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Should parties have Pre-Arbitration Negotiation, if there is no intention to settle the dispute?
Delhi HC has ruled that even while negotiating is a pre-requisite for commencing arbitration proceedings, it is not required if there is no intention to do so before sending the issues to arbitration.
Facts: On January 1, 2020, the Petitioner and the Respondent signed a Memorandum of Understanding ("MOU") to promote their respective business interests and profit. It had an arbitration clause that required negotiations to take place before the arbitration could begin. The arbitration provision in question was as follows:
“All disputes and disagreements arising out of or in connection with the MoU shall be sought to be addressed mutually through discussions between Parties, failing which the same shall be submitted and settled by a solitary Arbitrator...”
When a disagreement occurred over hiring each other's workers, the Petitioner invoked the arbitration provision on July 4, 2020, and requested that the Delhi International Arbitration Centre ("DIAC") appoint an arbiter. It's worth noting that the issue of the disagreement was an essential component of the contract. The Respondents were served with a notice by DIAC, but no response was received. As a result, the Petitioner filed the above-mentioned petition. The petition was opposed by the Respondent on the following grounds:
- the subject matter of the disputes was not arbitrable due to fraud (questioning the validity of the MoU on its own),
- non-compliance with the pre-arbitration procedure, which required the parties to attempt to resolve their differences through mutual negotiations, and
- the MoU was not a contract enforceable by law because it was an unstamped document.
Decision: In selecting an arbitrator under Section 11 of the Arbitration and Conciliation Act, 1996, the Delhi High Court ruled that it simply had to look into the existence of the arbitration agreement and arbitral issues. It stated that the charges of fraud were insufficient to cast doubt on the MoU's authenticity and that such claims may be debated on the merits before the arbitrator. The Court followed the concept of "wherein doubt, send the case to arbitration," based on a Supreme Court judgment. In terms of non-compliance with the pre-arbitration procedure, the Court stated that MSD could not pursue criminal charges against IMZ while also attempting to address the problems through dialogue.
In this case, the Court determined that forced discussion would be an "empty formality" that should not prevent parties from continuing the agreed-upon dispute settlement procedure. Finally, the Court stated that “the plea of the agreement being unstamped [would] not prohibit the Court from appointing an arbitrator” based on non-payment of stamp duty on a commercial contract. Hence, the court allowed the appeal.
Conclusion: The Court reiterated its stance that it will only meddle in the nomination of arbitrators to a limited extent. Since criminal procedures had begun, the Court deemed it unworkable in this situation to expect the parties to engage in serious talks at the same time. Furthermore, the Court cited the Supreme Court's decision in NN Global[1], which ruled that non-payment of stamp duty did not render the arbitration agreement void.
[1] 2021 SCC Online SC 13.
(This Article Does Not Intend To Hurt The Sentiments Of Any Individual Community, Sect, or Religion, Etcetera. This Article Is Based Purely On The Authors Personal Views And Opinions In The Exercise Of The Fundamental Right Guaranteed Under Article 19(1)(A) And Other Related Laws Being Force In India, For The Time Being. Further, despite all efforts made to ensure the accuracy and correctness of the information published, White Code VIA Mediation and Arbitration Centre Foundation shall not be responsible for any errors caused due to human error or otherwise.)
- Facts
- Decision
- Conclusion
