Pre-Arbitration Procedure in Nepal: Are Clauses Without a Timeline and Procedure Binding
Keywords: ‘Pre-Arbitration Clause’, ‘Nepal’, ‘Vague Clauses’
Multi-tiered dispute resolution clauses are becoming ubiquitous across all contracts. These clauses tend to provide parties with the opportunity of resolving the dispute amicably before resorting to arbitration. These clauses ensure parties commercial relationship are not disrupted amid the dispute and is based on the understanding that parties are cognizant of the disagreement that can arise and will act in good faith to resolve it. The types of these clauses also differ as per the industry and the complexity of the transactions. The clauses range from simple clauses which require parties to negotiate for amicable settlement to complex clauses which requires a third-party administered mediation and conciliation or expert determination and which prescribe detailed procedural guideline for resolving such dispute like rounds of negotiation, minimum timeline, responsible participants and so on. With the increase of cross-border contracts where the party will have to enforce the award in the counterparty’s jurisdiction, the parties are also factoring the laws of the enforcing country to ensure enforceability of these clauses. There have been significant discussions in academia on the importance of laying clear timelines and procedures for an enforceable pre-arbitral procedure. Klaus maintains that leaving the specific requirement of pre-arbitration procedure to be agreed upon after the occurrence of a dispute can be problematic. [1] Similarly, Courts of Singapore, [2] the United Kingdom, [3] Australia [4] have stressed upon the salience of specificity and clear construction of pre-arbitration clauses for them to be enforceable. Nepalese courts, like courts of jurisdictions, have encountered similar issues while evaluating pre-arbitral procedure that lacks a clear timeline as well as procedure.
In the case of National Construction Company Limited v. Appellate Court and others, [5] an agreement was concluded between National Construction Company (Applicant in the case) and Friend Construction Private Limited (Respondent in the case) for the construction of an indoor building of the zonal hospital. However, construction was not completed within the agreed time. After the final payment was issued by the Applicant, the Respondent, in this case, claimed additional payment for the work completed after the time period originally agreed upon. The Applicant refused the monetary claims of the Respondent.
Clause 51(1) of the agreement between the parties provided that in case of any dispute, parties should submit the case before an engineer. The agreement further provided that if the engineer does not issue any decision or if the parties were dissatisfied with such a decision, then the dissatisfied party could file an application before the Appellate Court. The Nepalese Supreme Court deemed Clause 51(1) as a pre-condition for arbitration and emphasized its mandatory nature. Therefore, the Nepalese Supreme Court held that the decision rendered by the Appellate Court without examining whether the Respondent had fulfilled all the conditions pursuant to the agreement be declared void by the order of certiorari.
Similarly, the Nepalese Supreme Court had the opportunity to examine the procedural compliance by parties for the enforcement of an award rendered in Korea in Hanil Engineering Construction Co. Ltd v. Appellate Court, Patan and others. [6] The agreement between the parties provided that in case of a dispute, the parties must attempt amicable settlement before proceeding to arbitration. The Nepalese Supreme Court held that the same was not complied with.
The Court held that the arbitral tribunal would have to enquire as to whether attempts to amicably settle the dispute were made, and only proceed with the arbitral proceedings after satisfaction of the pre-condition. The Court further adjudged that there was no attempt to settle the dispute amicably by Hanil Engineering. Since the pre-condition had not been fulfilled and the award was rendered, the Court found that the arbitral tribunal did not adhere to the procedure as per the agreement between parties. Accordingly, the Court considered this failure as one of the factors for refusing the enforcement of the foreign awards under Article V.1.b and Article V.1.d of the New York Convention.
The Damodar Case: A Lost Opportunity?
In Ministry of Finance v. Damodar Ropeway and Construction Limited (the “Damodar Case”) [7] a guarantee contract was concluded between the Nepal Government (Applicant) and the construction company Damodar Ropeways and Construction Limited (Respondent), guaranteeing the performance of the contractor by the Ministry of Finance, Nepal Government. The Respondent had sought for appeal of the award contesting that there was an error in the application of law and evaluation of evidence and that the requisite process under the contract agreed between parties was not complied with. This requirement of honoring the procedure agreed between parties was also provided in section 17 of the Arbitration Act 1999. Thus, this provided the Nepalese Supreme Court with authority to evaluate whether High Court had erred in the application of law and examination of evidence. The Nepalese Supreme Court avoided deliberation on the fulfillment of the pre-arbitral procedure under the guarantee contract. Instead, the court quashed the arbitral award holding it was contrary to facts and evidence.
In this case, the Nepalese Supreme Court failed to utilize the opportunity to clarify requirements that were necessary for the successful invocation of the pre-arbitral procedure. The arbitral tribunal in the case stated that the requirements of an amicable settlement had been met, which was vehemently disputed by the Respondent. This created a dispute regarding the exhaustion of pre-arbitral procedures in a scenario where there was no clarity regarding the timeline and procedure. Therefore, the Nepalese Supreme Court had an opportunity to flesh out in detail the nuances of such obligations when the pre-arbitral procedure is not lucid in terms of timeline and procedure. Nepalese Supreme Court, like in the Indian case of Swiss Timing Ltd. v. Commonwealth Games 2010 Organizing Committee, [8]could have identified whether there was material correspondence, frequency, and the qualitative nature of negotiation before adjudicating whether the parties had exhausted pre-arbitral procedure. However, the Nepalese Supreme Court proceeded to assume the validity of pre-arbitration clauses without delving into the merit and conduct of the parties.
