Riddhi Agarwal[1]
Introduction
Arbitration agreements in contemporary times incorporate pre-arbitral procedures to refer the said dispute to Conciliation, negotiation, and mediation. The latter has a flexible structure as compared to arbitration and allow parties to deliberate more freely and amicably in an informal setting. Arbitration clauses are also known as “mandatory arbitration” since these are contractual provisions that guide parties to settle disputes through other methods before taking up arbitration. The position of MDR in India is ambiguous since High courts all over the country have different interpretations of the same. From an international perspective, the position of India is similar to that of English law as has been depicted in the case of Halsey, which opined that mediation or other dispute redressal methods should be encouraged but not forced. On the other hand, Australia, Hong Kong, and Singapore have a rigid stand that encourages strict adherence to Multi-tiered dispute resolution clauses before proceeding to arbitration or Litigation. Through this article, the author will explore the scope of Escalation clause in India by taking into consideration of judicial developments and changes brought in through the Mediation Act, of 2023. The author also suggests the Med-Arb approach as a legitimate and more efficient Alternate Dispute Resolution approach.
Legal stand on Multi-tiered dispute resolution clauses: Scope of good faith negotiations and mediations.
The position of escalation clause or MDR Clause has been ambiguous in India which gives great flexibility for its application but also creates confusion. In plenty of cases, courts nationwide have upheld the mandatory nature of multi-tiered dispute resolution clauses.
In the case of Nirman Sindia v. Indal Electromelts Ltd., the Kerala High Court held that pre-conditions to arbitration are mandatory and parties cannot skip the prescribed mode of dispute resolution and jump to the second step without exhausting the first step. The Delhi High Court upheld this position in the case of Sushil Kumar Bhardwaj v. UOI.
It was held in Simpark Infrastructure (P) Ltd. v. Jaipur Municipal Corporation, that if an agreement prescribes a pre-condition or a multi-tiered dispute resolution clause, the requirements need to be fulfilled before approaching arbitration since if the steps are not being followed, the action will classify as pre-mature action, in a significant precedent set by the Bombay High Court in Tulip Hotels (P) Ltd. v. Trade Wings Ltd, the court acknowledged that pre-conditions to arbitration are mandatory. Parties must adhere to the procedure agreed on before approaching arbitration. Still, this condition depends upon the parties' intention and nature of such conditions.
However, in many recent judgments, the courts have taken a different stand and interpreted the escalation clause as discretionary. In the case of Demerara Distilleries Private Limited v. Demerara Distillers Limited, the agreement required a ‘mutual discussion’ before arbitration but this requirement was flouted by the other party and the application for arbitration was made without following pre-conditions to arbitration. The court in this case thought that the contention was not pre-mature and that mutual discussion or mediation before arbitration is discretionary. Therefore, based on facts the requirement was held to be discretionary. The courts have often interpreted escalation clauses as discretionary or empty formality. In the case of Quick Heal Technologies Limited v. NCS Computech Private Limited and M/S IMZ Corporate Private Limited v. MSD Telematics Private Limited, the court after looking into the circumstances and facts of the case held that the condition to arbitration is just an empty formality or unnecessary.
This position is being upheld by the Delhi High Court in the recent case of M/s Oasis Projects Ltd. v. the Managing Director, National Highway, and Infrastructure Development Corporation Ltd. In this case, Oasis Projects entered into a contract with NHIDCL and when disputes arose between both parties, Oasis Projects chose to invoke arbitration proceedings without adhering to pre-conditions to resolve the dispute. The counsel on behalf of NHIDCL relied upon the case of Sushil Kumar Bhardwaj v. UOI and Iron & Steel Co. Ltd v. Tiwari Road Lines, it was held in these cases that fulfillment of pre-conditions to arbitral proceedings is necessary, and if the procedure is not followed, a petition for arbitration would not be sustained.
According to the principle of ‘The parallel consultation exception’ established in Rajiv Vyas v. Johnwin, if the pre-arbitral consultation is not completed, it should not stop the parties from starting arbitration. Instead, they should be directed to continue negotiating at the same time as the arbitration procedure, even after it has started. This is because it would be irrational for a court to decline a referral to arbitration in the event of unsuccessful discussions, only to have the parties start the arbitration procedure anew. Another exception recognized by Indian courts is the Interim Relief Exception in which Indian courts have ruled that failing to conduct pre-arbitration consultation cannot be used to hinder a party from exercising their substantive rights by denying them access to urgent interim relief or thwart a party’s claim and make any future arbitration futile.
On the other hand, Oasis Projects relied upon section 77 of the Arbitration and Conciliation Act, 1996 (hereinafter, the Act of 1996), and stated that the conciliation process is not mandatory and does not bar petitioners from invoking an arbitration agreement. The court held that a conciliation clause cannot bind the parties since it is a voluntary process and hence indirectly escalation clause was declared as discretionary. It was also decided that any party could end the mediation process at any time. So, the Court agreed to hear the petition under Section 11 of the Act and chose a single arbitrator to settle the disagreement between the two sides.
