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  • Aditya Singh

M/s Oasis Projects v/s NHIDCL: Continuing the Pre-Arbitral Conundrum

[Aditya is a student at National Law School of India University, Bengaluru.]

The February 2023 ruling of the Delhi High Court in M/S Oasis Projects v. MD, National Highway and Infrastructure Development Corporation caught the news for its ruling that a contractually mandated pre-arbitral stage (conciliation in the instant case) is not mandatory. The brief facts of the case were that the petitioner was seeking appointment of an arbitrator u/s 11(6) of the Arbitration and Conciliation Act 1996 (Act) to settle a dispute pertaining to ‘balance work for four-lanning of NH 39’. The dispute resolution clause in the contract was multi-tiered and stipulated conciliation as the precursor to arbitration. What is also of the importance is that the dispute resolution clause was laid out in detail with stipulated timelines for initiation and completion of the process, mode of nominating the panel, etc.

At present, the Indian jurisprudence is still grappling with whether such multi tiered clauses are mandatory or directory and is yet to arrive at a consistent and workable test to gauge the same. The courts have continued to import extraneous considerations such as expediency, probability of the pre-arbitral mechanism’s success, external overarching principles, etc. To elucidate upon the state of affairs, this article critiques the court’s reasoning in the instant case by elucidating upon the overarching principles of multilateral dispute resolution clauses. It then examines the inconsistencies and uncertainties prevailing in the Indian jurisprudence. The article also puts forth certain recommendations which may help in achieving consistency.

Critiquing the Court's Approach

Before delving into specific analysis, it is imperative to explore the broad underlying principle behind multilateral dispute resolution clauses. As was observed in the Centrotrade line of cases, Tarun Chatterjee, J’s verdict from the 2006 division bench giving primacy to party autonomy became the majority opinion of the 2017 full bench, the rationale being a fundamental one that parties to an arbitration have the right to decide the applicable substantive law, procedure, seat, venue, etc. Hence, the court observed that when parties are operating in a framework which provides self-determining authority of this extent, party autonomy is of paramount importance and the guiding principle in adjudication. The Supreme Court in other cases such as Central Bank of India Limited v. Hartford Fire Insurance has stated that where the language of the contract is clear, effect has to be given to the bargain of the parties and the plain letter of the contract. In the Centrotrade line of cases, the pivotal area that created room for contention was the public policy challenge to the clause allowing parties to appeal the award to a larger tribunal. However, in usual cases of multilateral dispute resolution clauses, the conditions stipulate mandatory negotiation, conciliation or mediation hence completely removing the apprehension of public policy violation. As will be elaborated upon later, even the other countries use this test of construing a condition precedent clause as mandatory if the same is clear.

In the instant case, the court ended up appointing the arbitrator under Section 11 of the Act, but the same is subject to Section 11(6) of the Act. The authority to appoint the arbitrators stems from a valid ‘arbitration agreement’ per Section 7. Further, fulfilment of the pre-arbitral procedures may have formed a basis for having consented to arbitration in the first place. Hence, precedence here should be given to the bargain of the parties. Thus, the above principles derived from the various case law seem to be at odds with the Delhi HC’s rationale [paragraph 12] that “conciliation expresses a broad notion of a voluntary process, controlled by the parties and conducted with the assistance of a neutral third person or persons. It can be terminated by the parties at any time as per their free will. Therefore, while interpreting Article 26.2, the basic concept of Conciliation would have to be kept in mind.

Justifying the above rationale, the court [paragraphs 13 and 14] stated that the voluntariness was inherent in the process as the office memorandum mandated the consent of the other party in order to refer the dispute to conciliation. However, the office memorandum did not take into consideration the different stages of conciliation that were contemplated in the dispute resolution clause in the contract. The dispute resolution clause in several instances states that the parties have agreed to explore conciliation before resorting to arbitration hence making their intent clear.

