Multi-Tier and Pathological Arbitration Clauses

A multi-tier clause requires the parties to pass through one or more stages before arbitration may be invoked, typically negotiation between named officers followed by mediation. A pathological clause is one drafted so badly that it is difficult or impossible to operate. The two problems are distinct but meet in practice, because a poorly drafted escalation clause is the commonest pathology of all. The law's approach is settled in outline: pre-arbitral steps agreed by the parties are to be complied with, and a defective clause is to be saved wherever an intention to arbitrate can be found.

1. Multi-Tier Clauses

The commercial purpose of a tiered clause is to force the parties to talk before they fight, and to place the conversation at a level senior enough for a commercial decision to be taken. A typical clause requires written notice of the dispute, then a meeting between designated officers within a stated period, then mediation under named rules, and only on failure of those steps a reference to arbitration.

The tiers, and the defects that most often make a clause unworkable

1.1 Are the earlier tiers binding?

Yes, as a matter of contract. The parties have agreed on the route to arbitration, and a party cannot ordinarily insist on the last tier while ignoring the first. The Supreme Court has treated pre-arbitral requirements as conditions to be complied with as written where the clause is clear.

📖 Oriental Insurance Co. Ltd. v. Narbheram Power and Steel (P) Ltd., (2018) 6 SCC 534

Held: An arbitration clause is to be construed strictly, and effect must be given to the conditions on which the parties have agreed to arbitrate. Where a clause in a policy provided for arbitration only of disputes about the quantum of a claim, and expressly excluded arbitration where liability was disputed or denied by the insurer, no reference could be made once liability had been repudiated.

Significance: The decision is the leading modern statement that the conditions attached to an arbitration clause form part of the bargain and cannot be read out of it.

1.2 When may a tier be passed over?

Compliance is not insisted on where it would be an empty formality. In Demerara Distilleries (P) Ltd. v. Demerara Distillers Ltd., (2015) 13 SCC 610 the Supreme Court held that where the correspondence between the parties showed that mutual discussion and conciliation, which the clause required before arbitration, would be an empty formality given the entrenched positions, the requirement need not delay the appointment of an arbitrator. The principle is not an escape from the clause but a recognition that the clause serves a purpose; where the purpose cannot be served, insistence on the form is a device for delay.

No period fixed. Where the clause fixes no time for the earlier tier, a reasonable time is read into it; a party cannot obstruct the reference indefinitely by declining to conclude the negotiation.
Refusal to participate. Where the party relying on the tier is itself the one that failed to attend or respond, it cannot rely on non-compliance.
Limitation. A tier that would exhaust the period of limitation cannot be allowed to defeat the claim; a party facing that position should invoke arbitration and, where mediation under the Mediation Act, 2023 has been undertaken, rely on Section 24 of that Act, which excludes the period spent in computing limitation.
Urgent relief. The existence of a tier does not prevent an application for interim measures under Section 9, which may be made before the commencement of arbitral proceedings.

⚠ Who decides whether the tier was complied with

After the amendment of 2015 and the decision in Vidya Drolia v. Durga Trading Corporation, (2021) 2 SCC 1, the court at the stage of Section 8 or Section 11 examines only the prima facie existence of an arbitration agreement. Whether a pre-arbitral condition has been satisfied is ordinarily a question of fact for the arbitral tribunal under Section 16. The court will refuse a reference on this ground only where non-compliance is apparent and the clause makes compliance a clear condition precedent.

1.3 Drafting a workable tier

State each step separately and in order, and identify who must act at each step.
Fix a definite period for each step, running from a defined trigger such as a written notice of dispute.
Provide expressly that on the expiry of that period, with or without a meeting, the next step may be invoked.
Preserve the right to seek interim relief from a court or an emergency arbitrator notwithstanding the earlier tiers.
Avoid making the earlier step a condition precedent unless that is genuinely intended, since the words condition precedent will be given effect.

2. Pathological Clauses

The expression describes a clause that suffers from a defect capable of disrupting the smooth progress of the arbitration. The defects fall into a small number of recurring types.

Type	Example	How it is treated
Permissive wording	Disputes may, if the parties so desire, be referred to arbitration	Not an arbitration agreement at all; a fresh consent is required, following Jagdish Chander v. Ramesh Chander, (2007) 5 SCC 719
Misdescribed or non-existent institution	Arbitration under the rules of a body that does not exist or has been renamed	Saved where the institution can be identified with reasonable certainty; otherwise the reference proceeds ad hoc with appointment under Section 11
Unworkable appointment machinery	Each party to appoint one arbitrator, with no provision for the third; or appointment by an officer now ineligible	Section 11 supplies the machinery where the agreed procedure fails; a clause giving one party control of the appointment is invalid
Conflicting clauses	An arbitration clause and a clause conferring exclusive jurisdiction on a named court	Ordinarily reconciled by reading the jurisdiction clause as identifying the supervisory court at the seat
Uncertain scope	Only certain unspecified disputes referred, or two inconsistent descriptions of the disputes covered	A question of construction for the tribunal under Section 16
Optional or unilateral clauses	One party alone may elect between arbitration and litigation	Open to challenge for want of mutuality and for the same reasons that invalidate one-sided appointment procedures

3. The Approach of the Courts

📖 Enercon (India) Ltd. v. Enercon GmbH, (2014) 5 SCC 1

Held: A pragmatic rather than a technical approach is to be taken to an arbitration agreement. Courts should apply the principle of validation, giving effect to the intention of the parties to arbitrate wherever such an intention can be discerned, and should not render a clause unworkable where a workable construction is available. Where the clause provided for each party to nominate an arbitrator and for the two nominees to act with a third, the omission to provide for the appointment of the third did not make the clause unworkable.

Significance: This is the leading statement of the validation principle in Indian arbitration law, and it is the answer to most arguments that a clause is too defective to operate.

Three propositions follow from the cases. Where the intention to arbitrate is clear, defects of machinery are cured by the Act itself, principally by Sections 10, 11 and 20, which supply the number of arbitrators, the appointment and the place. Where the defect goes to intention, no amount of construction will save the clause, which is why permissive wording is fatal. And where a clause attaches conditions to the right to arbitrate, those conditions are part of the bargain and will be enforced as written, which is the lesson of the insurance cases.

4. A Checklist for a Clause that Works

Mandatory wording, covering all disputes arising out of or in connection with the contract.
The seat named expressly, and the venue separately if hearings are to be held elsewhere.
The number of arbitrators and a workable appointment mechanism that gives neither party control.
The institution, if any, named accurately, with its rules adopted by reference.
The language of the proceedings, and the governing law of the contract.
Any pre-arbitral tiers stated with definite periods and an express right to move on when they expire.
An express preservation of the right to interim relief under Section 9 or from an emergency arbitrator.

5. Related Topics and Provisions

Topic or provision	Connection
Form and Validity of the Arbitration Agreement	The writing requirement and the tests of validity
The Arbitration Agreement and Reference: Sections 7 and 8	The consolidated treatment of the agreement
Sections 10, 11, 16 and 20, A&C Act, 1996	Number of arbitrators, appointment, jurisdiction and place
Section 9, A&C Act, 1996	Interim measures notwithstanding pre-arbitral tiers
Section 24, Mediation Act, 2023	Exclusion of the mediation period in computing limitation