This article is written by Navya Tiwari, a law student at ICFAI University, Dehradun, with a keen interest in Corporate Governance and Alternative Dispute Resolution (ADR).
Arbitration agreements often include various procedural steps, such as conciliation, negotiation, and mediation, that a party is required to take before initiating an arbitration process.
These steps are generally referred to as pre-arbitral steps or preliminary measures.
However, an important legal question arises at this stage: are these steps mandatory, and what happens if a party fails to follow them?
For example, if a party goes straight, to arbitration without trying these steps can the other party. Say, “You haven’t done the necessary steps so your arbitration request is too early”?
PRE-ARBITRATION STEPS ARE MANDATORY
Mandatory rules are those that apply regardless of the law governing the contract or the procedural rules chosen by the parties.
These can include substantive rules, such as laws on taxation, competition, and imports, as well as procedural rules, such as due process.
The most cited definition of mandatory rules is given by Professor Mayer:
“A mandatory rule is an imperative provision of law which must be applied to an international relationship irrespective of the law that governs that relationship. To put it another way: mandatory rules of law are a matter of public policy and moreover reflect a public policy so commanding that they must be applied even if the general body of law to which they belong is not competent by application of the relevant rule of conflict of laws.”
The Courts have said that the steps we have to take before we start the arbitration process, which are written in the contract are very important and we have to follow them.
The Kerala High Court said something about this in the case of Nirman Sindia v. Indal Electromelts Ltd., Coimbatore. They said that when people who signed a contract agree on a way to solve problems that come up, they have to do it that way. They cannot just skip the step and go to the second step to solve the dispute.
The Delhi High Court also said something in the case of Sushil Kumar Bhardwaj and Ors. Vs. Union of India (UOI) and Ors. They agreed with what the Kerala High Court said.
The Delhi High Court said that we have to follow the procedure that is required before we start the arbitration process. We cannot just go to court. Ask for an arbitrator without doing what we are supposed to do first.
The Bombay High Court made a decision in the case of Tulip Hotels Private Limited v Trade Wings Limited. They did not allow a petition to appoint an arbitrator because the parties did not follow the steps, they were supposed to before starting the arbitration process. The court said that if people agree on a way to solve their problems using arbitration, they have to follow the rules they set for themselves. Only after they do that can they start the arbitration process.
Arbitration is a process that the Courts take seriously and the steps before arbitration are also very important. The Courts want to make sure that people follow the rules they agreed on before they start the arbitration process.
The Kerala High Court and the Delhi High Court and the Bombay High Court all said that the steps, before arbitration are mandatory. This means that people have to follow them it is not optional. So, arbitration is a process and we have to be careful and follow all the steps before we start it.
DISCRETIONARY NATURE OF PRE-ARBITRAL STEPS
On the contrary there have been judgments where following pre-arbitral steps is not considered a must. The Supreme Court of India in the case of Demerara Distilleries (P) Ltd v. Demerara Distilleries Ltd. said that pre-arbitral steps are not required.
In this case an application under Section 11 of the Arbitration and Conciliation Act 1996 was filed for the appointment of an arbitrator. The other party objected, saying the application was too early. Their dispute resolution clause said parties should discuss, then mediate and only if that fails go to arbitration. The Supreme Court disagreed and said this objection did not merit serious consideration and appointed the arbitrator.
The Delhi High Court in Ravindra Kumar Verma vs. M/S. BPTP Ltd. & Anr also said pre-arbitral steps are not mandatory.
They based this on decisions in M/s. Sikand Construction Co. Vs. State Bank of India and Saraswati Construction Co. Vs. Cooperative Group Housing Society Ltd. The Court said parties should try conciliation in a time, before starting arbitration.
If conciliation fails parties can then proceed with arbitration. The Court tried to balance the two approaches.
The Limitation Question: When Does Time Start Running?
A big question comes up when people carefully follow the steps they agreed to in their contract before going to arbitration: does the time they spend trying to resolve their issue through mediation, conciliation or a Dispute Resolution Committee count towards the time limit for starting arbitration? Can someone really get in trouble for trying to solve their problem in a way and then lose their chance to go to arbitration?
This is a problem. We want people to try to work out their issues before going to arbitration but we also want to make sure they still have the right to arbitrate if they need to. The Supreme Court of India looked at this problem in the case of Geo Miller & Co. Pvt. Ltd. V. Rajasthan Vidyut Utpadan Nigam Ltd. The Court decided that sometimes the time people spend trying to solve their problem in a way can be excluded when figuring out the time limit, for arbitration according to the 1996 Act. However, the Court said there are two conditions that must be met:
- A specific requirement for pleading is that the entire history of negotiations, between the parties must be clearly stated and recorded.
- The court uses a test called the “breaking point” test.
The court must find the date when any reasonable party would have given up trying to reach a settlement and thought about sending the dispute to arbitration. This date is then considered the date when the cause of action starts for the purpose of time limits. The negotiation history and the breaking point are important. They help decide when a dispute can be taken to court.
The Delhi High Court made some things clear in the cases of Alstom Systems India Pvt. Ltd. Versus Zillion Infraprojects Pvt. Ltd. And Welspun Enterprises Ltd. Versus NCC Ltd. If the agreement between the parties says that they have to take some steps before going to arbitration then they can only go to arbitration after these steps have been taken. So, the time limit for going to arbitration starts from the day these pre-arbitral steps fail not from the day the problem first started.
The Supreme Court looked at this issue again in the case of B&T AG versus Ministry of Defence in 2023. The Court said that just talking about the problem does not mean that the time limit for arbitration is delayed. If people have been discussing the issue for a time it does not mean that the time limit is postponed. However, if the parties are really trying to solve the problem and can show when the talks broke down then this time can be excluded from the time limit. This decision should be considered along with the decision in the Geo Miller case.
The thing is, it is not clear if the parties have to follow the -arbitration procedure or not. If they do how far they have to go. Different courts have given opinions on this issue over time. The Delhi High Court and the Supreme Court have looked at the arbitration procedure in cases like Alstom Systems India Pvt. Ltd. Versus Zillion Infraprojects Pvt. Ltd. And B&T AG, versus Ministry of Defence and the arbitration procedure is still not fully understood.
Conclusion
When we examine the decisions made by courts, it is evident that parties are not required to complete every step before starting arbitration. However, a party cannot simply ignore these steps without a valid reason. All that is necessary is for a party to make an effort to follow the pre-arbitral procedures. If this effort fails and it appears that the other party is not genuinely seeking a resolution but is instead delaying to avoid their obligations, then arbitration can proceed. The key message from these rulings is that parties must demonstrate that they have made a genuine attempt to resolve the matter. If the other party does not respond, arbitration can be pursued. The law does not require parties to do something that is impossible. It does not want them to continue with efforts that will never lead to a solution. Once it is clear that the pre-arbitral steps will not result in a resolution, parties can move forward with arbitration without unnecessary delays.