The English Precedents and Vague Pre-arbitration Procedure
The issue of vague pre-arbitration procedures and their validity has been addressed in some judgments of the common law courts. In Fluor Enters v. Solutia, [9] the Court in the context of an agreement with options of mediation held that obligations to negotiate can be enforced if there are clear and mandatory procedures to this end. Following the same vein, in Wah v. Thornton, [10] the English Court laid down a three-pronged test for enforceable pre-arbitral procedures, requiring: (a) a sufficiently certain and unequivocal commitment to commence a process; (b) from which may be discerned, what steps each party is required to take to put the process in place; and which is (c) sufficiently and clearly defined to enable the court to determine objectively (i) what is the minimum requirement of participation in the procedure by parties to the dispute and (ii) when or how the process will be exhausted or properly terminable without breach. The test proposed in this case provides parties with certainty regarding their scope of obligations and temporal point of exhaustion of these obligations.
The Way Forward
The Supreme Court of Nepal has identified the mandatory nature of the pre-arbitral procedure and has accordingly invalidated the domestic awards and refused enforcement of foreign arbitral awards. The approach of the Nepalese Supreme Court in identifying pre-arbitral procedure as mandatory obligations is similar to the approach of the Singapore Court in International Research Corp PLC v. Lufthansa Systems Asia Pacific Pte Ltd and another, [11] and the Pakistani Supreme Court in Board of Intermediate and Secondary Education, Multan v. Fine Star & Company, Engineers and Contractor. [12] However, in the Damodar case, the court lost the opportunity to flesh out the specificity of these obligations under Nepalese law.
The Nepalese Supreme Court has frequently and heavily relied on English case laws while reaching its decision in the past. For example, in Pradipraj Pandey v. Karmalaxmi Kanshakar[13] Nepalese Supreme court could have referred to the jurisprudence of the English courts, specifically that of Wah v. Thorton. As such, there is likely to be future contentions for resolution of the Nepalese courts due to existing dispute resolution provisions in certain legal instruments like the Railway Service Agreement between Nepal and India, the bilateral investment treaties entered by Nepal with Germany and the United Kingdom which merely provide disputes to be settled amicably without providing clear standards and timeline against which the fulfillment can be measured. While certain investment tribunals have held the pre-arbitration procedure as mandatory [14] several other decisions have reached the contrary outcome, holding the clauses providing for negotiation as being merely directory and procedural in nature, thus subjecting such vague clauses to varying interpretation from tribunals. [15] Therefore, the issue regarding the temporal point of exhaustion of pre-arbitral procedure under certain pre-arbitral procedure prescribed in Nepal and under investment treaties entered by Nepal is far from settled.
The Nepalese Supreme Court is likely to deal with these types of clauses in its future judgments and it behooves upon them to set out clear criteria for clauses without the timeline and procedure so that the responsibility of the parties for the pre-arbitral procedure are identifiable and determinable. It is also understood that Nepal has released the draft model investment treaty. The draft to be adopted should also clearly lay down the timeline and procedure, to ensure they are binding in nature, thus leaving few grounds for varying interpretation. The certainty of pre-arbitration procedure under contract and law would ensure that the parties would not be obliged to pursue a futile remedy, thereby saving unreasonable costs and efforts. Further, the ambiguity of these clauses should not act as a bar to the innocent party resorting to arbitration. The snow must thaw, and it should thaw sooner than later.
ENDNOTES
[1] Klaus Peter Berger, ‘Law and Practice of Escalation Clauses’ [2014] Arbitration International 1, 9.
[2] International Research Corp PLC v. Lufthansa Systems Asia Pacific Pte Ltd and another [2013] SGCA 55.
[3] Wah v. Thornton [2012] EWHC 3198 (Ch).
[4] Elizabeth Bay Developments Pty Ltd v. Boral Building Services Pty Ltd [1995] 36 NSWLR 709.
[5] National Construction Company Limited v. Appellate Court and others,N.K.P 2065 BS. (2008 AD.), Volume 2, Decision Number 7933.
[7] Ministry of Finance v. Damodar Ropeway and Construction Limited, N.K.P 2067 BS. (2010 AD.), Volume 5, Decision Number 8368.
[8] Swiss Timing Ltd. v. Commonwealth Games 2010 Organizing Committee [(2014) 6 SCC 677]; See also Visa International Limited v. Continental Resources (USA) Ltd. [(2009) 2 SCC 55].
[9] Fluor Enters v. Solutia [2001] 147 F. Supp 147 F Supp 2d. 648 (S.D. Tex.).
[10] Wah (n 3).
[11] International Research Corp PLC (n 2).
[13] Pradipraj Pandey v. Karmalaxmi Kanshakar, N.K.P 2071 BS (2015 AD.), Volume 3, Decision Number 9368.
[14] Hochtief AG v. Argentine Republic (24 October 2011) ICSID Case No ARB/07/31, Decision on Jurisdiction [55]; see also, Tulip Real Estate Inv & Dev Netherlands BV v Repub of Turkey (5 March 2013) ICSID Case No ARB/11/28, Decision on Bifurcated Jurisdictional Issue [71]; Gary Born and Marija Šćekić, ‘Pre-Arbitration Procedural Requirements: A Dismal Swamp’ in David Caron and others (eds), Practising Virtue Inside International Arbitration (Oxford University Press 2015) 227.
[15] Société Générale de Surveillance SA v Islamic Republic of Pakistan (6 August 2003) ICSID Case No. ARB/01/13, Decision of the Tribunal on Objections to Jurisdiction [184] – An excerpt of the Decision read ‘Tribunals have generally tended to treat consultation periods as directory and procedural rather than as mandatory and jurisdictional in nature.’.
Sameep Khanal is currently an associate at Pioneer Law Associates. His areas of specialization include Project Finance Law, Insolvency Law, and Arbitration law.
The views and opinions expressed in the article are those of the author(s) solely and do not reflect the official position of the institution(s) with which the author(s) is /are affiliated. Further, the statements of the author(s) produced herein should not be construed as legal advice.
