Institution of conciliation prior to arbitration: Mandatory or directory?

Recently, the Delhi High Court in the case of M/s Oasis Projects Ltd v. The Managing Director, National Highway and Infrastructure Development Corporation Ltd was seized with a question as to whether conciliation is a mandatory pre-condition prior to arbitration.

This was because Oasis Projects, the petitioners in the dispute, invoked an arbitration agreement between the parties while not considering the conciliation clause laid out in the contract between the parties.

The facts

Oasis Projects entered into an engineering, procurement and construction contract with NHIDCL, the respondents, for undertaking the remaining work in four-laning the NH-39 Dimapur-Kohima Road in Nagaland. When disputes arose between the parties, Oasis Projects invoked the arbitration agreement vide a notice dated November 19, 2022.

In their response to the notice of invocation dated November 25, 2022, NHIDCL demanded that Oasis Projects must first consider conciliation by the Conciliation Committees of Independent Experts, as provided in Article 26.2. of the contract entered into between the parties. However, Oasis Projects proceeded to file a petition under Section 11(6) of the Arbitration and Conciliation Act, 1996 seeking the appointment of an arbitrator to adjudicate the dispute.

Is a party mandatorily bound by the conciliation clause in the contract, prior to arbitration?

It was pointed out by the Senior Counsel appearing on behalf of NHIDCL that the arbitration petition was liable to be dismissed, since it was premature. According to him, this was because Oasis Projects had not followed the procedure prescribed for invoking arbitration proceedings mentioned in Article 26 of the contract. He relied upon the case of Sushil Kumar Bharadwaj v. Union of India, where the Delhi High Court held that conciliatory procedures prior to arbitration, as agreed between the parties in the contract, were mandatory and not directory.

In the aforesaid case, the Municipal Corporation of Delhi, the respondents in the case, had laid out a three-tiered conciliatory system where one initially approached the engineer-in-charge with their grievance, and “in the absence of any decision in writing and upon his failure to give a decision in writing inspite of demand”, they had to appeal to the superintending engineer, after which they could finally appeal to the Chief Engineer in case they were dissatisfied with the latter’s decision. It was only after the appeal before the Chief Engineer that they could apply for appointment of the arbitrator.

Counsel for NHIDCL also relied on the case of Iron & Steel Co Ltd v. Tiwari Road Lines, where the parties had agreed to resolve disputes by means of arbitration, in accordance with the arbitration rules of the Indian Council of Arbitration. The petitioner in this case, in lieu of following the aforesaid procedure, went on to move an application under Section 11 of the Arbitration Act. The Supreme Court ultimately held that in this case that considering that the agreed procedure not being followed, the petition was not maintainable.

On the other hand, counsel for Oasis Projects contested these submissions by stating that the process of conciliation as stated in Article 26 was directory in nature. Thus, this process could not disentitle the petitioner from invoking the arbitration agreement.

The Court took note of an Office Memorandum (OM) dated July 3, 2020 which was published on the NHIDCL website, stating the constitution, establishment and the procedure of the Conciliation Committee reflected that such conciliation process is of a voluntary nature. The process could only be turned to only where the contractor agrees to such a process “after the disputes have arisen and in spite of the earlier agreement, as recorded in the Agreement”. The OM went on to state that the NHIDCL shall offer the other party to refer the matter to the conciliation committee of independent experts. It could be made out here that it was only pursuant to the consent of the contractor that the reference to the Committee was possible.

In the Court's opinion, the cases of Sushil Kumar Bharadwaj and Iron & Steel Co Ltd did not apply to the present case. Firstly, in the case of Sushil Kumar Bharadwaj, the facts were such that there was a multi-tiered, organised process of conciliation and arbitration was to be invoked only on the failure of those stages.  This was different from the Conciliator Committee in the present set of facts. Secondly, in Iron & Steel Co, the rules of the Indian Council of Arbitration took utmost precedence, unlike the present case where the OM put forth the implication that the reference to the Conciliation Committee was possible, only if the contractor had given their consent.

This brings us to the question of whether a party is mandatorily bound by the conciliation clause in the contract prior to arbitration. As can be made out above, the facts of the present case may appear as though the petition was allowed solely on the ground that there was a significant indication of a consent-oriented conciliation process which could be made out from the OM uploaded by NHIDCL on their website. At this point, one may find themselves ambling towards a conclusion that the mandatory nature of a conciliation clause depends upon the facts of each case. The Court accordingly leads us towards a clarification on this point, as explained below.

A clarification on the mandatory nature of the conciliation clause: Section 77 of the Arbitration Act

Counsel for Oasis Projects relied upon several precedents in support of his arguments, one of which was the case of Ravindra Kumar Verma v. M/s BPTP Ltd & Anr, where the Delhi High Court held that the existence of mutual discussion or conciliation should not be a bar while filing proceedings for referring the matter to arbitration.

Coming back to the present case, the High Court referred to a comment in Ravindra Kumar Verma, whereby it is observed that the doubt with regard to whether the conciliation proceedings as required by the arbitration clause were mandatory or directory in nature, was removed after a reference to Section 77 of the Arbitration Act, which states as follows:

“The parties shall not initiate, during the conciliation proceedings, any arbitral or judicial proceedings in respect of a dispute that is the subject-matter of the conciliation proceedings except that a party may initiate arbitral or judicial proceedings where, in his opinion, such proceedings are necessary for preserving his rights.”

According to the aforesaid provision, it is clear that a party is entitled to initiate arbitral proceedings in respect of a dispute that is the subject-matter of conciliation, in a scenario where they deem it necessary for preserving their rights. It was held in this respect that in order to conclusively determine whether or not there is an urgency or a necessity, it is the opinion of the concerned party which is the governing factor. This was because, as repeatedly emphasized by the Court in this judgment, conciliation was a voluntary process, and thus, by its very nature, directory.

The Court also noted that since Oasis Projects feared debarment from bidding for any future contract of NHIDCL for two years and the invocation of the performance guarantee, they were left with no alternative but to initiate arbitration for preserving their rights. It was further held that conciliation could be terminated at any point of time by any party. Thus, the Court went on to allow the petition filed under Section 11 of the Act and appointed a sole arbitrator to adjudicate the dispute between the parties.

Conclusion

It was observed in Ravindra Kumar Verma that the time spent in conciliation prior to the invocation of arbitration is not exempt from limitation under the provisions of the Limitation Act, 1963.If conciliation proceedings were to continue despite the expiry of the limitation period for invoking arbitration, this would result in the nullification of the arbitration clause. It was further observed that if the pre-condition with respect to conciliation were to be treated as mandatory, the rights available to the parties to get their disputes decided by arbitration will be smothered, which is not a position that must be acceptable in law.

In the present case, while keeping it in mind that the Court in Ravindra Kumar Verma held conciliation prior to arbitration to be of a directory nature, the Bench observed and emphasized that conciliation must be one of the first endeavours by the parties in case a dispute arises. In light of the reasoning and the analysis as laid out above, it can thus be concluded that this judgment is a welcome precedent for arbitration as a dispute resolution mechanism in India.

Abhijit Christopher is a litigation associate at HSB Partners, Chennai.