https://heinonline.org/HOL/LandingPage?handle=hein.journals/harmonius2017&div=25&id=&page=
4. https://www.lexology.com/library/detail.aspx?g=3b6536f2-e493-4fc8-ab68-269098079840
5. https://ijlpp.com/multi-tiered-dispute-resolution-clauses-and-their-enforceability-in-india/
6. https://www.lawteacher.net/free-law-essays/commercial-law/multi-tier-arbitrations-and-its-validity-commercial-law-essay.php
7. https://www.mondaq.com/india/arbitration-dispute-resolution/712978/multi-tier-arbitration-clauses-directory-or-mandatory
8. https://rmlnlulawreview.com/2017/10/25/multi-tier-arbitration-clauses/#_ftn3
9. http://arbitrationblog.kluwerarbitration.com/2019/06/09/the-muddy-waters-of-pre-arbitration-procedures-are-they-enforceable-answers-from-an-indian-perspective/?doing_wp_cron=1594925561.2105050086975097656250
10. https://www.lexology.com/library/detail.aspx?g=d9570dd8-3a0a-4207-92f1-c14b9ad4fa04 

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