Examining the Indian Jurisprudence

Among the case laws (such as Iron and Steel Company v. M/s Tiwari Road Lines, Sushil Kumar Bhardwaj v. Union of India (Sushil Kumar Bhardwaj), etc.) that have construed pre-arbitration requirements as mandatory, there is consensus that fulfilment of pre-arbitral procedure forms a basis for consent to arbitrate. These cases have also placed reliance on Section 11(6) and the overall legislative scheme of Section 11 which makes the same abundantly clear. The legislative intent becomes starker with the increased shift towards party autonomy in the Act. The Supreme Court in Sushil Kumar Bhardwaj noted this through the difference in Section 20 of the Arbitration Act 1940 and Section 11 of the Act. The former plainly provisioned for parties to petition the court for a court-appointed arbitrator in case the parties fail to appoint one directly.

The other line of cases which construe pre-arbitral procedure as merely directory differ in their reasoning. For instance, the court in Demerara Distillers simply stated that non-compliance with the stipulated requirements “does not merit serious consideration” as the same in the court’s assessment would be an “empty formality”. This reasoning apart from being vague is also over-intrusive and resembles a parens patriae attitude by the courts. The approach of dictating the best path for the parties as opposed to upholding the statutory mandate coupled with the letter of the contract is baseless and hence creates enormous room for uncertainty. Other facets of this rationale include extensions such as conciliation/ mediation only being effective when they are truly voluntary. A similar rationale was also used in the instant case.

The second broad line of reasoning as taken in Ravinder Kumar Verma v. BPTP (Ravinder Kumar) and reproduced in other cases was that construing pre-arbitral requirements as mandatory would prejudice the parties' interests as the time consumed is not excluded from limitation. However, the Supreme Court in Shree Ram Mills Limited v. Utility Premises and Geo Miller & Co has ruled that the cause of action i.e., right to reference only accrues when the pre-arbitral procedures have failed. Pre-arbitral procedures can be shielded by Section 5 of the Limitation Act 1963 as the same is a “sufficient cause for not preferring the appeal or making the application within such period”. There is sufficient statutory basis and jurisprudence preceding Ravinder Kumar that ensures the rights of the parties from being prejudiced. Another inconsistency in Ravinder Kumar is that it relies on Saraswati Construction v. Co-operative Group Housing (Saraswati Construction) to conclude that pre-arbitral procedures are directory. This is because Saraswati Construction predates the Act and the scheme of Section 20, Arbitration Act 1940 was different from the scheme under Section 11 of the Act as has been stated earlier.

In pre-arbitral requirements specific to conciliation, courts without proper assessment have also used Section 77 of the Act which allows parties to initiate arbitral/ judicial proceedings if it is necessary to preserve their rights. However, this does not count as a line of reasoning that construes pre-arbitral procedures as merely directory.

Recommendations and Way Forward

Thus far, it can be noted that the Indian jurisprudence lacks a coherent test to determine whether a pre-arbitral clause is mandatory or directory. Since they, after all, are contractual conditions agreed upon by the parties, a plausible approach would be to enforce these clauses per the wordings as long as they are clear. This approach of not making any additional imputations when the clause is unambiguous and is an established one in contract construction as mentioned above. Other jurisdictions such as the UK and Australia also follow this approach in cases of multilateral dispute resolution contracts. The author agrees with the ruling in the English case of Wah v. Grant Thornton, that a vague and general agreement to negotiate in good faith would not be enforceable. However, as long as a multilateral dispute resolution clause contains aspects such as the number of days, method of exhausting the clause, a specific mode of dispute resolution, etc., multiple jurisdictions have construed it to be mandatory in such cases. As even Gary Born and Marija Šćekić have concluded, such clauses are in most circumstances unenforceable on ‘grounds of uncertainty’. In cases such as the instant case wherein the clause contains all the necessary steps of compliance, there is no reason not to construe the impugned clauses as mandatory.

The Indian jurisprudence needs to move beyond this conundrum and answer whether non-compliance with an unambiguous pre-arbitral condition amounts to an issue of jurisdiction or admissibility. This is because the same has important implications ranging from dismissal of claims by the tribunal, order to comply to the annulment of the award at an enforcement stage. The adoption of non-arbitral methods is an effective tool to preserve business relations. The author concludes that pre-arbitral requirements should be mandatory as long as the clause is clear. Maintaining consistency at this stage, the jurisprudence should steer towards determining the consequences of non-compliance.

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