In an age of increased cross-border investment, transaction and trade, modern day commercial contracts incorporate arbitration clauses as an efficient means of resolving disputes in a time-bound manner. Despite its benefits, arbitration proceedings can be expensive and is not an economical means of resolving petty disputes. Thus, a growing number of contracts have seen parties incorporate certain preconditions that must be satisfied before invoking arbitration. These preconditions take the form of “multitiered” and “escalation” clauses which generally envisage conciliatory cost-efficient methods of mutually resolving disputes before resorting to the zero-sum game of arbitration.
This proposed silver bullet has instead given rise to new conundrums that affect the efficacy of arbitration proceedings. The non-compliance of these preconditions have instead been used by parties to challenge the legality of an Arbitral Tribunal so constituted and in rare cases, some of the domestic courts around the world have gone so far as to annul the awards arising from improperly constituted tribunals.
The present article attempts to characterise the pre-arbitration procedural requirements and whether the same is a matter of jurisdiction (the theory that until the precondition procedures have been satisfied, the arbitration agreement is not triggered and that the constitution of a tribunal is invalid and the issue concerning the same cannot be heard by the tribunal as it goes to the root of its jurisdiction) or a matter of admissibility (the theory that the arbitration agreement exists and provides the arbitrators with jurisdiction to hear the issue of non-compliance of the preconditions, but does not permit adjudication of material claims until the issue of adherence to the preconditions has been satisfied).
Position in India
As of date, the aforementioned issue has not presented itself before the courts of India in order to determine the position of Indian laws with respect to it. However, before delving into the basket of foreign jurisprudence that have definitively opined on the aforesaid issue, it is necessary to examine the judicial pronouncements made by the courts of India that differentiate the issues of “jurisdiction” from those of “admissibility”.
In this regard, it is pertinent to highlight the case of BSNL v. Nortel Networks (India) (P) Ltd., wherein the Supreme Court has applied the “tribunal versus claim test” to determine whether the issue of a statutory time bar is a matter concerning jurisdiction or admissibility. To put it succinctly, the “tribunal versus claim test” asks whether the objection/issue is targeted at the tribunal (in the sense that the claim should not be arbitrated due to a defect in or omission to consent to arbitration), or at the claim (in that the claim itself is defective and should not be raised at all). In the present case, the Court decreed in favour of holding the issue of limitation as one towards admissibility as it challenges the nature of claims raised as opposed to challenging the jurisdiction of the Tribunal.
Another case of import, is United India Insurance Co. Ltd. v. Hyundai Engg. and Construction Co. Ltd., wherein the Supreme Court held that in a case where the amount under the car policy has to be admitted as a precondition to bring forth the claim in arbitration, it is necessary that the said precondition has to be satisfied before arbitration can be invoked as only the admitted amount can be made part of the dispute to be adjudicated by the Tribunal. Thus, to reiterate, the arbitration clause would come to life only if the liability in respect of the car policy is admitted by the purportedly defaulting party, as a precondition.
The Supreme Court in Demerara Distilleries (P) Ltd. v. Demerara Distillers Ltd., took a different stance altogether with respect to the examination of the preconditions and stated that one must also consider whether such preconditions have been complied with by the correspondence of the parties, and the likelihood of success especially in cases where the preconditions are open-ended and do not provide conclusive definitive terms to measure the attempt of satisfying the preconditions. In the instant case, the Court decreed after inferring the correspondence exchanged that the attempts to resolve disputes by mutual discussion and mediation as a precondition is merely an empty formality and not mandatory. It is pertinent to note that the Court itself determined the nature of preconditions without considering whether the Arbitral Tribunal was sufficiently empowered to decide the same.
Whereas the Supreme Court in S.K. Jain v. State of Haryana, had held that the language of the arbitration clause necessitated the adherence of pre-requirements, however the decision by the Supreme Court was reached after the Arbitral Tribunal was constituted and the said Tribunal held that it cannot assume jurisdiction as the mandatory requirements were not satisfied.
The courts in India have not conclusively dealt with the issue of whether non-compliance of arbitral preconditions are to be treated as a matter affecting the jurisdiction of the Tribunal, or whether the same is a matter of admissibility.
In light of the divergent and inconclusive Indian jurisprudence on the characterisation of preconditions, it is imperative to examine foreign jurisprudence in recent years which have definitively opined on the characterisation of preconditions.
Prevailing Trend in International Jurisprudence
Perhaps the earliest known case to attempt the delineation of the issues of admissibility and jurisdiction is in the US Supreme Court case of BG Group Plc v. Republic of Argentina where a challenge to an arbitral award was rejected, as the challenge was made on the premise that mandatory preconditions to arbitration have not been complied with. The precondition arose out of a bilateral investment treaty (BIT) agreement between UK-Argentina, which required the claimant to litigate their claims for 18 months in the domestic courts of Argentina prior to commencing a claim in arbitration.
The US Supreme Court went on to hold that in absence of a contrary provision in the arbitration agreement, questions as to whether the parties are bound by an arbitration clause are for the courts to decide and it is for the constituted Arbitral Tribunal to decide the meaning and import of procedural preconditions, including their non-compliance.
Recently, the Hong Kong Court of First Instance (HKCFI), in T v. B, held that any matter concerning the compliance or non-compliance of arbitral preconditions is a question of admissibility and not jurisdiction even though the parties and the arbitrator in the instant case referred to it as a “jurisdictional challenge”. This Court affirmed and upheld the rationale in C v. D and stated that it is prudent to deem preconditions as a matter of admissibility rather than jurisdiction as the same would be in line with the general trend of judicial restraint in interfering with the arbitration proceedings and would facilitate expeditious disposal of matters rather than annulling awards after a long and expensive process on non-fulfilment of preconditions, which would render the arbitration process as circuitous and would defeat the very object of time-bound and expeditious disposal of arbitration proceedings. Since there is no doubt as to the mutual consent to arbitration and the challenge to the award was with reference to certain procedural prerequisites that have not been followed, it would not be appropriate for the domestic courts to hear such a challenge where the Arbitral Tribunal is empowered to hear such disputes.
