By: Yuman Islam and Ravit Singh
Introduction
In the recent case of M/s Oasis Projects Ltd. v. Managing Director, the Delhi Court has again opened Pandora’s box concerning pre-arbitration procedures and whether or not they are mandatory. The dispute in the case was regarding a clause that had mandated the parties to refer to conciliation before going for arbitration. In this case, though the court held that conciliation as a pre-arbitration procedure is not mandatory, the greater question needs to be addressed regarding the legal characterisation of such pre-arbitration procedures in India and whether they are mandatory or directory.
Pre-arbitration conditions are certain pre-conditions in the form of mediation, conciliation and other requirements attached to an arbitration clause. These conditions are also known as multi-tiered dispute resolution clauses (MTDRC) that prescribe certain pre-steps to be followed before the commencement of arbitration proceedings. In India, there has not been a judgement by the Hon’ble Supreme Court wherein the legal characterisation of MTDRC has been laid down conclusively. In this article, the authors discuss the two points of view taken by courts regarding MTDRC. The authors further elucidate on the ‘claims v. tribunal test’ and analyze whether the test can be used to determine if a certain MTDRC is mandatory or directory.
MTDRC as Mandatory or Directory
Mandatory
In the case ofUnited India Insurance, the arbitration clause had a provision in which any dispute concerning the quantum to be paid under the policy would be referred to arbitration. However, there was a pre-condition that if the insurance company disputed the claim under the policy, the matter could not be referred to arbitration. In this case, the Hon’ble Supreme Court relying on its decision of Oriental Insurance Company Ltd., went ahead with the strict interpretation of the arbitration clause. The Court opined that the insurance company holding the claim in dispute was a pre-condition attached and was a sine qua non for the claim to be arbitrable. Here the Court considered the MTDRC as a pre-condition wherein the tribunal was not to assume jurisdiction unless the procedure was met.
Directory
In another case of Demerara Distillers Ltd., the pre-conditions were not subjected to strict interpretation. In this case, the parties were expected to resort to mediation and mutual discussion before the claim could be referred to arbitration. Here, the Hon’ble Supreme Court took a different approach and opined that the MTDRC was a mere formality and that there existed no need for strict interpretation concerning the arbitration clause. A similar stance was also taken in the case of M/S Incomm Tele Ltd., wherein the court struck down a provision in the arbitration clause that stipulated a deposit of 10% of the claim amount before the dispute could be referred to arbitration. Here, the reasoning provided by the Court was that the objective of arbitration is to provide speedy disposal to cases and such MTDRC lead to a delay in the process of seeking relief.
Using Tribunal v. Claims test to determine the mandatory or directory nature of MTDRC
As per the ‘Tribunal v. Claims test’, it is seen whether a particular MTDRC raises objections to the formation of the tribunal itself or objects to the claim in the relief sought for arbitration. The former becomes an issue of jurisdiction, meaning that without satisfying the pre-arbitration procedure, the arbitral tribunal cannot exist. The latter becomes a question of admissibility wherein a tribunal, under the principle of kompetenz-kompetenz, can rule on its own jurisdiction and decide whether the claim is arbitrable. The authors contend that the test can be used to determine the mandatory or directory nature of an MTDRC. In one of the more recent cases before the Supreme Court of Indiaof BSNL v. Nortel the Hon‘ble Court applied the ‘tribunal v. claims’ test to determine whether a particular MTDRC was a question of admissibility or jurisdiction. In Swisbourgh Diamond Mines (Pty) Ltd. & Ors. v. Kingdom of Lesotho, the Singapore Court of Appeal further distinguished the jurisdiction and admissibility of an MTDRC. Herein, it was said that jurisdiction is the tribunal’s power to hear a particular case, while questions of admissibility deal with whether it is appropriate for a tribunal to hear a case. Hence it can be said that when a pre-arbitration procedure mentioned in the arbitration clause appears to be of such a nature that without satisfying it the tribunal cannot come into existence, it will logically become a mandatory MTDRC. Else it will just be a directory and the tribunal after its constitution, can decide if the particular MTDRC needs to be adhered to before the tribunal takes up the claim on merits.
