Introduction

Arbitration provides parties with a considerable amount of flexibility to determine the procedure they wish to follow in resolving their disputes. A multi-tier arbitration clause envisages a mechanism where when a dispute arises, parties may take certain steps before initiating arbitration in an attempt to settle the dispute. In its most basic form, a multi-tier provision will call for the completion of a single process, such as negotiations between party representatives for a predetermined amount of time, before arbitration can begin. In its more complicated forms, a clause may demand that the parties go through several steps before initiating arbitration, such as negotiations between the lower-level representatives, negotiations between the higher-level representatives, and formal mediation or conciliation proceedings, all for set periods of time. A multi-tier provision ensures that arbitration is should only used as a last resort and that all reasonable efforts are made to resolve a dispute before that.

However, one of the most debated questions concerning this aspect is whether such pre-arbitration steps are mandatory or directory in nature.  For instance, let us consider a situation where there is a party (Party A) in a contract who instead of going into negotiation with the other party over a dispute directly invokes the arbitration clause. During the arbitration proceedings, the other party (Party B) to the contract objects to the jurisdiction of the tribunal on the ground that a pre-mandated process of negotiation has not been complied with earlier, and as a result this tribunal has no jurisdiction to conduct the proceedings. ‘Party A’ rebuts the objections raised by saying the dispute is of such nature and extent that negotiation, even if conducted, would have been futile and pointless.[1] The question now before the tribunal is whether such pre-negotiation before invoking arbitration is mandatory or directory.

The Indian Point of View

In India, despite frequent debates, this issue remains unresolved. In the case of Nirman Sindia v. Indal Electromelts Ltd [2],  the Kerala High Court ruled that parties to a contract are obligated to follow the manner specified in the agreement if they agree to any unique form for resolving disputes arising out of it. The side must use the first procedure offered for dispute settlement before moving on to the second. Relying on the aforementioned ruling, the Delhi High Court also concluded in Sushil Kumar Bhardwaj v. Union of India [3], that the process mandated in the contract before initiating arbitration is mandatory and not optional.

On the other hand, there are plethora of judgments where the courts have held that pre-arbitral measures are not mandatory and merely directory. In the case of Demerara Distilleries (P) Ltd. v. Demerara Distilleries Ltd [4], the Supreme Court of India ruled that complying by the pre-arbitral measures is not mandatory. In the instant case, a request for the appointment of an arbitrator was made under Section 11 of the Arbitration and Conciliation Act, 1996. However, the other party objected this, arguing that it was premature because the dispute resolution clause required the parties to first engage in mutual discussion, then mediation, and only to refer the disputes to arbitration if a resolution could not be reached. Nevertheless, the Supreme Court dismissed this argument, ruling in paragraph 5 that the concerns regarding the application’s prematureness and the disputes’ lack of arbitrability would not be given any real weight.

Additionally, the Delhi High Court in the case of Ravindra Kumar Verma vs. BPTP Ltd[5] reversed its earlier ruling in Haldiram Mfg. Co. (P) Ltd. v. DLF Commercial Complexes Ltd [6], where the Court had rejected a Section 8 application of the Arbitration and Conciliation Act, holding that the pre-arbitral procedures was not followed. The Court relied on its previous rulings in Sikand Construction Co. v. SBI [7] and Saraswati Construction Co. v. East Delhi Coop. Group Housing Society Ltd [8] to hold that the pre-arbitration steps specified in a pre-arbitration clause are directory rather than obligatory in nature.

Foreign Point of View

The United Kingdom’s approach to multi- tiered arbitration has been inconsistent. The England and Wales High Court held in the historic case of Emirates Trading Agency LLC v. Prime Mineral Exports Pvt [9], that the non-compliance of multi-tiered dispute resolution clauses is a question of jurisdiction and that arbitration proceedings cannot start until multi-arbitration is satisfied, making the pre-arbitration condition a requirement. On the other hand, a different stance was adopted in the case of Sierra Leone v. SL Mining Limited [10]. Taking cognizance of the kompetenz-kompetenz principle, the court held in a case similar to M/s Oasis Projects, [11] that it was the arbitrator’s responsibility to determine whether failure to mediate would constitute a breach of multi-tiered arbitration. In this case, the court considered the specific process to be one of admissibility rather than jurisdiction.[12]

It appears that pre-arbitral steps in multi-tiered clauses won’t stop the tribunal from being constituted in the US, which makes Multi Dispute Resolution Clause (MTDRC) directory rather than required. The United States Supreme Court ruled in BG Group plc v. Republic of Argentina [13], that the conditions precedent were procedural matters and that, in absence of a contrary language , pre-arbitral steps in multi-tiered clauses do not constitute a jurisdictional pre-condition. However even though the condition precedent isn’t explicitly mentioned, US courts have held in some cases, such as Kemiron Atlantic Inc. v. Aguakem International Inc [14], that pre-arbitral steps in multi-tiered clauses constitute jurisdictional conditions precedent to arbitration. In conclusion, American courts have not gone so far as to declare that MTDRC is not a prerequisite for the start of arbitration; rather, they believe that arbitral forums, not the courts themselves, are the appropriate authorities to decide what should happen when parties fail to comply.

