The Article is written by Shruti Malviya

Introduction

In recent years, the arbitration landscape in India has evolved significantly, particularly concerning the enforcement of pre-arbitration formalities. A pivotal starting point for this discussion is the landmark judgment of the Calcutta High Court in Jayashree Electromech Private Limited v. West Bengal State Electricity Transmission Company Limited. This case underlines the principle that compliance with pre-arbitration requirements is not mandatory and can be waived by mutual consent among the parties involved.

Legal Background

Arbitration in India

Arbitration is the most popular method of dispute resolution in India and is primarily governed by the Arbitration and Conciliation Act, 1996 (the Act). The Act promotes arbitration as an efficacious alternative to traditional modes of litigation with a great deal of emphasis on party autonomy and minimal judicial intervention.

Pre-Arbitration Formalities

Formal pre-arbitration proceedings include those procedural steps to be met by parties before bringing the arbitration proceedings. They are mostly considered to amicably settle disputes and vary greatly under different arbitration agreements. A review of the nature, types, and implications of these formalities has been provided against the backdrop of the Indian legal framework.

Nature of Pre-Arbitration Formalities

Based on whether their fulfillment is mandatory or discretionary in nature, pre-arbitration formalities can be generally categorized into two categories as below:

1. Mandatory Formalities: In some cases, certain courts have held that steps taken before arbitration are mandatory and without which cannot proceed to arbitration. In Nirman Sindia v. Indal Electromelts Ltd.[1], the Kerala High Court laid emphasis on the fact that the parties concerned were expected to follow the procedure as agreed strictly and that skipping initial steps was impermissible.

2. Discretionary Formalities: On the other hand, the Delhi High Court judgments have considered these as discretionary. In Demerara Distilleries Pvt Ltd v. Demerara Distilleries Ltd.[2], the Supreme Court ruled that pre-arbitral steps do not have to be strictly followed; a party can begin arbitration when preconditions become mere formalities or are no longer effective.

Common Types of Pre-Arbitration Formalities

Most common pre-arbitration formalities are;

1. Negotiation: parties often negotiate in a bid to amicably resolve disputes before arbitrating it.
2. Mediation: this requires the presence of an independent third-party mediator whom party’s cases to be negotiated by the said disputing parties to a settlement.
3. Conciliation: As practiced in mediation, conciliation involves a conciliator to assist parties in resolving differences, however, they will provide suggestions on settlement.
4. Cooling-off Period: Some contracts contain a requirement for a certain period within which the parties must try to agree on an amicable settlement of the dispute before resorting to arbitration.
5. Dispute Boards: In some industries, such as construction, the contracts will require the forming of a dispute board to be formed in advance to deal with disputes arising from the contract.

Legal Implications of Non-Compliance

While the legal consequences would be different in many respects, as will be noted briefly below:

• Premature Invocation: It is where the referring party invokes arbitration without meeting any of the mandatory steps that precede arbitration. Such applications are normally dismissed by courts as in Tulip Hotels v. Trade Wings[3] where the court refused to appoint an arbitrator because of failure to observe conciliation requirements.
• In exertion of Award enforceability: failure to comply with mandatory pre-arbitral procedures may impact the resulting arbitral award’s enforceability. If non-compliance is considered jurisdictional, it results in disputes over the validity of an award.

• Judicial Discretion: However, courts are different in the discretion exercised in giving effect to the matters. Whereas some courts are strict on the pre-arbitral requirements, other courts make exceptions within the context of the surrounding dispute and parties’ intent.

Jayashree Electromech Private Limited v. The West Bengal State Electricity Transmission Company Limited

Court and Bench: Calcutta High Court, Justice Sabyasachi Bhattacharyya

Facts

Jayashree Electromech Private Limited (the Petitioner) was awarded six contracts by West Bengal State Electricity Transmission Company Limited (the Respondent) for the construction of electrical transformers and allied projects. Contracts were executed between May 26, 2016, and April 6, 2018. After the implementation of GST, the petitioner sought an increase in the contract amount and a waiver of liquidated damages. The respondent rejected both requests.

On February 20, 2023, the petitioner unilaterally appointed an Adjudicator, who passed an award on March 27, 2023. The respondent challenged this award under Section 34 of the Arbitration and Conciliation Act, 1996.

The Calcutta High Court, in a prior order on June 26, 2023, held that the challenge did not fall under Section 34, as the award was not issued by an arbitrator but by an Adjudicator. The petitioner then invoked the arbitration clause on May 22, 2024. The respondent objected to one of the names proposed for arbitration and insisted on compliance with pre-arbitration formalities under Clause 6 of the General Conditions of Contract (GCC).

A second notice was issued under Section 21 of the Arbitration Act on June 26, 2024, but the respondent refused to appoint an arbitrator. As a result, the petitioner filed an application under Section 11 of the Arbitration and Conciliation Act for the appointment of an arbitrator.

Issues:

1. Waiver of Pre-Arbitration Formalities: Can pre-arbitration requirements be waived by mutual consent?
2. Prematurity of Section 11 Application: Was the application under Section 11 of the Arbitration and Conciliation Act, 1996 premature due to non-compliance with pre-arbitration formalities?

