Dispute Resolution, Posts

Multi-Tier Arbitration Clauses

By: Prachi Aggarwal

Arbitration Clauses that envisage an escalation of the dispute through at least two different forms of dispute resolution procedures are called ‘multi-tier’ dispute resolution clauses. They are also known as ‘escalation clauses’ as the dispute escalates in complexity and formality of procedure from one stage to other and ultimately reaches the final stage of arbitration. Multi-tier arbitration clauses are generally of two kinds: parties to an arbitration agreement may decide that, prior to submitting any dispute to arbitration, they want to attempt an amicable settlement of the matter (pre-arbitration clauses) or post-arbitration proceedings the clause should provide for the second tier of arbitration proceedings (post-arbitration clauses)

PRE-ARBITRATION CLAUSES

Pre-Arbitration Clauses are those clauses in an arbitration agreement that require parties to first try and resolve the dispute with an alternate form of dispute resolution before proceeding to arbitration proceedings. They act as a pre-condition to the agreement and if not fulfilled the arbitration proceedings can be held to be premature. In Commercial Arbitration proceedings the most common forms of pre-arbitration clauses are:

  • Nego-Arb Clause: Under this clause, the parties must try to amicably resolve the dispute amongst themselves through negotiations and try to reach an amicable settlement. Upon failure of negotiations, the parties must commence arbitration proceedings within the prescribed period of time.
  • Med-Arb Clause: Under this clause, the parties enter into mediation proceedings wherein neutral third party appointed as a mediator tries to resolve the dispute between the parties. In case no result is achieved parties may commence arbitration proceedings.
  • Conciliation-Arb Clause: Pre-arbitral conciliation proceedings are conciliation proceedings before arbitration. If the parties reach a settlement in such conciliation proceedings it becomes binding upon them.

Post-Arbitration Clauses

Post Arbitration clauses are generally in the form of appellate arbitration clauses. Appellate arbitration clauses provide a mechanism wherein the parties can, if dissatisfied with the award rendered by the arbitral tribunal under the arbitration agreement appeal to another arbitral tribunal as provided under the agreement. There are three ways in which the parties can incorporate a “private” appeal mechanism in their arbitration agreement:

  • Provision for remand of the award to the same arbitral tribunal for review.
  • Provision for appeal of award to the appellate body if provided by the institutional rules.
  • Provision for constitution of another arbitral tribunal in appellate capacity under the same or other institution.

INTERNATIONAL PERSPECTIVE

Most jurisdictions have zealously recognized multi-tier arbitration clauses as valid. However, the same attitude has not been extended to the enforcement of such clauses.

In the English case of Emirates Trading Agency LLC v. Prime Mineral Exports Pvt. Ltd[1] the court laid down certain considerations, which must be kept in mind when enforcing Pre-Arbitration clauses. Courts should pay attention to the language of the clauses. Furter use of the word “shall” makes the pre-arbitration clause mandatory in nature and parties are obligated to follow the same. However, use of the word “may” only makes the condition directory and is of non-binding nature. In a recent decision by the Swiss Federal Supreme Court[2]in 2015, the court held:

“In situations where the parties have not yet completed a mandatory conciliation procedure, the arbitral tribunal should not decline jurisdiction or dismiss the claim altogether, but rather suspend the proceedings and fix a time limit for the parties to attempt to settle their dispute amicably. In doing so the arbitral tribunals are encouraged to provide clear guidance as to the exact conditions under which a party may resume the arbitral proceedings, so as to avoid undue delays and dilatory tactics.”

This allows the parties to disturb the limitation period with a request for arbitration even though the proceedings are suspended for the time.

With respect to post-arbitration clauses, there has been a consensus that parties cannot expand the scope of judicial review under the statutory arbitration law and submit an arbitral award for review. However, there is nothing stopping the parties from incorporating an internal appellate arbitration mechanism in their arbitration agreement to submit the award of the first instance to a second appellate tribunal as per the arbitration agreement.[3]

THE INDIAN EXPRESS

The Indian position with respect to pre-arbitration clauses has not been settled yet. The Delhi High Court in its judgment of M/s Haldiram Manufacturing Company Pvt. Ltd v. M/s DLF Commercial Complexes Ltd.[4] held that any application u/s 8 of the Act must be dismissed if the pre-conditions of entering into mutual discussions before commencing arbitration is not complied with. However, the same court in the case of Ravindra Kumar Verma v. M/s BPTP Ltd & Anr[5] held that non compliance with preconditions mentioned in the arbitration agreement does not bar the parties from commencing arbitration proceedings as the same can result in serious and grave prejudice to a party who is seeking to invoke arbitration because the time consumed in conciliation proceedings before commencing arbitration is not exempted from limitation. And if conciliation proceedings continue when the limitation period expires the same will result in nullifying the claim for arbitration

