Escalation Clauses & Pre-Conditions to Arbitration-A matter of jurisdiction or admissibility?

Updated: Nov 15

Richa Jain[1]


INTRODUCTION


In a recent ruling of the Hong Kong Court of Appeal, the reputed Herbert Smith Freehills law firm has once again derailed a landmark ruling in C v D having global implications for contract disputes. The Hong Kong Court of Appeal on June 7, 2022, determined that any disagreement over escalation clauses should be settled by arbitrators appointed by the parties rather than by the courts. In other words, the decisions of the arbitration panel on such matters will be final and binding and cannot be used to contest the final award.


PRE-CONDITIONS & ESCALATION CLAUSES


Many commercial contracts have "escalation clauses", which compel a party to engage in negotiations or mediation before initiating legal actions. These clauses are designed to facilitate speedy dispute settlement, though in practice, they frequently result in costly litigation. In the dispute resolution provision of an agreement, parties frequently consider negotiation or other means of amicable dispute resolution as a “precondition” for sending the matter to arbitration. Parties often agree to a list of preconditions or escalation procedures that must be met before formal arbitration may begin.


Pre-conditions in a dispute resolution process take the shape of 'multi-tiered' and 'escalation' clauses, which often envision cost-effective conciliatory means of peacefully settling conflicts before resorting to the zero-sum game of arbitration.


A recurring problem in commercial contracts is whether a claimant's inability to comply with the terms of a dispute resolution clause raises an issue of admissibility or jurisdiction. A number of recent rulings by courts throughout the world have addressed this issue, all holding that problems of compliance with pre-arbitral processes relate to the admissibility of an issue in dispute rather than the arbitral tribunal's jurisdiction.


JURISDICTION v ADMISSIBILITY


The delineation between jurisdiction and admissibility is immensely crucial. If an arbitral tribunal lacks jurisdiction over an issue, then it does not have the authority to issue an award on the merits of that matter. In contrast, admissibility pertains to whether the arbitral tribunal has the authority to rule on the merits of the claims brought to it. At its core, the distinction between a matter of jurisdiction and matter of admissibility has a delicate balance with a thin line.


Matter of Jurisdiction – It is the theory that the arbitration agreement is not triggered until the pre-condition procedures are met. It also purports that the formation of a Tribunal is invalid and that the issue concerning the same cannot be heard by the Tribunal because it goes to the core of its jurisdiction.


Matter of Admissibility – It is the argument that the arbitration agreement exists and gives the arbitrators a jurisdiction to hear the question of non-compliance with the pre-conditions, but does not allow adjudication of significant claims until the problem of non-compliance with the pre-conditions is resolved.


While a challenge to jurisdiction is a ground for appeal in a number of jurisdictions such as the United States, Switzerland, and England, and as also stated in the UNCITRAL Model Law, on the question of admissibility, the decision of the arbitral tribunal is decisive and is not a ground for appeal.


In this article, the author compares the current position in India with other jurisdictions to outline pre-arbitral procedural requirements and determine whether they are an issue of jurisdiction or admissibility.


INTERNATIONAL JURISPRUDENCE


HK Case of C vs. D


The case of C vs. D [2021] HKCFI 1474 stems from a contract that obliged parties to try to settle problems through settlement sessions for 60 days before proceeding to arbitration. A disagreement ensued between the parties, and the defendant requested arbitration. The plaintiff disputed the arbitral tribunal's jurisdiction on the grounds that the contract's dispute escalation clauses had not been followed. The arbitral tribunal rejected this objection, and the plaintiff then sought to dismiss the arbitral tribunal's ruling on the grounds that it dealt with an issue that did not fit within the scope of the arbitration filing.


The court correctly observed that the essential question here is whether the parties intended for the issue of fulfilment of pre-conditions' to be decided by the arbitral tribunal. To answer this question, the Hong Kong court referred to Lord Hoffmann's landmark English decision Fiona Trust [2010] EWHC 3199, in which he held that there is a presumption that parties, as rational businessmen, would have intended any dispute arising out of their relationship to be decided by the same tribunal.


After reviewing significant International Judgements, the Hong Kong court concluded that the "commonly held position of international tribunals and national courts" is that failing to comply with a pre-condition to arbitration is an issue of admissibility rather than jurisdiction. The Hong Kong court acknowledged that the commonly held position may be overturned if the parties expressly stipulate that failure to comply with pre-arbitration conditions precludes the arbitral tribunal's jurisdiction, but the court then concluded that no such express provision existed in the circumstances in question.


