Supreme Court of India: When Does an Arbitration Claim Is Barred by Limitation for Seeking Appointment of Arbitrator by Court

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In Geo Miller & Co. Pvt. Ltd. v. Chairman, Rajasthan Vidyut Utpadan Nigam Ltd. 2019 (11) SCALE 764, the Three Judge Bench of the Supreme Court of India addressed some pertinent questions in respect of limitation period to invoke arbitration such as what is the applicable limitation period for making reference of a dispute to arbitration or for seeking appointment of arbitrator by Court under the Arbitration Act, 1940 (the ‘Old Act’) and the Arbitration & Conciliation Act, 1996 (the ‘New Act’)? For the purpose of computing the limitation period in such case, from when does the cause of action of arbitration shall be deemed to have arisen? Whether the period during which the parties were bona fide negotiating towards amicable settlement may be excluded for the purpose of computing the period of limitation for reference to arbitration? The Court’s reasoning and conclusions in response to these issues are analyzed in brief below:-

Factual Matrix

Geo Miller (‘Geo’) filed applications under Section 11(6) of the New Act before the High Court seeking appointment of arbitrator for adjudication of the disputes between the Rajasthan Vidyut Utpadan Nigam Ltd. (‘RVUNL’) and itself. These applications were rejected by the High Court which held that Geo had raised its final bill against RVUNL in 1983 but failed to take any steps since then including invocation of arbitration and instead requested appointment of arbitrator as late as in 2002. Thus, the High Court found that the applications are hopelessly barred by limitation and Geo had failed to make out any case of hardship or injustice justifying the condonation of delay in triggering the arbitration so lately in time. The High Court also observed that the arbitration clause stipulates the arbitration to be conducted as per the Old Act and therefore, Geo cannot seek appointment of arbitrator under Section 11(6) of the New Act. The decision of the High Court was impugned before the Supreme Court in the present proceedings.

Geo’s Contentions

Geo contended as under:-

  • That the cause of action arose not in 1983 but in 1999 when RVUNL had repudiated its claim;
  • The period prior to 1999 cannot be taken into consideration to compute limitation since during that period parties were under negotiations.

Issues before the Supreme Court

The issues before the Court were as under:-

  1. If the arbitration clause contemplates arbitration under the Old Act, then can the New Act applied for invoking arbitration?
  2. What will be the applicable limitation period for reference of a dispute to arbitration or for seeking appointment of arbitrator by Court?
  3. For the purpose of computing the limitation period, from when does the cause of action deem to have arisen i.e. is it from the date on which the final bill was raised by the party seeking appointment of arbitrator ? or is it from the date on which the other party denies its liability to pay under such final bill? or what if the party to whom the final bill is raised fails to finalise such bills at all?
  4. Whether the period during which the parties were bona fide negotiating towards amicable settlement may be excluded for the purpose of computing the period of limitation for reference to arbitration?

Reasoning

Issue 1

On Issue 1 the Court observed

  • That for determining which Act will be applicable, it is essential to consider following two variables:-
    • Commencement date of arbitration proceedings (Section 21 of the New Act); and
    • Repeal and saving provision of New Act (Section 85 of the New Act)
  • Upon a co-joint reading of the above-mentioned provisions, it is settled that the date of commencement of arbitration proceedings shall be the date on which the notice was served to the other party requesting appointment of an arbitrator for the purpose of deciding which Act will apply to the arbitration proceedings. [Milkfood Ltd. v GMC Ice Cream (P) Ltd. (2004) 7 SCC 288, Shetty’s Constructions Co. Pvt. Ltd. v Konkan Railway Construction and Anr. (1998) 5 SCC 599]
  • Thus, if the notice was served on or after 25.01.1996 (i.e. when the New Act came into force for all practical purposes), the New Act will apply to the arbitral proceedings even if the arbitral clause contemplates proceedings under the Old Act. [Fuerst Day Lawson Ltd. v. Jindal Exports Ltd. (2001) 6 SCC 356]

