December 30, 2018
January 18, 2019


Multi-tiered dispute resolution clauses (“MTDRCs”), known variously as escalation, multi-step or ADR-first clauses, allow parties to agree that in the event of a dispute between them, they would follow a series of stages with different procedures for a determination on the dispute. MTDRCs have come to be recognized as a commonly accepted method of dispute resolution in commercial contracts. These clauses are generally of two kinds: (1) Pre-arbitration clauses, which require the parties to attempt and amicably settle the dispute before the commencement of arbitration proceedings, and (2) Post-arbitration clauses, generally in the form of appellate arbitration clauses. In this post, I will be discussing the enforceability of pre-arbitration clauses in the Indian perspective.
Some of the most commonly adopted ADR methods which find their way in pre-arbitration clauses are negotiation, mediation and conciliation. The objective of inserting such a clause is to put emphasis on amicably settling disputes prior to litigation or arbitration. However, due to the voluntary and non-binding nature of these dispute resolution techniques, most of the times these clauses are not adhered to. One of the main concerns is about the enforceability of the second tier of dispute resolution (in most cases, arbitration) if one party has failed to honour their commitment of complying with the first tier. The Courts in India remain divided on questions such as whether parties can ignore one of the tiers at their will, consequences of non-compliance of a tier and whether it is mandatory to fulfill all dispute resolution tiers.
One of the first judgments to address these questions was delivered by the Kerala High Court in the Case of Nirman Sindia v. Indal Electromelts [1999 SCC OnLine Ker 149]. In that case, the contract between the parties specified that before being referred to arbitration, any dispute was to be first referred to an engineer. In the case of aggrievance, either of the parties could approach the adjudicator and if dissatisfied, the dispute was then to be resolved through arbitration. The Applicant approached the Court without exhausting the available mechanism. The Applicant contended that since the contract was unilaterally and illegally terminated by the Respondent, the clauses in the contract regarding reference of the disputes to an engineer as the adjudicator also came to an end. Rejecting the above contention, the Court observed that without resorting to the first tier in the agreed dispute resolution mechanism,  the parties cannot jump to the second step or to the final step to settle the disputes between them. In light of the above ratio, the Court dismissed the Petitioner’s application for appointment of an Arbitrator and held that the Applicant’s failure to follow the compulsory procedure laid down in the arbitration clause, the request to appoint an arbitrator was premature.
The Rajasthan High Court has adopted a similar approach in the case of M/.s. Simpark Infrastructure Pvt. Ltd. v. Jaipur Municipal Corporation [2012 SCC OnLine Raj 2738]. The factual matrix in this case contemplated that the parties had to first try and settle the disputes amicably or through conciliation, failing which they could refer the dispute to arbitration. The Respondent contended that the Applicant has not taken recourse of amicable settlement or conciliation which is a condition precedent for appointment of Arbitrator as mentioned in the contract. The applicant contended that since the dispute was incapable of being resolved by conciliation or reconciliation, it was the discretion of the parties to reject the invitation for conciliation within the meaning of Section 62 (3) of the Arbitration and Conciliation Act, 1996.  Rejecting the applicant’s contention, the High Court relied on the Apex Court judgement in SBP & Co. v. Patel Engineering Co. [(2009) 10 SCC 293] and held that an Applicant has to satisfy the preceding conditions mentioned in the contract before appointing an Arbitrator under Section 11(6). The Court held that a perusal of Section 11(6) reveals that a party is required to act upon the agreed arbitral procedure for dispute resolution and it is not possible for party to ignore the same.
However, the Delhi High Court, in Ravindra Kumar v. BPTP Limited [2014 SCC Online Del 6602] has taken a divergent view by holding that MTDRCs should not bar filing proceedings to refer a matter to arbitration. The first reason given by the Court is that if an MTDRC is read in a mandatory manner, it can cause grave prejudice to a party who is invoking arbitration, as the time consumed in the conciliation proceedings before seeking invocation of arbitration is not exempted from limitation under any of the provisions of the Limitation Act, 1963.  This can result in nullifying the arbitration clause on account of the same not being capable of being invoked on account of bar of limitation. Second, the Court relies on Section 77 of the Arbitration and Conciliation Act, 1996 which states that in spite of conciliation proceedings going on, the existence of the same will not prevent any of the parties to exercise its rights in accordance with the law. Relying on Ravindra Kumar (supra), the Rajasthan High Court M/s JIL- Aquafil (JV) v. Rajasthan UIDP [2016 SCC Online Raj 3814] has adopted a similar view to that of the Delhi High Court. Interestingly, the Rajasthan High Court has not considered its earlier decision in Simpark Infrastructure (supra) while adjudicating upon JIL – Aquafil (JV).
Enforceability of MTDRCs has also come up before the Apex Court in the cases of  Visa International Limited v. Continental Resources (USA) Ltd. [(2009) 2 SCC 55] and Swiss Timing Ltd. v. Commonwealth Games 2010 Organizing Committee [(2014) 6 SCC 677]. In the first case, the contract contained a pre-condition that an attempt must be made to settle the disputes amicably before reference to arbitration. Here, the Supreme Court observed that the communication which took place between the parties through letters and correspondences after the dispute arose was proof that the dispute could not be settled amicably, and thus the pre-condition had been complied with. In the case of Swiss Timing, the subject clause contemplated that parties seeking to resolve a dispute must notify the existence and nature of the dispute to the other party and thereon should use their respective reasonable endeavours to negotiate to resolve the dispute. The Court observed that there were several discussions between the parties, and keeping in mind the facts of the case, the Court held that this was evidence to show that the parties had tried to negotiate to resolve the dispute. 
Despite these decisions, the fundamental question of whether non-compliance of MTDRC’s bars a party from referring a dispute to arbitration remains unanswered. It is in the common nature of parties to communicate after a dispute has arisen, but can this communication or conduct of parties be inferred as an attempt to resolve a dispute amicably? In the above-mentioned decisions, the Apex Court has not interpreted the MTDRCs strictly, and the decisions in Swiss Timing and Visa International do not lay down any law regarding enforcement of MTDRCs and whether they constitute a “procedure” under Section 11(6) of the Arbitration and Conciliation Act 1996, thus creating a lacuna which is being filled with differing opinions of various High Courts.
Arbitration in India is a cost-intensive process. Therefore, the parties often prefer to have these pre-clauses so they can resort to relatively cost-effective procedures. Apart from saving on cost and time, in some cases, the adjudication of the dispute may require a technical understanding of the subject matter which often an Arbitration tribunal may not possess. This problem can be fixed if the parties agree to settle disputes amongst themselves or with the help of an expert through a pre-condition clause in the contract.
However, the purpose of inclusion of these clauses is defeated if a party decides to circumvent the decided procedure, or the Court holds them to be only directory and non-mandatory in nature. In Ravindra Kumar (supra), the Delhi High Court acknowledged that in some cases, it may be necessary for parties to conciliate before instituting arbitration proceedings. In such cases, the pre-clause could contain a reasonable and time-bound period for conciliation, failing which the parties can be referred to arbitration. 
As disputes in the commercial world become more common with every passing day, the importance of MTDRC’s grows inversely. The absence of clarity on the enforcement of MTDRC’s poses a threat to the advancement of alternate dispute resolution mechanisms in India. A review of the aforementioned case laws requires MTDRCs to include the order of the steps to be followed, the agreed rules and limitations of each step, and imposing time limits for every step for their proper enforcement.



Shivek Sahai Endlaw is a third year law student at Amity law School Delhi, affiliated to GGSIPU. 


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