One of the takeaways from above judgement is that when a party fails to comply with a pre-condition to arbitration, that should not stop the case from moving ahead, since it will be up to the arbitrators to evaluate if the provision was followed and, if not, what the repercussions should be. Since the tribunal retains jurisdiction to consider the case, an award cannot be challenged in court on this ground. This gives the procedure far more clarity (and finality), and should avoid costly and prolonged litigation.


The aforementioned C v. D case was affirmed in Kinli Civil Engineering vs. Geotech Engineering [2021] HKCFI 2503 in the context of a dispute filed under a contract including an arbitration agreement allowing that a party may submit a disagreement to arbitration. The Court issued a stay of litigation in favour of arbitration, stating that the Court has no involvement in evaluating whether the preconditions for the right to arbitrate have been met.


US Case of BG Group vs. Republic of Argentina


The US Supreme Court's 2014 decision of BG Group vs. Republic of Argentina 134 S.Ct, 1198 is perhaps the oldest known case which seeks to delineate the problems of admissibility and jurisdiction. It denied a challenge to an arbitral award on the grounds that a statutory pre-condition to arbitration was not met. In this case, BG Group had invoked arbitration under the Argentina-UK BIT in response to Argentina's actions in the aftermath of its economic collapse in late 2001. The Argentina-UK BIT obliged claimants to fight their claims in Argentina for 18 months before filing a claim in arbitration.


After arbitrators rendered an award against Argentina, it moved to vacate the award in US courts, claiming that the arbitrators lacked jurisdiction since BG Group did not follow the local litigation requirement. The US Supreme Cour ruled that, courts presume that the parties intend arbitrators, not courts, to resolve disputes about the meaning and application of specific procedural preconditions for using arbitration, such as the satisfaction of "prerequisites such as time limits, notice, laches, estoppel, and other conditions precedent to an obligation to arbitrate."


The arbitral tribunal ruled that BG Group's claim was valid despite the fact that it had not sought remedy in Argentine courts first. BG Group won the arbitration, which was held in Washington, DC.


Singapore Case of BBA vs. BAZ and BTN vs. BTP


The case of BBA vs. BAZ [2020] SGCA 53 concerned a dispute originating from a sale and purchase agreement that included an arbitration clause requiring arbitration in Singapore. The contract specifically prohibited the arbitral tribunal from awarding punitive, exemplary, or consequential damages. BAZ won the arbitration and attempted to have the verdict enforced in Singapore. BBA opposed enforcement on the grounds that (i) the arbitral tribunal had exceeded its jurisdiction by awarding damages and pre-award interest, which they claimed amounted to compensation for loss of opportunity in violation of the prohibition on awarding consequential damages, and that (ii) the claim for fraud was time-barred.


The Singapore Court of Appeal refused to rescind the decision, reasoning that the first concern was about the award's merits rather than jurisdiction, and that the time-bar problem was about admissibility rather than jurisdiction because it was directed at the claim rather than the tribunal. This is a significant judgement that explains an essential point of law while also limiting the basis for potential court intervention in the initial stages of an arbitration.


UK Case of Republic of Sierra Leone vs. SL Mining Ltd.


The English High Court declined to set aside an arbitral judgement in Republic of Sierra Leone v SL Mining Ltd [2021] EWHC 286 (Comm.) on the grounds that the defendant had failed to comply with certain pre-conditions to arbitration.


The underlying issue was the revocation of a mining permit. The licence included a multi-tiered dispute resolution clause in which the parties promised to try to resolve disagreements amicably for three months. A notice of dispute was served on 14th July, 2019 and six weeks later on 30th August, 2019, the defendant issued a notice of disagreement, followed by a request for arbitration.

The claimant sought to invalidate the decision under Section 67 of the English Arbitration Act 1996 wherein “if the issue relates to whether a claim could not be brought to arbitration, the issue is ordinarily one of jurisdiction and subject to further recourse”, claiming that the arbitral panel lacked substantive jurisdiction to hear the case. The English court determined that the primary comments and authorities all pointed "one direction" in that pre-conditions to arbitration are concerns of admissibility to be determined by arbitrators rather than jurisdiction falling under Section 67.