The aforesaid case of C v. D has also been upheld in Kinli Civil Engg. v. Geotech Engg. in the context of a dispute brought under a contract containing an arbitration agreement providing that a party may submit a dispute to arbitration. The Court granted a stay of litigation proceedings in favour of arbitration noting that the Court has no role in determining whether conditions with respect to the right to arbitrate have been satisfied.
The English High Court has taken the same view in Republic of Sierra Leone v. SL Mining Ltd. expressly stating that any alleged non-compliance of preconditions is to be treated as a matter of admissibility, despite the fact that the defendant in the instant case failed to comply with the preconditions to arbitration. It also stated that the leading commentaries and authorities were all in favour of preconditions to arbitration being an issue of admissibility and not one of jurisdiction.
This rationale and reasoning shows a clear understanding of the distinction between issues of admissibility and those of jurisdiction, as can be evinced by a consensus of the domestic courts around the world using a similar line of thought, and thus framing a common standard governing international commercial arbitration.
When characterising contractual preconditions to arbitration agreements, it is prudent to ascertain the intention of the parties when drafting such prerequisites, therefore as a general rule of thumb, the better approach is to treat preconditions which envisage mutual settlement or domestic litigation as aspirational or exhortive, unless the parties state otherwise in clear, unequivocal language that the said preconditions are a matter of jurisdiction. Whether the said preconditions are mandatory or optional must be left to be determined by the Arbitral Tribunal and not by the domestic courts, thereby observing the kompetenz-kompetenz principle.
To quote Gary Born’s International Commercial Arbitration (3rd edn. 2021):
“The best approach is to presume, absent contrary evidence, that pre-arbitration procedural requirements are not jurisdictional, but matters better determined by the arbitrators.”
However, the aforesaid approach seeds doubt as to the malleable nature of preconditions, and would seem contrary to the contractual intent of the parties to commence arbitration when the preconditions have not been satisfied. In the same vein, if these contractual preconditions are not satisfied a dispute arises between the parties, and if an arbitration agreement exists, the disputes must be referred to arbitration. If the parties had intended for all issues and disputes between the parties to be resolved by arbitration, it would be imprudent to label the non-compliance of preconditions as an issue to be determined by the courts which would ultimately treat preconditions as a matter of jurisdiction than that of admissibility.
It is pertinent to clarify, that characterising preconditions to arbitration as an issue of admissibility does not give a go-by to the preconditions to be satisfied. Whether the preconditions are mandatory or exhortive in nature is to be determined by the arbitrator who is vested with the authority to arbitrate and resolve all issues arising out of the contract. For example, where the preconditions use certain words such as “shall” rather than “may”, it is to be treated as a mandatory preconditions. The arbitrator if, he deems the preconditions as mandatory to the tee, may direct the parties to instead comply with the preconditions or apply a sanction of costs to the non-complying party.
The underlying basis for this assumption is that any pre-conditional procedures often require interpretation of the contractual intent and application of the preconditions by itself acts as a moratorium period for parties to settle some or all of the disputes. Thus, from its very nature, these preconditions to arbitration act as a stopgap from bringing claims to arbitration and should any claims which are not subject to preconditions be brought before the Arbitral Tribunal, the said claims would be treated as premature.
At this juncture I refer to the Oxford Handbook of International Arbitration (OUP 2020) at Paras 6-7:
“… the question of jurisdiction concerns the power of the Tribunal. The question of admissibility is related to the claim, rather than the Tribunal, and asks whether this is a claim which can be properly brought. In particular, it considers the question of whether there are any conditions attached to the exercise of the right to arbitrate which have not been fulfilled. Those conditions might be, for example, a limitation period applicable to the right to commence arbitration, or a requirement to mediate and/or negotiate before arbitral proceedings may be commenced.”
Hence, if a claim is deemed to be premature by the Tribunal and consequently, not admissible, in such circumstances, the parties would be constrained to appoint a new tribunal after complying with the preconditions. It is clearly established that preconditions by its very nature are a matter of admissibility and its adjudication is best left to the Tribunal rather than the domestic courts, which would be counter-intuitive to the purpose of arbitration.
It is perhaps fortunate and unfortunate that the courts in India have not conclusively determined on the characterisation of preconditions as a matter of admissibility or jurisdiction as this allows the courts to prepare a comprehensive set of rules and judicial tests in line with the global arbitration practices of treating preconditions to arbitration as a matter of admissibility. Once, the characterisation of arbitral preconditions is deemed as one of admissibility, there is no scope for interference by the domestic courts. However, if the said precondition were to be treated as a matter of jurisdiction it would give way to a slew of frivolous litigation and congest the already saturated Indian courts with inane applications to set aside the award on petty grounds such as that of non-compliance of arbitral preconditions.
† Hiroo Advani, Founder and Chairman, Advani Law.
†† Asif Lampwala, Senior Partner, Advani Law.
††† Kenneth Martin, Associate, Advani Law.
 188 L Ed 2d 220 : 134 S Ct 1198 : 572 US 25 (2014).
 2021 HKCFI 3645.
 2021 HKCFI 1474.
 2021 HKCFI 1474.
 2021 HKCFI 2503.