Mandatory pre-litigation Mediation in light of The Mediation Act, 2023
One of the major features of the Mediation Bill, 2023 (hereinafter, the Act of 2023) was that it mandated ‘pre-litigation mediation’ under section 6 of the draft. However, this mandate as per the wording of section 5 (1) was done away with and introduced as a voluntary process under the Act of 2023. The purpose of mandated 'pre-litigation mediation' is for parties to acquire knowledge about the mediation process through sessions before initiating a lawsuit. Following the compulsory 'information sessions', either party is allowed to terminate and exit the procedure. Alternatively, if they like, individuals can choose to participate 'voluntarily'. If the intention is to provide required mediation, it may be more appropriate to refer to it as a mandatory pre-litigation information session on mediation.
Indian Courts have observed that mandating parties to engage in mediation will not impact the inherently voluntary nature of the process. In Afcons Infrastructure Ltd v. Cherian Varkey Constructions Co. (P) Ltd, the Supreme Court of India decided that if a judge finds there is a possibility of settling a lawsuit, except in certain cases, the parties involved may be required to engage in mediation. By virtue of Section 89 and Order 10 Rule 1A of the Civil Procedure Code.
Italy has been using required pre-litigation mediation as an experimental approach since 2011. Only the 'information sessions' are mandatory. Statistics show that since its establishment, the number of lawsuits filed has decreased, the rate of settlements has increased, and the usage of mediation has increased when compared to other European countries. India is currently confronting a crisis similar to the one that Italy encountered in 2013. Italy utilized a technique known as 'opt-out' mandatory mediation to handle its high number of pending cases. In 2010 and 2013, a law was enacted that compelled mandatory pre-litigation mediation for particular problems, such as those involving property partition and joint ownership, before filing a lawsuit. According to their opt-out approach, plaintiffs are not entitled to appear in Italian courts unless they can demonstrate that they participated in an initial mediation session that was unsuccessful. This Italian law has shown to be quite effective over time. But the same is not the case in India since s.24(c) of the Act of 2023 provides for termination of mediation by written consent of both the parties or even one party and there is no model that compels pre-litigation mediation in certain categories of cases, rendering MDR clause ineffective.
Legal Framework for Med-Arb in India: A possible way out
Med-Arb is an amalgamation of the best features of both arbitration and mediation. In this, the parties first try to overcome their issues through mediation with the help of a third party who is neutral to both parties known as a mediator. If the mediation achieves desirable results then a settlement is being signed but if mediation fails in whole or relating to any particular issue then parties can further resolve it through arbitration wherein the arbitrator can same person who mediated the parties or any other person.
There is yet no legal framework that governs Med-Arb but many existing legislations such as the Act of 1996, the Act of 2023, and the Commercial Courts Act, of 2015 encourage Med-Arb in India.
There is yet no legal framework that governs Med-Arb but many existing legislations such as the Act of 1996, the Act of 2023, and the Commercial Courts Act, of 2015 encourage Med-Arb in India. In the case of Haresh Dayaram v. State of Maharashtra, it was observed by the Supreme Court that Med-Arb is a novel ADR technique that can be utilized to resolve complex commercial disputes. The Court further stated that Med-Arb can be conducted by retired judges who are experienced and knowledgeable in both mediation and arbitration. Recently Gujrat High Court on the occasion of 78thIndependence day inaugurated Med-Arb centre which would comprise of specially trained official trained by Gujrat State Legal Services Authority (GSLSA). In the case of DMRC v. DAMPEl, the importance of shifting from traditional approach towards Med-arb was encourage since the Indian government's most current recommendations for arbitration and mediation in domestic public procurement contracts, announced in June 2024, reflect the country's changing dispute resolution landscape. These rules address the specific issues that government organisations encounter while emphasising the value of arbitration's speed, convenience, and finality. They also indirectly discourage the government from using arbitration to resolve public procurement disputes. Med-Arb is a potentially effective and increasingly popular ADR method in India. Its suitability depends on the parties' consent and the dispute's specific characteristics.
Conclusion
The position of pre-arbitral procedures in India is open to wide judicial interpretation with pros and cons on a case-to-case basis. Making mediation and conciliation has benefits since parties would have more flexibility and can retain their relationship with each other. A legal framework to regulate matters related to the mandatory or directory nature of escalation clauses would be a step to de-clog the judiciary and facilitate a smooth process.
[1] Riddhi Agarwal is a third-year student currently pursuing B.A LL.B (Hons.) programme at Rajiv Gandhi National University of Law, Patiala.
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