A Party’s Insistence On Complying With Pre-Arbitral Steps Would Be Meaningless If It Fails To Respond To The Counter-Party’s Notice Invoking Arbitration: Delhi High Court – Arbitration & Dispute Resolution

In a recent decision in Akhil Gupta v. Hindustan Unilever
Ltd.¹, the Delhi High Court, while
deciding upon a petition filed under Section 11 of the Arbitration
and Conciliation Act, 1996 (“Arbitration
Act“), opined that the requirement of engaging in
pre-arbitral steps could be dispensed with if the same is rendered
meaningless and would only delay the matter further. In this
article, we briefly navigate through the facts and findings in the
above-mentioned case.

1. Brief Facts

The applicant/ petitioner
(“Petitioner“) filed a petition under
Section 11 of the Arbitration Act seeking the appointment of a sole
arbitrator to adjudicate certain disputes that had arisen between
the parties. As per the Petitioner, he had entered into what is
termed as a Redistribution Stockist Agreement dated 14.07.2021
(“Agreement“) with Hindustan Unilever
Ltd. – the respondent
(“Respondent“). In terms of the
Agreement, the Petitioner was purportedly appointed as a
Redistribution Stockist of the Respondent, which is engaged in,
amongst other things, the business of marketing and sale of
consumer and healthcare products.

Pursuant to disputes having arisen between the parties, the
Petitioner alleged that the Agreement came to be terminated by the
Respondent on 14.02.2022. In this regard, the Petitioner claimed to
have various monetary claims to the tune of INR 55,00,000, which
were raised by the Petitioner against the Respondent. With respect
to such claims, the Petitioner issued a notice to the Respondent
under Section 21 of the Arbitration Act invoking arbitration on
06.03.2023. However, the Petitioner received no response from the
Respondent.

When the matter came up for hearing before the High Court, the
Respondent confirmed that no response was issued to the
Petitioner’s notice invoking arbitration under Section 21 of
the Arbitration Act. However, the Respondent argued that the
arbitration and the dispute resolution clauses in the Agreement
contemplated the appointment of an “ombudsman” if
disputes could not be resolved amongst the parties within a period
of two months since they arose. As this pre-arbitral step never
came to be followed, the Respondent submitted that the arbitration
was invoked prematurely and the petition under Section 11 was not
maintainable.

2. Findings

The High Court observed that in the present matter, the notice
invoking arbitration under Section 21 of the Arbitration Act was
sent way back on 06.03.2023. Further, it was clear that the
disputes had ensued between the parties and had not been resolved
for more than a year. In fact, admittedly, the Respondent did not
even respond to the notice dated 06.03.2023.

The High Court opined that, in the above circumstances, the fact
that the dispute resolution clause contemplates a specific
multi-tier procedure for resolving disputes would have no meaning.
The High Court arrived at this finding since the Petitioner issued
a notice invoking arbitration, but the Respondent failed to take
any steps in this regard. Accordingly, the High Court opined that
the relegation of parties to an ombudsman at such a stage is
clearly a step which would further delay the matter. The High Court
then proceeded to appoint a sole arbitrator in the matter.

3. Comments

Arbitration agreements often include pre-arbitral procedural
steps like conciliation, negotiation, and mediation, that parties
are required to pursue before initiating arbitration to resolve
disputes amicably. These pre-arbitral procedures raise important
legal inquiries. First, is compliance with these steps obligatory?
Second, what are the consequences if a party neglects these
preliminary measures? Third, can an argument be made during
arbitration initiation that arbitration invocation is premature
because a party failed to complete the pre-arbitral steps?

The issue has resulted in contradictory rulings from various
High Courts across India. While some Indian Courts have affirmed
the indispensable and obligatory nature of pre-arbitral procedures
outlined in a contract, others have taken a different stance.

In the case of Nirman Sindia v. Indal Electromelts
Ltd.², the Kerala High Court stressed
that parties bound by a contract with a designated dispute
resolution mechanism must strictly follow the agreed-upon
procedure. The Kerala High Court opined that bypassing the initial
dispute resolution step and proceeding directly to the second step
would be impermissible. Similarly, the Delhi High Court, in
Sushil Kumar Bhardwaj v. Union of India³, echoed a similar
interpretation, asserting that the procedural conditions preceding
invocation of arbitration are not discretionary but compulsory.

In Simpark Infrastructure Pvt. Ltd. v. Jaipur Municipal
Corporation⁴, the Rajasthan High Court also
highlighted the necessity for parties to adhere to the agreed-upon
dispute resolution procedure and meet the specified conditions
before triggering the arbitration clause. Failure to adhere to the
designated steps renders an arbitration application
“premature“. Likewise, the Bombay High Court, in
Tulip Hotels Pvt. Ltd. v. Trade Wings Ltd.⁵, rejected a petition
seeking the appointment of an arbitrator when the parties neglected
the prescribed pre-arbitral conciliation step. The Bombay High
Court affirmed that only after fulfilling these prerequisites could
the parties legitimately resort to arbitration.

On the other side, there are rulings where the necessity to
adhere to pre-arbitral measures is considered optional. In the case
of Ravindra Kumar Verma v. BPTP Ltd.⁶, the Delhi High
Court ruled that the pre-arbitral procedures specified in an
arbitration clause are only directory rather than being mandatory.
It was recognised that parties should strive to follow the
agreed-upon conciliation process within a reasonable timeframe
before initiating arbitration. However, arbitration can still be
initiated if these discretionary pre-arbitral steps prove
ineffective or become merely a formality. Following the
Ravindra Kumar⁷ judgment, subsequent decisions⁸ of
Delhi High Court have affirmed this view, highlighting the
suggestive nature of pre-arbitral measures.

In Demerara Distilleries P. Ltd v. Demerara Distilleries
Ltd.⁹, the Supreme Court of India
determined that pre-arbitral procedures are not obligatory. Despite
the arbitration clause requiring mutual discussion and mediation
before arbitration, the Supreme Court appointed an arbitrator in a
case where an application for appointment was challenged as being
“premature“.

4. Conclusion

The intricacies surrounding the obligatory or discretionary
nature of pre-arbitral procedures, as highlighted in various Court
decisions, emphasise the importance of proper drafting of dispute
resolution clauses. As evidenced by conflicting rulings, there is
no uniformity in the legal landscape regarding whether parties are
obligated to strictly adhere to pre-arbitral measures before
initiating arbitration or if such steps are optional. The wording
of dispute resolution clauses plays a pivotal role in this
regard.

To navigate this uncertainty, businesses should proactively
craft dispute resolution clauses with precision. By incorporating
language that unambiguously defines the obligatory nature of
pre-arbitral steps and sets forth specific timelines for their
completion, enterprises can bolster the effectiveness of the
dispute resolution process.

By clearly outlining pre-arbitral steps along with specific
timelines, businesses can not only streamline the arbitration
process but also significantly improve cost, administrative, and
logistical efficiency. This strategic approach not only enables
businesses to concentrate on their core growth objectives but also
helps mitigate the risks associated with prolonged litigation at
the arbitration stage.

* Vasanth Rajasekaran is Founder and Head at
Trinity Chambers, Delhi.

** Harshvardhan Korada is Counsel at Trinity
Chambers, Delhi.

Footnotes