Supreme Court: In a petition filed under Section 11(6) of the Arbitration and Conciliation Act, 1996, (‘the Act 1996’), filed at the instance of a company based in Switzerland and engaged in the business of manufacturing of arms etc., praying for appointment of an arbitrator for the adjudication of disputes and claims arising out of the Contract dated 27-03-2012 executed with the Government of India in its Ministry of Defence, the Division Bench of Dr. DY Chandrachud, CJI and J.B. Pardiwala, J. rejected the petition and held that the claim in the petition is a barred claim as the petitioner by its conduct slept over its right for more than five years.
Issue: Whether time-barred claims or claims which are barred by limitation, said to be live claims, which can be referred to arbitration?
The Court took note of Section 11 of the Act 1996 that provides for the appointment of arbitrators and said that no time limit has been prescribed for filing an application under Section 11(6) of the Act, 1996 for the appointment of an arbitrator. Further, it noted that Section 43 of the Act 1996 provides that the Limitation Act, 1963 would apply to arbitrations as it applies to the proceedings in Court.
The Court said that, since a petition under Section 11(6) of the Act 1996 seeking appointment of Arbitral Tribunal is required to be filed before the High Court or the Supreme Court, Article 137 of the Schedule to the Act 1963 would apply. Further, after a plain reading of the aforesaid Article, the Court said that the period of limitation in cases covered by Article 137 is three years, and the said period would begin to run when the right to apply accrues.
After taking note of Merla Ramanna v. Nallaparaju, (1955) 2 SCR 938 the Court said that the starting point of limitation under Article 137 is the date when ‘the right to apply arises’. This being a residuary Article to be adopted to different classes of applications, the expression ‘the right to apply’ is an expression of a broad common law principle and should be interpreted according to the circumstances of each case. ‘The right to apply’ has been interpreted to mean ‘the right to apply first arises’.
The Court also referred to Section 9 of the Act 1963, which states that where once time has begun to run, no subsequent disability or inability to institute a suit or make an application stops it.
The Bench laid down three principles of law that are discernible from Major (Retd.) Inder Singh Rekhi v. Delhi Development Authority, (1988) 2 SCC 338
- First, ordinarily on the completion of the work, the right to receive the payment begins.
- Secondly, a dispute arises when there is a claim on one side and its denial/repudiation by the other.
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Thirdly, a person cannot postpone the accrual of cause of action by repeatedly writing letters or sending reminders. Thus, ‘bilateral discussions’ for an indefinite period would not save the situation so far as the accrual of cause of action and the right to apply for appointment of arbitrator is concerned.
After examining various decisions, the Court said that it is important for the Court to 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 for arbitration.
After placing reliance on BSNL v. Nortel Networks (India) (P) Ltd., (2021) 5 SCC 738 wherein it was observed there is vacuum in the law to provide a period of limitation under Section 11 of the Act 1996 the Courts have taken recourse to the position that the limitation period would be governed by Article 137 of the Limitation Act, 1963 which provides a period of three years from the date when the right to apply accrues. The Court said that, in this case it was considered necessary for the Parliament to affect an amendment to Section 11 of the Act 1996, prescribing a specific period of limitation within which a party may move the court for making an application for appointment of arbitrators under Section 11 of the Act.
The Court, after examining the aforesaid decisions, concluded that there is a fine distinction between the plea that the claims raised are barred by limitation and the plea that the application for appointment of an arbitrator is barred by limitation.
Further, the Bench said that the cause of action becomes important for the purposes of calculating the limitation period for bringing an action. It is imperative that a party realises when a cause of action arises. If a party simply delays sending a notice seeking reference under the Act 1996 because they are unclear of when the cause of action arose, the claim can become time-barred even before the party realises the same.
The Court said that whether any particular facts constitute a cause of action has to be determined with reference to the facts of each case and with reference to the substance, rather than the form of the action. If an infringement of a right happens at a particular time, the whole cause of action will be said to have arisen then and there. In such a case, it is not open to a party to sit tight and not to file an application for settlement of dispute of his right, which had been infringed, within the time provided by the Limitation Act, and, allow his right to be extinguished by lapse of time, and thereafter, to wait for another cause of action and then file an application under Section 11 of the Act 1996 for establishment of his right which was not then alive, and, which had been long extinguished. In such a case, such an application would mean an application for revival of a right, which had long been extinguished under the Act 1963 and is, therefore, dead for all purposes. Such proceedings would not be maintainable and would obviously be met by the plea of limitation under Article 137 of the Act 1963.
Further, the Court stated that in the present case , when the bank guarantee came to be encashed in 2016 and the requisite amount stood transferred to the Government account, that was the end of the matter. This “Breaking Point” should be treated as the date at which the cause of action arose for the purpose of limitation.
It also said that negotiations may continue even for a period of ten years or twenty years after the cause of action had arisen. Mere negotiations will not postpone the cause of action for the purpose of limitation. The Legislature has prescribed a limit of three years for the enforcement of a claim and this statutory time period cannot be defeated on the ground that the parties were negotiating.
Thus, the Court, while rejecting the petition, held that the case at hand is clearly and undoubtedly one of a hopelessly barred claim, as the petitioner by its conduct slept over its right for more than five years.
Also read: Exploring Arbitration Claims through the Lens of Law of Limitation: A comprehensive analysis
[B & T AG v. Ministry of Defence, 2023 SCC OnLine SC 657, decided on 18-05-2023]
*Judgment Authored by: Justice J.B. Pardiwala