With respect to post-arbitration clauses regarding the appeal to the award, the Hon’ble Supreme Court in the recent judgment of Centrotrade Minerals & Metals Inc v. Hindustan Copper Ltd[6] upheld the validity of post-arbitration clauses. The Court upheld the validity of both the clauses concluding that plain reading of the arbitration agreement shows the intent of the parties to provide for two opportunities to resolve their disputes; the first time in India and the second in London in the form of an appeal. The reasoning behind upholding the validity of the internal appellate mechanism was the principle of party autonomy. If the parties have agreed to a second instance of arbitration they are bound by it and it is not against the public policy of the State or the Act.

BENEFITS OF PRE-ARBITRATION CLAUSE

  • These clauses represent an opportunity for the parties to resolve the dispute before resorting to arbitration thereby, avoiding the financial costs and delays involved in the process.
  • Such clauses help in the preservation of the contractual relationship between the parties
  • It gives the respondent more time to prepare their defense in case the first tier of dispute resolution fails.
  • The settlement is kept confidential, which would not be the case in an arbitration award.

DETRIMENTS OF PRE-ARBITRATION CLAUSE

  • Since the dispute has already arisen it is difficult to bring the parties together and amicably resolve the dispute.
  • Pre-Arbitration clauses suffer from uncertainty. As the parties might disagree as to when the dispute arose; when the negotiations failed; or when the limitation period for commencement of arbitration proceedings began and so on. These uncertainties may have a negative impact on the limitation period calculations.
  • Such clauses give parties grounds for objecting to the jurisdiction of the arbitral tribunal, by alleging non-compliance with the pre-arbitral steps.

BENEFITS OF POST ARBITRATION CLAUSE

  • In high stake arbitration proceedings an appellate arbitration provision is helpful to assure the parties that no mistake has been made in deciding the substantive issues by the first arbitral tribunal.
  • It prevents the parties from seeking to annul arbitral awards before national courts.

DETRIMENTS OF POST ARBITRATION CLAUSE

  • Appellate clauses defeat the principle of “finality of award” and open the award for further scrutiny. It takes away the binding characteristic of the award.
  • The second set of arbitration proceedings means more delay and costs will be incurred by the parties.
  • In the case of Ad-Hoc arbitrations (the most prevalent form of arbitration in India), there is no mechanism for appointment of an appellant tribunal.
  • There is no provision in the act, which prescribes a time limit within which such appellate arbitration proceedings must commence.
  • It provides the respondent with another delaying tactic.
  • Since there is no provision in the act regarding this there is ambiguity as to which issues can be submitted for appeal.
  • No prescribed time limit in which the appellate tribunal must render its decision.
  • There are no provisions regarding parallel enforceability proceedings that might have been started against the first award.

CONCLUSION

Therefore, while drafting a multi-tier arbitration clause containing pre-arbitration proceedings, parties must make sure that the terms are not uncertain or ambiguous in nature. Specific timelines and procedures must be prescribed in the clause. Whereas while drafting post-arbitration clause, parties must ensure that the clause contains specific provisions regarding the appointment of the appellate tribunal, the time limit for requesting for appeal, issues that can be put forward in the appeal and whether parallel enforcement proceedings can be initiated against the award of the first instance.

[1] Emirates Trading Agency LLC v Prime Mineral Exports Pvt Ltd  [2015] 1 WLR 102.

[2] 4A_628/2015.

[3] Hall Street Associates, LLC v Mattel Inc 552 US 576 (2008)

[4] M/s Haldiram Manufacturing Company Pvt Ltd v M/s DLF Commercial Complexes Ltd 2012 DLT 193 (De) 410.

[5] Ravindra Kumar Verma v M/s BPTP Ltd & Anr 2015 DRJ 147 (Del) 175.

[6] Centrotrade Minerals & Metals Inc v Hindustan Copper Ltd  (2017) (2) SCC 228.

(Prachi is currently a student at Amity Law School, Indraprastha University, Delhi)