It is important to note here that the Chartered Institute of Arbitrators, one of the world's major arbitration organisations, has warned arbitrators to distinguish between a challenge to jurisdiction and admissibility in the Preamble and S.6 of its International Arbitration Practice Guidelines on Jurisdictional Challenges. The Guidelines establish optimal practises in international commercial arbitration.


STANCE OF INDIAN LAW


The jurisprudence on the legality of jurisdiction vs. admissibility in the Indian context is still at a very nascent stage. We have till now seen the status quo of other jurisdictions by analysing some important international judgements governing this law in order to deeply understand the position of Indian Law. Now, let us try to discern the position of Indian Jurisdiction for multi-tiered contracts containing escalation clauses and pre-conditions.

In the case of BSNL v. Nortel (2021) 5 SCC 738, the Hon’ble Supreme Court employed the 'tribunal v. claim' test to assess whether the question of a statutory time bar is one of jurisdiction or admissibility. To put it simply, the 'tribunal v claim’ asks whether the objection / issue is directed at the tribunal, in the sense that the claim should not be arbitrated due to a flaw in or failure to consent to arbitration, or at the claim, in the sense that the claim itself is defective and should not be raised at all. In the current instance, the Court relied on BBA vs. BZA, and ruled in favour of treating the question of limitation as one of admissibility since it challenges the character of the claims submitted rather than the tribunal's jurisdiction.


Another significant case is United India Insurance Co. Limited v Hyundai Engineering and Construction Co Ltd & Ors (Civil Appeal no 8146 of 2018), in which the Supreme Court held that in a case where the amount under the CAR Policy has to be admitted as a pre-condition to bring forth the claim in Arbitration, the said pre-condition must be satisfied before Arbitration can be invoked, because only the admitted amount can be made part of the dispute to be adjudicated. To restate, the Arbitration Clause would be activated only if the purportedly defaulting party admits obligation under the CAR Policy as a precondition.


However, because the decision was not explicitly concerned with the distinction between a jurisdictional and an admissibility issue, it is indicative of the dearth of Indian law on the subject. Given this deficiency and the situation of law in other jurisdictions, it is hoped that the Supreme Court would take a stride forward rather than two steps back.


Certain important takeaways from analysing foreign Jurisprudence to incorporate in Indian Jurisprudence could be:


· With multi-tiered conflict resolution clauses, clear drafting and compliance are critical to avoid costly and time-consuming judicial proceedings;

· Failure to comply with pre-arbitration procedures does not change the venue of dispute resolution from arbitration to court;

· in many cases, parties should provide the arbitrator with their grievances, both substantive and procedural;

· if the parties really want the court to intervene on pre-arbitration compliance concerns, their wish should be conveyed in the clause.


CONCLUDING REMARKS


The relevancy of admissibility and jurisdiction is becoming extremely pertinent in cases where parties have escalation clauses or preconditions in their contractual agreements and arbitration in dispute. Not many cases have dealt with this novice issue, thus it is still a gray area, especially for the Indian jurisdiction. With the newer arbitration clauses and contracts, we can see the incorporation of preconditions in dispute clauses.


The 'tribunal v. claim' test might be helpful in situations involving pre-conditions to arbitration. The test requires the judge to assess the object of the objection in order to decide whether the problem is one of admissibility or jurisdiction, and then to evaluate whether a motion to set aside the award on the cited grounds can be granted. By using 'tribunal v. claim,' courts across diverse jurisdictions are clearly inclined to treat the question of conformity with preconditions laid forth in dispute resolution clauses as one of admissibility rather than jurisdiction. The tribunal's ruling on the issue of admissibility is regarded final. Therefore, by delimiting the grounds for challenge, this practice furthers the idea of minimal judicial interference which advises courts of law to meddle with the arbitral judgement to the smallest degree feasible.


There is an existing gap on this subject in Indian arbitration law. However, given the judgements in the aforementioned countries as well as that of BSNL v Nortel Networks India Pvt Ltd., it is anticipated that when the matter is taken before the Supreme Court of India, it would resolve the issue of non-compliance as one of admissibility rather than jurisdiction. Such a decision would be consistent with the pro-arbitration attitude and "overarching" concept of least involvement enunciated in the Arbitration and Conciliation Act of 1996.


 

[1] Richa Jain is a student of RMLNLU 3rd Year.

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