Legal Opinion - Attention to procedural details

Guest Columnist , February 16th, 2010

Legal Opinion - Pay attention to the procedural details

Parties must remember the importance of actually complying with the agreed procedure for commencing an arbitration or the benefits of having an arbitration clause disappear, writes Shourav Lahiri

As discussed in last month’s article, there are a number of issues to consider when drafting an arbitration agreement. Once the arbitration agreement is finalised it isn’t always plain sailing from there on. Parties must remember the importance of actually complying with the agreed procedure for commencing an arbitration. Get it wrong and the benefits of having an arbitration clause disappear. In this issue, let us consider a timely reminder of this in the Delhi High Court’s decision in Engineering Development Corporation v MCD.
Arbitration agreements allow parties to settle their contractual disputes outside the public glare of the courts. However, as an arbitration agreement takes away the jurisdiction of the courts, the courts are really careful when giving effect to an arbitration agreement. When a party relies on an arbitration agreement, it is important that they fully understand the procedure that must be followed to commence the arbitration successfully. Failure to follow the procedure can leave parties exposed to challenges in relation to the arbitrator’s jurisdiction.
The recent case of Engineering Development Corporation and the Municipal Corporation of Delhi (451-2008, Delhi High Court) highlights what can go wrong when a party fails to follow the procedures in the arbitration agreement.

The facts
The Municipal Corporation of Delhi (‘MCD’) issued tender documents for the construction of storm water and waste drains in Devli Village, Delhi. The Engineering Development Corporation (‘EDC’) was awarded the contract via a work order with a request to enter into a formal agreement within seven days of receipt of the work order.
No formal agreement was entered into and commencement of the works by EDC was initially delayed due to a stay granted by the High Court in relation to separate litigation. When the MCD finally instructed EDC to commence work on the site, EDC informed MCD that as a result of delay in commencing the works, the time period for the works had expired. Additionally EDC had suffered losses as a result of the delay. Consequently, EDC issued a request for arbitration against MCD and, when MCD failed to respond, it filed a request before the Delhi High Court for appointment of an arbitrator under section 11 of the Arbitration and Conciliation Act 1996 (the ‘Act’).

The issues
MCD contended that the request to appoint an arbitrator under the Act was not maintainable as there was no valid arbitration agreement between the parties given that EDC had not signed the formal contract, and, if there was an arbitration agreement, the procedure under the arbitration agreement had not been followed by EDC. EDC argued that the tender documents contained a valid arbitration agreement between the parties. It is not clear from the Court’s decision what EDC’s response was in relation to the breach of the procedure for commencing an arbitration.
The Court found that there was a valid arbitration agreement but that EDC had not followed the procedure set out in the agreement, the consequence of which was that it could not invoke arbitration and the dispute would have to be submitted to the Court for determination. The Court would not appoint an arbitration under section 11 of the Act.

Reasoning
With reference to the ruling in UNISSI (India) Pvt. Limited v Post Graduate Institute of Medical Education and Research (2009) 1 SCC 107, the High Court ruled that an arbitration agreement existed between the parties by way of inclusion in the tender documents which EDC had accepted. It did not matter that a formal contract had not been signed. Readers should not assume that this will always be true; it appears that the particular tender process and arbitration clause had been the subject of a previous court decision and accordingly it was easier for the Court to follow that decision. If you want to be sure that you have an arbitration clause, its best to incorporate it into a signed agreement at the outset.
The Court then proceeded to examine the arbitration clause and concluded that a successful arbitration could only commence when the party referring the dispute had clearly complied with all the specific procedures stipulated in the agreement. The arbitration clause in question required the party invoking the arbitration to clearly list the matters in dispute and the value of each claim when submitting the notice to appoint an arbitrator. Also, the arbitration could only be a person appointed by the Commissioner of MCD (as stated in the clause). Unfortunately for EDC, it had agreed to an arbitration clause in which the arbitrator would have to be appointed by the very body with which it was in dispute! That did not happen and, as a result, the Court held that EDC’s relief was to bring the dispute to the court. It could not apply to the Court for appointment of an arbitrator because the clause did not contemplate that process.

Lessons to be learnt
First, think carefully when drafting your arbitration clause. Don’t allow a party to back you into a corner where you end up with a restrictive and unworkable arbitration clause that you may have trouble relying upon. In this case, the fact that the arbitrator could only be appointed by the other contracting party put EDC at a significant disadvantage and it effectively lost its right to arbitrate as a result of MCD’s inaction.
Secondly, don’t forget to read, understand and comply with your arbitration agreement. Make sure you know how to successfully commence your arbitration. It is common place in today’s litigious markets, especially where large construction contracts are concerned, for parties to negotiate multi-tier dispute resolution procedures. This means parties will have to comply with three or four stages of dispute resolution before they can proceed with arbitration. It is therefore fundamental that all these stages are followed to allow a dispute to formally crystallise and operate successfully.

Shourav Lahiri is a Partner in the international law firm Pinsent Masons LLP. He wishes to thank Ms Helen Turner of Pinsent Masons LLP for her assistance with this article. The author can be reached at shourav.lahiri@pinsentmasons.com. Pinsent Masons LLP has been selected as the Global Construction Law Firm of the Year 2009 by Who’s Who Legal and as one of the Top 10 international firms doing India work by the India Business Law Journal in 2009.