Supreme Court: Mere Negotiations Does Not Postpone Cause of Action for the Purpose of Limitation

Supreme Court: Mere Negotiations Does Not Postpone Cause of Action for the Purpose of Limitation

The Supreme Court coram comprising of Chief Justice Dhananjaya Y. Chandrachud and Justice J.B. Pardiwala while adjudicating an arbitration petition under Section 11(6) of the Arbitration and Conciliation Act, 1996 filed by a Switzerland-based company, observed that, mere negotiations does not postpone the of ‘cause 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.

The brief background of the case was that the petitioner had prayed for an appointment of an arbitrator for the adjudication of disputes and claims arising out of the Contract executed with the respondent- Government of India in its Ministry of Defense.

The Defense Ministry floated an urgent tender for procurement of 1,568 Sub Machine Guns under a Fast Track Procedure. The petitioner participated in the tender process and offered its bid which was declared to be the lowest acceptable bidder. After due negotiations, the Contract was executed and signed on 27 March, 2012.

The dispute between the parties arose in relation to the alleged wrongful encashment of warranty bond by the respondent. The respondent on 26 September, 2016 dedicated the amount for recovery of applicable Liquidated Damages (‘LDs’), an amount which was consequently credited into the Government Account as per the instructions contained in the letter dated 11 August, 2016 issued on behalf of the President of India. Accordingly, the claims of the Petitioner stood rejected.

The parties continued to engage in ‘bilateral discussions’ with a view to explore the possibility of resolving the dispute. The respondent vide its letter dated 22 September, 2017 informed the petitioner, that all actions taken by the respondent were in accordance with the terms of the Contract, and that the petitioner was given sufficient opportunity to present its case.

The petitioner claimed that after the letter dated 22 September, 2017 was issued, the parties remained in constant communication with each other, to negotiate and resolve the dispute. Nonetheless, the petitioner vide letter dated 4 September, 2019, requested the respondent to review and discuss the wrongful imposition of LDS and give a fair chance to the petitioner to present its case.

The only question that fell for reconsideration before the Court was whether time-barred claims or claims which are barred by limitation, could be said to be live claims, which can be referred to arbitration?

At the outset the Court referred to the provisions of Arbitration and Conciliation Act, 1996 (in short Arbitration Act), which specifies that no time limit had been prescribed for filing application under Section 11 (6) of the Arbitration Act for appointment of an arbitrator. Further, Section 43 of the Arbitration Act provided that the Limitation Act, 1963 would apply to arbitrations as it applies to the proceedings in Court.

The Bench stated that since the petition under Section 11(6) of the Arbitration Act sought appointment of Arbitral Tribunal which was required to be filed before the High Court or the Supreme Court, Article 137 of the Schedule to the Arbitration Act would apply which indicates that the period of limitation in cases covered by Article 137 was three years and the said period would begin to run when the right to apply accrues.

Further, the Court appositely stated that 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 and thirdly, a person cannot postpone the accrual of cause of action by repeatedly writing letters or sending reminders.

“In other words, ‘bilateral discussions’ for an indefinite period of time 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,” the bench observed.

The Bench asserted 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.

Averting to the present case, the bench noted that the LD were deducted by encashment of bank guarantee. This was a positive action on the part of the respondent, crystallizing the rights and cause of action and the same should not be interpreted as a continuing cause of action.

The Court discerned that there was a fine distinction between the plea that the claims raised were barred by limitation and the plea that the application for appointment of an arbitrator was barred by limitation.

The bench remarked that if a party simply delays sending a notice seeking reference under the Arbitration Act because they are unclear of when the cause of action arose, the claim can become time-barred even before the party realizes the same.

The Court observed that, “the cause of arbitration arises when the claimant becomes entitled to raise the question, that is, when the claimant acquires the right to require arbitration. An application under Section 11 of the Act 1996 is governed by Article 137 of the Schedule to the Act 1963 and must be made within 3 years from the date when the right to apply first accrues. There is no right to apply until there is a clear and unequivocal denial of that right by the respondent.”

It must, therefore, be clear that the claim for arbitration must be raised as soon as the cause for arbitration arises as in the case of cause of action arisen in a civil action, stated the Court.

Therefore, the Court was of the view that even if according to the petitioner, the disputes arose between the parties in relation to the wrongful encashment of bank guarantee vide letter dated 16 February, 2016 for and for wrongful imposition of LD, the respondent on 26 September, 2016, deducted the amount towards recovery of LD. The requisite amount was credited into the Government account in accordance with the instructions contained in the letter dated 11-08-2016. This was the end of the matter and to say that even thereafter, the petitioner kept negotiating with the respondent in anticipation of some amicable settlement would not save the period of limitation.

Therefore, the Court held that petitioner was not justified in saying that it continued to negotiate till 2019.

In view thereof, the Court declared that the present case was hopelessly barred in time as the petitioner by its conduct slept over its right for more than five years, thus, the petition fails and stood rejected.