Delhi High Court: Importance of Pre-Arbitration Steps in India

Background of the Case on Pre-Arbitration Steps in India

The Delhi High Court in M/S BKSONS Infrastructure Pvt. Ltd. v. Managing Director, National Highways and Infrastructure Development Corporation [ARB.P. 498/2024 decided on 12.08.2024] held that courts can intervene in arbitration only after pre-arbitration steps have been breached, as per Section 11(6) of the Arbitration and Conciliation Act.

M/S BKSONS Infrastructure Pvt. Ltd. (hereinafter referred to as the “Petitioner”), entered into an Engineering, Procurement, and Construction Contract on 01.06.2020 (hereinafter referred to as the “Agreement”) with National Highways and Infrastructure Development Corporation (hereinafter referred to as the “Respondent”) for the conversion of a two-lane stretch of NH 117 into a four-lane stretch.

Overview of the Agreement and Clause 26 Arbitration Dispute Resolution

The Article 26 of the Agreement encompassed a dispute resolution clause prescribing a three-stage pre-arbitral process:

• An attempt at amicable resolution through a Conciliator appointed by the Respondent,
• A referral to the Chairman of the Respondent for a joint meeting in case of failure at the first stage, and
• Conciliation through a Conciliation Committee of Independent Experts.

Only after all three pre-arbitration stages fail, the parties can actively refer the dispute to arbitration for resolution.

Disagreements emerged between the parties, resulting in the Petitioner seeking the appointment of a Conciliator on 02.01.2023. Despite reminders, the Respondent did not respond. Consequently, the Petitioner requested a meeting with the Chairman of the Respondent, which took place on 27.12.2023. The Petitioner’s claims were rejected on 11.01.2024. The Petitioner subsequently issued a notice invoking arbitration under Section 21 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as the “A&C Act”).

The Respondent vide reply dated 05.02.2024, informed the Petitioner to approach the Conciliation Committee of Independent Experts. Instead of complying with the Respondent’s suggestion, the Petitioner has filed a Petition under Section 11(6) of the A&C, seeking the appointment of an Arbitrator.

Issues before the Delhi High Court Regarding Pre-Arbitration Steps

• Whether the present application under Section 11(6) of the A&C Act is maintainable before this Hon’ble Court?
• Whether the arbitration clause can be invoked before exhausting the mandatory pre-arbitration stages envisaged in the Agreement?

Contentions of the Parties on Mandatory Pre-Arbitration Procedure

The Petitioner cited Oasis Projects Ltd v. M.D. National Highway and Infrastructure Development Corporation Ltd [2023 SCC OnLine Del 645]. They argued that Clause 26.2’s Conciliation Clause is voluntary and directory, not mandatory for initiating arbitration under the Agreement.

Conversely, the Respondent contended that the Petition is not maintainable, as the Petitioner failed to complete the mandatory three-stage pre-arbitral process. The Respondent emphasized that Clause 26.2 required exhaustion of all pre-arbitration steps before seeking recourse to arbitration.

The Respondent contended that the petitioner should have approached the Conciliation Committee of Independent Experts, as outlined in Stage (iii) of the pre-arbitral procedure, before seeking arbitration.

Judgment on Pre-Arbitration Steps and Arbitration under Section 11(6)

Delhi High Court observed that the Clause 26.2 of the Agreement categorically provides three stage pre-arbitration procedure, which has to be mandatorily followed before institution of an Arbitral Tribunal and the provision of Section 11 (6) of the A&C Act can be invoked when either of the parties fail to act as per the Agreement.

Furthermore, the Court observed that if either party defaults in following the pre-mandatory process, Court jurisdiction under Section 11(6) begins. The Respondent failed to participate and appear before the Independent Conciliator, despite several reminders sent by the Petitioner. Therefore, the Court held that the Petitioner is automatically entitled to invoke arbitration under the Agreement.

Consequently, the Court confirmed that the Petitioner acted rightly in approaching it for the appointment of an Arbitrator. The Court appointed Mr. A.K. Behera, Senior Advocate, as the Arbitrator, and arbitration proceedings will follow Delhi International Arbitration Centre (DIAC) rules. Hence, the Court allowed the Petition in favor of the Petitioner.

Appointment of Arbitrator in India

This judgment reinforces that courts respect the mandatory pre-arbitration procedure, emphasizing that pre-arbitration steps in India are crucial before seeking judicial intervention.

Source

M/S BKSONS Infrastructure Pvt. Ltd. v. Managing Director, National Highways and Infrastructure Development Corporation, [ARB.P. 498/2024 decided on 12.08.2024]