Legal Analysis:

1. Waiver of Pre-Arbitration Requirements:
   • The primary issue in this case was whether pre-arbitration formalities, as agreed in the contract, could be waived by mutual consent.
   • The court clarified that compliance with pre-arbitration stages is not a mandatory legal requirement. Such pre-conditions stem from the contractual agreement and thus can be waived by consensus.
   • The court further observed that since the parties had already engaged in attempts to resolve the dispute through discussion, forcing the petitioner to go through further pre-arbitration steps would be unnecessary and futile.
   • This reasoning relied on established case law, including Demerara Distilleries Private Limited v. Demerara Distillers Limited[4]and Backend Bangalore Private Limited[5], which held that insistence on procedural formalities should not obstruct the arbitration process when such steps do not serve any practical purpose.
2. Prematurity of the Section 11 Application:
   • The respondent’s primary defense was that the petitioner’s application under Section 11 was premature, as it had not complied with the pre-arbitration formalities outlined in the contract.
   • However, the court rejected this argument, noting that the respondent had already refused to agree on the appointment of an arbitrator and that the petitioner’s efforts to resolve the dispute had been met with resistance. This demonstrated an implied refusal by the respondent, justifying the initiation of arbitration.
   • The court also distinguished between the requirements for a Section 11 notice (requesting the appointment of an arbitrator) and a Section 21 notice (which marks the commencement of arbitration proceedings). The Section 11 notice serves as a pre-arbitral formality, while the Section 21 notice initiates the arbitral process.
3. Efforts to Resolve the Dispute:
   • The court found that the petitioner’s various efforts to resolve the matter through adjudication and discussion had failed due to the respondent’s non-cooperation. Therefore, it would be pointless to require the petitioner to go through additional pre-arbitration procedures.
   • The court’s reliance on the Backend Bangalore Private Limited case was significant because it reinforced the principle that if one party is unwilling to engage in adjudication or arbitration, the other party should not be left in procedural limbo.

Judgment:

• The court held that the application under Section 11 of the Arbitration and Conciliation Act was not premature.
• It was determined that the pre-arbitration formalities could be waived by mutual consent, and the respondent’s refusal to cooperate in the appointment of an arbitrator provided a sufficient basis for the court to intervene.
• Therefore, the court allowed the petitioner’s application and ordered the appointment of an Arbitral Tribunal under Section 11 of the Act.

Key Takeaways:

1. Pre-Arbitration Formalities: The case reinforces the principle that pre-arbitration steps are contractual and not mandatory under the law. As such, they can be waived by mutual agreement.
2. Practical Approach to Arbitration: The court emphasized the importance of practicality and efficiency in arbitration. Forcing parties into unnecessary procedural steps when disputes are clearly ripe for arbitration serves no useful purpose.
3. Consent and Waiver: Mutual consent and waiver of certain contractual conditions play a key role in the arbitration process, allowing parties to streamline dispute resolution.
4. Refusal to Engage in Arbitration: A party’s refusal to cooperate in appointing an arbitrator or comply with reasonable arbitration requests can justify judicial intervention under Section 11.

Other Judicial Perspectives

1. Delhi High Court: The Delhi High Court has it based on many authorities that all the steps which precede arbitration are what are referred to as directory and not obligatory. Like in Ravindra Kumar Verma v.M/s BPTP Ltd.[6] it was pointed out that such steps are not mandatory and are infact, negating the requirement if the buyer and the seller agree to do so.

• Supreme Court Rulings: The Supreme Court has also endorsed this point of view. In  own case of Demerara Distilleries Pvt Ltd v. Demerara Distilleries Ltd.  it was pointed out that pre-arbitral steps could become an empty formality and direct arbitral proceedings could be invoked.

• Limitation Issues: As with most issues, the courts have pondered on this and made it clear that time spent in pre-arbitral negotiations does not count towards limitation periods for starting the arbitration. This was laid down in Geo Miller & Co. Pvt. Ltd. V. Chairman, Rajasthan Vidyut Utpadan Nigam Ltd.[7], whereby it was held that bona fide negotiations could operate as exclusion of time.

Implications for Parties

The Jayashree Electromech judgment has tremendous importance for the parties in arbitration.

1. Flexibility in Dispute Resolution

Waiver of pre-arbitration formalities makes way for parties to bypass these potentially time-consuming procedures because, if they think that a direct arbitration would expedite their dispute resolution, these cannot be dispensed with.

• Importance of Clear Drafting

Taking this in mind, parties may also need to draft clear arbitration agreements. Prearbitration requirements can sometimes be misconstrued by parties about their enforceability and thereby create controversies on the need to pursue prearbitration steps or not .

• Settlement Promotion

Waiving prearbitration requirements may facilitate the arbitral process but will entice parties to settle or settle down a case even after it is filed, and subsequently, it will result in a collusive attitude .

• Judicial Enforcing Party Autonomy

Judicial acceptance of party autonomy rejuvenates the belief that parties have a right to decide on their procedure and process concerning the settlement of disputes without the undue influence of courts.

Conclusion:

This case exemplifies the Calcutta High Court’s pro-arbitration stance and its inclination to avoid procedural roadblocks that delay the resolution of disputes. By allowing the waiver of pre-arbitration formalities through mutual consent, the court has provided valuable guidance on how arbitration clauses should be interpreted in light of practicality and fairness.

[1] Nirman Sindia v. Indal Electromelts Ltd AIR 1999 KERALA 440

[2] Demerara Distilleries Pvt. Ltd. vs Demerara Distilleries Ltd. on 24 November, 2014

[3] Tulip Hotels Pvt. Ltd. vs Trade Wings Ltd. A Public Limited 2009 SCC OnLine Bom 1222.

[4] Demerara Distilleries Private Limited v. Demerara Distillers Limited (2015) 13 SCC 610

[5] Backend Bangalore Private Limited (2022 SCC OnLine HP 1044)

[6] Ravindra Kumar Verma vs M/S. Bptp Ltd. & Anr. On 18 November, 2014

[7] M/S Geo Miller & Co.Pvt.Ltd. vs Chairman, Rajasthan Vidyut Utpadan , AIR 2019 SUPREME COURT 4244,

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