Approach in Foreign Jurisdictions
United Kingdom
In the United Kingdom, there has been a mixed approach to MTDRC. In one of the landmark cases of Emirates Trading Agency LLC v. Prime Mineral Exports Pte Ltd., the England and Wales High Court had ruled that non-compliance with MTDRC is a question of jurisdiction and arbitration proceedings cannot begin unless MTDRC is satisfied, thereby making the pre-arbitration condition as a mandatory condition. However, in another case of Sierra Leone v SL Mining Limited, a contrary position was taken. In a case similar to that M/s Oasis Projects, wherein the parties had to refer to LCIA Mediation before going for LCIA Arbitration, the court, taking cognizance of the kompetenz-kompetenz principle, held that it was for the arbitrator to decide whether failure to mediate would result into a breach of MTDRC. Here, the court took the particular procedure as a matter of admissibility rather than jurisdiction.
United States
In the United States, the prevalent view seems to be that pre-arbitral steps in multi-tiered clauses will not prevent the constitution of the tribunal, thereby making the MTDRC directory and not mandatory. In the case of BG Group plc v. Republic of Argentina, the United States Supreme Court held that the conditions precedent were procedural issues and that pre-arbitral steps in multi-tiered clause do not constitute a jurisdictional pre-condition in the absence of language to the contrary. However, in certain cases like Kemiron Atlantic Inc v. Aguakem International Inc the United States courts have held that pre-arbitral steps in multi-tiered clauses constitute jurisdictional conditions precedent to arbitration, even without express reference to the condition precedent. Therefore, to conclude, United States courts have not gone so far as to say that MTDRC are not conditions precedent to the commencement of arbitration but that arbitral forums are the right bodies to determine what consequences should arise in cases of failure to comply, rather than courts themselves.
Singapore
Until 2019, it appeared that Singapore courts attached significant jurisdictional consequences with failing to comply with pre-arbitral requirements of a multi-tiered dispute resolution clause. In cases like International Research Corp PLC v. Lufthansa Systems Asia Pacific Pte Ltd and another, the Singapore Court of Appeal established that adherence to pre-arbitral conditions of a multi-tiered dispute resolution clause was a mandatory condition, failure to satisfy which could lead to the effect of an arbitral tribunal being deprived of its jurisdiction. The position in 2020 was altered when in the case of BTN v. BTP the Singapore Court of Appeal ruled that the maintainability of pre-arbitration conditions should be determined by arbitral tribunal themselves, thus reeling towards the directory nature of MTDRC.
Future of pre-arbitration clauses in India
Going forward, even if we look at other foreign jurisdictions, there is no conclusive ruling given by any of the foreign jurisdictions. They mostly stand on the same footing like that of the Indian courts, with the decisions being given on case-by-case basis. In such a vacuum, to use the ‘Tribunal v. Claims’ test to determine the nature of an MTDRC can be a welcome step in India. If we look at the case of United India Insurance and the mandatory nature of the requirements therein it directly struck at the root of the existence of the tribunal as without adhering to the pre-arbitration requirements, there couldn’t be the formation of the tribunal. Hence, as per the claim v. tribunal test, the issue would directly question the formation of the arbitral tribunal, thereby rendering the particular MTDRC as mandatory.
Conclusion
Recently, it has become a norm for arbitration clauses to include pre-arbitration conditions in the form of mediation, conciliation and other mechanisms before resorting to arbitration proceedings. However, this has led to mixed jurisprudence on the subject matter with some Indian courts considering the MTDRC as mandatory while some are not. In such a scenario, the matter needs to be considered by the Supreme Court at length. Hopefully, accepting the ‘Tribunal v. Claims’ test as a standard test for determining the legal characterisation of the pre-arbitration clauses will settle the debate and be a full-proof solution to the conundrum.
Author’s Bio
Yuman Islam and Ravit Singh are 4th year law students at Gujarat National Law University, Gandhinagar
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