Issue 2

On Issue 2 the Court observed

  • The provisions dealing with limitation under the Old Act (Section 37) and the New Act (Section 43) are pari materia which inter alia provides that the Limitation Act, 1963 of India applies to arbitrations as it applies to proceedings in Court. In addition, the provision also provides that the Court may, as the justice require, condone the delay caused in triggering arbitration agreement within the time stipulated in the arbitration clause, if any, if in the circumstances of the case, undue hardship would be caused to the party seeking such condonation of delay;
  • It is well settled that by virtue of Article 137 of the First Schedule to the Limitation Act, 1963 of India, the limitation period for reference of a dispute to arbitration or for seeking appointment of an arbitrator before a Court under the Old Act as well as the New Act is 3 years from the date on which the cause of action or the claim which is sought to be arbitrated first arises. [State of Orissa v Damodar Das (1996) 2 SCC 216, Grasim Industries Limited v. State of Kerala (2018) 14 SCC 265]
  • Same principles continue to apply with respect to the applicability of the law of limitation to an application under Section 11(6) of the New Act as laid down in the judicial precedents decided under the Old Act.

Issue 3

On Issue 3 the Court observed

  • The existence of a dispute is essential for appointment of an arbitrator. A dispute arises when a claim is asserted by one party and denied by other. The term ‘dispute’ entails a positive element and mere inaction to pay does not lead to the inference that dispute exists.
  • However, if a party fails to finalize the bills due to the party seeking appointment of arbitrator, the cause of action would be treated as arising not from the date on which the payment became due, but on the date when such applicant party first wrote to such resisting party requesting finalization of bills. Nonetheless, a party cannot postpone the accrual of cause of action by writing reminders or sending reminders. [Major (Retd.) Inder Singh Rekhi v Delhi Development Authority (1988) 2 SCC 338]

Issue 4

On Issue 4 the Court observed

  • In case of family disputes, when the settlement talks were taking place, the period of limitation would commence from the date of the last communication between the parties. However, such a settlement is to be treated differently from a formal commercial settlement since Courts should usually make efforts to promote family settlements without the obstruction of technicalities of limitation, etc. [Hari Shankar Singhania and others v. Gaur Hari Singhania and Ors. (2006) 4 SCC 658]
  • In a mercantile dispute, the Court may exclude such period of negotiation for the purpose of computing the period of limitation for reference to arbitration, considering the complete history of negotiation between the parties. However, in such cases the entire negotiation history between the parties must be specifically pleaded and placed on the record.
  • The court on careful consideration of such history must find out what was the ‘breaking point’ at which any reasonable party would have abandoned efforts at arriving at a settlement and contemplated referral of the dispute to arbitration. This ‘breaking point’ would then be treated as the date on which the cause of action arises, for the purpose of limitation.
  • In commercial disputes, while mere failure to pay may not give rise to a cause of action, once the applicant has asserted their claim and the Respondent fails to respond to such claim, such failure will be treated as a denial of the Applicant’s claim giving rise to the cause of action for reference to arbitration and it does not lie to the Applicant to plead that he waited for an unreasonably long period to refer the dispute to arbitration merely on account of the Respondent’s failure to settle their claim and because they were writing representations and reminders to the Respondent in the meanwhile.

Judgement

On Issue 1

  • In the present case, since the notice to invoke arbitration was served in 2002, the Court held that the New Act will be deemed to apply to the arbitration proceedings;

On Issue 2

  • Geo’s cause of action in respect of arbitration applications arose in 1983 and mere correspondence of Geo by way of writing letters/reminders to RVUNL subsequent to 1983 would not extend the time of limitation. Hence Geo’s claim is barred by limitation.

On Issue 3

  • Geo had itself handed over the final bill to RVUNL in 1983 therefore, the right to apply for appointment of arbitrator accrued from that year. Hence the maximum period during which the Court could have allowed Geo’s application for appointment of arbitrator is 3 years from 1983 i.e. till 1986 [Union of India v Momin Construction Company (1997) 9 SCC 97]

On Issue 4

  • Geo vaguely stated that it was involved in ‘negotiations’ with the Respondent, but it has not placed any evidence to show when it had first made a representation to RVUNL in respect of the outstanding amount and what was the history of negotiations. Thus, an adverse inference of mala fide is drawn against Geo under Section 114(g) of the Indian Evidence Act, 1872.

Thus, the Court concluded that Geo’s own default in sleeping over its right for 14 years will not constitute a case of ‘undue hardship’ justifying extension of time or show ‘sufficient cause’ for condonation of delay. The Court further observed that Geo should have approached the Court for appointment of an arbitrator within appropriate limitation period. Hence, the Court upheld the decision of the High Court.

Disclaimer: The views expressed on this post are mine and do not reflect the views of the organisation(s) I am engaged with

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