Issue of Mandate of Pre-Arbitral Steps/Preceding Steps Before Invoking Arbitration

Arbitration agreements often provide various procedural steps such as consultation, negotiation, and mediation to be resorted by a party before the invocation of the arbitration. These steps are commonly known as pre-arbitral steps or preceding steps.

However, the question arises whether these steps are mandatory and what is the consequence in case a party failed to comply with these pre-requisite/arbitration steps. Further, can a party raise an objection that the party invoking the arbitration had failed to follow the pre-arbitration/preceding steps, and thus such arbitral proceeding is premature.

There has been constantly a different approach taken by different High Courts on this issue and the judgments to that effect are discussed below.

Mandatory nature of pre-arbitration steps

In many cases, the courts have held that the pre-requisites/preceding steps laid down in a contract before the initiation of arbitration proceedings are essential and mandatory in nature.

The Kerala High Court in Nirman Sindia v. Indal Electromelts Ltd.¹ has held that when the parties to a contract agree to any special mode for resolution of the disputes arising out of the agreement and they are bound to comply with the mode prescribed under the agreement. The party cannot jump into the second step without exhausting the first step provided for the resolution of dispute.

The Delhi High Court in Sushil Kumar Bhardwaj v. Union of India² has relied upon the above judgment of Kerala High Court and held that the procedure required before invocation of arbitration is mandatory and not directory. It held that the party before approaching the court are required to first exhaust the agreed procedure or the procedure prescribed by law.

The Rajasthan High Court in Simpark Infrastructure (P) Ltd. v. Jaipur Municipal Corpn.³ has held that where the parties agreed to a particular procedure for dispute resolution and prescribed condition precedent for invoking the arbitration clause, the same is required to be followed. When the particular steps are not followed by the parties and the aggrieved party files an arbitration application, then the same is premature.

The Bombay High Court in Tulip Hotels (P) Ltd. v. Trade Wings Ltd.⁴ dismissed a petition for the appointment of an arbitrator where the parties had failed to follow the prescribed pre-arbitral step of conciliation. 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 for referring the matter to arbitration, they must comply with those preconditions and only then can they refer the matter to arbitration.

Discretionary nature of pre-arbitral steps

On the contrary to the above judgments, there have been several judgments wherein, the requirement of pre-arbitral steps has been held discretionary.

The Supreme Court of India in Demerara Distilleries (P) Ltd. v. Demerara Distilleries Ltd.⁵, has held that the requirement of pre-arbitral steps is not mandatory. In the said case, Section 11⁶ of the Arbitration and Conciliation Act, 1996, application was filed for the appointment of an arbitration. However, the said application was objected on the ground of being pre-mature by the opposite party as the language of the dispute resolution clause provided the parties to engage in mutual discussion, followed by mediation and only in the absence of a resolution, to refer the disputes to arbitration. Howsoever, the Supreme Court rejected this contention and held in para 5 that of the objections with regard to the application being premature and thus the disputes not being arbitrable, would not merit any serious consideration.

Further, the Delhi High Court in Ravindra Kumar Verma v. BPTP Ltd.⁷ had overruled its previous judgment in Haldiram Mfg. Co. (P) Ltd. v. DLF Commercial Complexes Ltd.⁸ which stated that an application invoking arbitration submitted to the Court, prior to complying with the pre-arbitral steps must be dismissed. The Delhi High Court while relying on its earlier decisions of Sikand Construction Co. v. SBI⁹ and Saraswati Construction Co. v. East Delhi Coop. Group Housing Society Ltd.¹⁰ held that pre-arbitral steps stated in a pre-arbitration clause are directory in nature and not mandatory. The Court in para 11 further held that the existence of conciliation or mutual discussion should not be a bar in seeking to file proceedings for reference of the matter to arbitration. However, since in many contracts there is an effective need of conciliation, etc. in terms of the agreed procedure provided by the contract, the best course of action to be adopted is that existence of conciliation or mutual discussion procedure or similar other procedure though should not be held as a bar for dismissing of a petition which is filed under Section 11 or Section 8¹¹ of the Act or for any legal proceeding required to be filed for preserving the rights of the parties. However, before formally starting effective arbitration proceedings parties should be directed to take up the agreed procedure for conciliation as provided in the agreed clause for mutual discussion/conciliation in a time-bound reasonable period, and which if they fail the parties can thereafter be held entitled to proceed with the arbitration proceedings.

Subsequently, while different High Courts in Kunwar Narayan v. MS Ozone Overseas (P) Ltd.¹², Siemens Ltd. v. Jindal India Thermal Power Ltd.¹³, Union of India v. Baga Bros.¹⁴, Sarvesh Security Services (P) Ltd. v. DSIIDC¹⁵, relied upon Ravindra Kumar case¹⁶, and further reiterated the directory nature of pre-arbitral steps and held that the appointment of an arbitrator can be proceeded with even prior to completion of such steps.

However, the issue always arises that when a party opts for pre-arbitral steps then whether such time is included or excluded for the purpose of calculation of limitation period. This constant debate was resolved by the Supreme Court in Geo Miller & Co. (P) Ltd. v. Rajasthan Vidyut Utpadan Nigam Ltd.¹⁷ n which it was clarified that 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.¹⁸

Conclusion

Thus, on an analysis of the above judgments, it is clear that the requirement to fulfil the pre-arbitral steps is not mandatory before invoking arbitration. All that is required is that the parties should at least exhaust the remedy of pre-conditions and if that position is not viable then, such pre-condition is no bar for the parties to approach appropriate authority or court for the appointment of an arbitrator.