Conclusion and Author’s Personal Opinion

The author feels that to consider whether the pre-arbitration clause is mandatory or directory in nature, it is imperative that the tribunal looks at the intention of the parties at the time of making the contract. When it’s quite apparent, by looking at the arbitration clause that parties intended to use pre-arbitration procedures, then the opposite party cannot later on move directly to arbitration merely on ground that its convenient and conducting pre-arbitration process would be futile or pointless.  The author regardless is in general in favor of pre-arbitration procedures and making such agreements incorporating pre-arbitration mechanisms is beneficial for both the parties to the agreement.

Following the literal interpretation, the use of the word shall instead of may in an agreement establishes the fact that the parties intended to go for pre-arbitration before moving on to arbitration. There is a reason why it is there in the agreement, and parties cannot just merely tiptoe over it and go directly for arbitration. This attacks the very foundation and principles which bind parties to the contract. However, if the agreement says may instead of shall then a party can move directly to arbitration. The literal rule of interpretation in such a scenario is the best rule to be followed.

1. They offer a ‘cooling-off period’ in contracts whereby the parties can reconsider and decide whether to reach a resolution outside of the contentious arbitral setting.
2. By agreeing on the matters on which they agree before arbitration, it may allow the parties to focus on the issues to be arbitrated, making the arbitration process more productive and economical.
3. It is a contractually required chance to settle disputes at a lower cost than during an actual arbitration process.
4. They can be especially helpful in situations where parties want to maintain a long-term business relationship.

Critics object to pre-arbitration mechanisms because they can lead to wastage of time and unnecessary expenditure, however, instead of first wasting money on arbitration, a proper attempt to negotiate no matter how futile should be made. This ensures that the relationship between the parties is not tarnished and there is a mutually compromised agreement between the parties. Even in matrimonial cases, the Court always attempts to save the marriage and encourages mediation before moving further. In the field of foreign policy, one should always keep war as the last resort and diplomacy as first.

Another objection raised by the critics is that it can lead to an objection to the tribunal’s jurisdiction, which may result in the termination of the arbitration, or the final award being set aside or refused recognition and enforcement. However, it has been laid down in a plethora of judgments that objection concerning pre-arbitration is not a matter of jurisdiction but rather an issue of admissibility thus defusing the objection raised by the critics. Thus, an issue concerning whether a pre-arbitration clause mentioned in the agreement shall be followed or not is to be decided by the tribunal after presuming it has the jurisdiction, and thus it cannot be later dismissed by going to the courts and setting aside the award or refusing recognition or enforcement.

Another objection raised by the critics is concerning the limitation period. Suppose an arbitration clause stipulates negotiation to be mandatory while. It also laying down in the clause that the negotiation should be completed within one month. That would mean that the parties have one month less time for recourse towards the civil courts according to the Limitation Act. However, the Supreme Court in the case of Geo Miller & Co Pvt. Ltd vs. Rajasthan Vidyut Utpadan Nigam [15], held that the duration of the negotiation will not be taken into account when calculating the statute of limitations. The ruling makes it clear that the statute of limitations will begin to run when the negotiation reaches a “breaking point,” or the moment at which a reasonable party would have given up on trying to resolve the issue amicably and would have thought about taking the matter to arbitration. This rule applies irrespective of whether or not the arbitration agreement includes pre-arbitration negotiation.

Thus, in conclusion, the author, for the above-mentioned reasons is in favour of making pre-arbitration clauses enforceable and encourages the parties to avail it before going ahead.

[1]Ashish Kumar, Multi-Tier Dispute Resolution Clause WILMER https://www.scconline.com/blog/post/2022/02/21/multi-tier-dispute-resolution-clause/ (last visited December 10^th, 2023)

[2] AIR 1999 Ker 440

[3] 2009 SCC OnLine Del 4355

[4] 2015 13 SCC 610

[5] 2014 SCC OnLine Del 6602.

[6] 2012 SCC OnLine Del 2139

[7] ILR 1979 Delhi 364

[8] (1995) DLT 343

[9] 2014 EWHC

[10] [2021] EWHC 286 Comm

[11] Neutral Citation Number: 2023/DHC/000828

[12] Charlie Caher & Matteo Angellini, Republic of Sierra Leone v SL Mining Lt: The English Commercial Court Rules on the Effect of Non-Compliance With A Multi- Tier Dispute Resolution Provision, WILMER (Dec. 10, 2023, 11:45 AM), https://www.wilmerhale.com/en/insights/blogs/international-arbitration-legal-developments/20210224-republic-of-sierra-leone-v-sl-mining-ltd.

[13] Case No.  US 12-138 (2014)

[14] 290 F.3d 1287 (11th Cir. 2002)

[15] RLW 2008 (1) Raj 429