Pre-Arbitration Referral Obligations
Pre-Arbitration Referral Obligations
1. Introduction
Pre-arbitration referral obligations are procedural steps that parties must follow before initiating arbitration. Many commercial contracts include dispute resolution clauses requiring parties to attempt negotiation, mediation, or conciliation before commencing arbitration.
These obligations are often known as multi-tier dispute resolution clauses or escalation clauses. Their purpose is to encourage amicable settlement and reduce the time and cost of arbitration.
In Nepal, arbitration practice concerning pre-arbitration obligations is generally interpreted under:
Arbitration Act 1999 Nepal
Contract Act 2000 Nepal
These laws recognize the binding nature of contractual agreements, including dispute resolution procedures agreed by the parties.
2. Meaning of Pre-Arbitration Referral Obligations
Pre-arbitration referral obligations are contractual requirements that must be satisfied before arbitration begins.
Typical steps include:
Negotiation between parties
Senior management discussion
Mediation or conciliation
Expert determination
Only after these procedures fail can a party initiate arbitration.
3. Purpose of Pre-Arbitration Procedures
Pre-arbitration obligations serve several important purposes.
1. Encouraging Settlement
Many disputes can be resolved through negotiation without expensive arbitration proceedings.
2. Preserving Business Relationships
Negotiation and mediation allow parties to maintain commercial relationships.
3. Reducing Litigation Costs
If disputes are settled early, arbitration and court proceedings can be avoided.
4. Clarifying Issues
Pre-arbitration discussions help identify the core issues before formal proceedings begin.
4. Types of Pre-Arbitration Clauses
1. Negotiation Clauses
These clauses require parties to attempt good-faith negotiation before initiating arbitration.
2. Mediation Clauses
Parties must attempt mediation through a neutral third party.
3. Escalation Clauses
Disputes must first be referred to senior management before arbitration.
4. Dispute Boards or Expert Determination
Common in construction contracts where disputes are first referred to experts.
5. Legal Nature of Pre-Arbitration Obligations
Courts generally examine whether such obligations are:
| Category | Explanation |
|---|---|
| Mandatory | Arbitration cannot begin until the pre-arbitration steps are completed |
| Directory | Failure to comply does not prevent arbitration |
The enforceability depends on clarity of the contractual language.
6. Consequences of Non-Compliance
Failure to follow pre-arbitration obligations may lead to several consequences:
Suspension of arbitration proceedings
Jurisdictional objections by the opposing party
Court refusal to enforce arbitration until obligations are fulfilled
Delay in dispute resolution
However, if the pre-arbitration step is vague or impractical, tribunals may allow arbitration to proceed.
7. Case Laws on Pre-Arbitration Referral Obligations
1. Cable & Wireless plc v IBM United Kingdom Ltd 2002
Issue:
Whether mediation before arbitration was mandatory.
Decision:
The court held that the mediation clause was legally enforceable.
Principle:
Clear pre-arbitration procedures must be followed before arbitration.
2. Emirates Trading Agency LLC v Prime Mineral Exports Pvt Ltd 2014
Issue:
Whether a negotiation clause requiring “friendly discussions” was enforceable.
Decision:
The court held that the clause requiring four weeks of negotiation was binding.
Principle:
Good-faith negotiation clauses can be legally enforceable.
3. Sulamerica Cia Nacional de Seguros SA v Enesa Engenharia SA 2012
Issue:
Whether mediation was a mandatory condition before arbitration.
Decision:
The court allowed arbitration to proceed due to uncertainty in the mediation clause.
Principle:
Unclear pre-arbitration clauses may not block arbitration.
4. International Research Corp PLC v Lufthansa Systems Asia Pacific Pte Ltd 2013
Issue:
Whether failure to complete negotiation procedures affected arbitration jurisdiction.
Decision:
The court held that arbitration could proceed despite incomplete negotiations.
Principle:
Some pre-arbitration steps may be procedural rather than jurisdictional.
5. BG Group plc v Republic of Argentina 2014
Issue:
Whether a treaty-based pre-arbitration requirement affected tribunal jurisdiction.
Decision:
The tribunal determined that the requirement could be interpreted flexibly.
Principle:
Arbitral tribunals may interpret pre-conditions pragmatically.
6. Siemens AG v Dutco Construction Co 1992
Issue:
Whether procedural fairness and dispute resolution steps must be respected.
Decision:
The court emphasized fairness and adherence to contractual dispute procedures.
Principle:
Contractual dispute resolution mechanisms must be respected to ensure fairness.
8. Approach of Arbitral Tribunals
Arbitral tribunals usually consider several factors when evaluating pre-arbitration obligations:
Clarity of the contractual clause
Intent of the parties
Whether negotiation or mediation was genuinely attempted
Whether compliance would serve any practical purpose
If compliance is impossible or futile, tribunals may allow arbitration to proceed.
9. Importance in International Arbitration
Pre-arbitration procedures are particularly common in:
Construction contracts
Investment agreements
Joint venture agreements
International commercial contracts
They help create a structured dispute resolution process and reduce unnecessary arbitration.
10. Conclusion
Pre-arbitration referral obligations are an important feature of modern arbitration agreements. These clauses require parties to attempt negotiation, mediation, or other dispute resolution mechanisms before initiating arbitration.
Under legal frameworks such as the Arbitration Act 1999 Nepal and Contract Act 2000 Nepal, courts generally respect contractual dispute resolution procedures agreed by the parties.
However, the enforceability of these obligations depends largely on the clarity of the clause and the intention of the parties. When drafted clearly, pre-arbitration clauses can significantly improve efficiency and encourage early settlement of disputes.
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