Saving The Claims: Excluding Time Spent In Pre-Arbitration Mechanisms From The Period Of Limitation

It is now common practice for the parties to a commercial contract to provide for an attempt at amicable settlement of disputes before formally invoking the arbitration, thus, most of the contracts nowadays contain a multi-tier or waterfall dispute resolution mechanisms in the form of Med-Arb or Arb-Med-Arb clauses or provides for pre-arbitration mutual talks, conciliation/negotiation. Many of the arbitral institutions have also come-up with Med-Arb clauses. Similarly, in most of the contracts involving a government entity, some internal authority such as Dispute Resolution Board (DRB) or Dispute Adjudication Board (DAB), Dispute Review Expert (DRE) or an Appellate Authority comprising of the Superintending Engineer is created to resolve the dispute and only in the eventuality where these bodies fail to resolve the dispute, the arbitration begins.

This principle of pre-arbitration/litigation mediation is also embodied in certain statutes i.e., Commercial Courts Act, 2015, MSMED Act, 2006 and Consumer Protection Act, 2019.

Given their importance in the effective prevention and settlement of dispute, it is pertinent to discuss the effect of the time consumed in these mechanisms on the period of limitation of the substantive claims. This article analyses how the Indian Courts have dealt with this issue.

Nature Of Pre-Arbitration Procedures: Mandatory Or Directory

To better understand the interplay between pre-arbitration mechanisms and law of limitation, it is pertinent to first understand the nature of these mechanisms as it determines the effect of their non-compliance on the application for arbitration.

There are diverging views taken by Courts on the nature of pre-arbitral procedures that are in the nature of mutual talks, mediation or conciliation, however, most of the Courts have unanimously held a pre-arbitration reference to an internal dispute board or redressal committee to be mandatory, the non-compliance of which results in the application for appointment of the arbitrator being pre-mature.

Nature of dispute clauses providing for mutual talks, negotiation, conciliation or mediation before arbitration.

The Supreme Court in Visa International Ltd. v. Continental Resources^[1]and Demerara Distilleries^[2] though did not directly decide on the nature of pre-arbitration mutual talks or conciliation, however, appointed the arbitrator despite non-compliance of those requirements on the ground that there is no scope for the parties to mutually settle the dispute.

The High Courts have taken diverging views. The High Court of Delhi in Haldiram Mfg v. DLF Commercial Complexes^[3] held mutual discussion before taking recourse to arbitration to be a mandatory requirement. In Sanjay Iron v. SAIL^[4] the Court had given mandatory character the requirement of conciliation before taking recourse to arbitration. Similarly, the High Court of Rajasthan in Simpark Infrastructure v. Jaipur Municipal Corporation^[5] held non-compliance with pre-arbitration conciliation proceedings to be a bar to the appointment of arbitrator.

However, the Delhi High Court in Ravindra Kumar v. BPTP Ltd^[6] held the pre-arbitration conciliation mechanism to be directory for the reason that otherwise this would result in grave prejudice to a party who is nearing the limitation as the time consumed in conciliation proceedings are not excluded within the meaning of Section 14 of the Limitation Act. It further held that Section 77 of the A&C Act does not prevent the parties from initiating arbitration during the pendency of conciliation proceedings as arbitration is necessary to preserve the rights of parties which otherwise would expire on account of limitation. However, the Court had clarified that although conciliation should not be a bar to the appointment of arbitrator, but the parties should be directed to make an attempt at an amicable settlement before the formal arbitration begins. A similar view had been taken by the High Court of Bombay in Rajiv Vyas v. Johnwin^[7].

Again, a co-ordinate bench of Delhi High Court in Welspun Enterprises v. NCC Limited^[8] has disagreed with the view taken in Ravindra Kumar (Supra) and held that period of limitation commences only upon the parties exhausting the necessary pre-reference procedure, thus, the Court has given both kinds of pre-arbitration mechanism a mandatory nature.

Nature of multi-tier dispute resolution clauses

The Supreme Court in M.K. Shah Engineers v. State of M.P^[9] held the pre-arbitration mechanism of referring the dispute Superintending Engineer to be a mandatory requirement, however, the Court held that such a requirement can be waived by the conduct of the parties.

The High Courts of Delhi^[10], Calcutta^[11], Kerala^[12], Madhya Pradesh^[13] and Chhattisgarh^[14] have also held pre-arbitration mechanism providing for resolution of dispute by internal dispute boards, superintending engineer, dispute review board or redressal committee to be mandatory.

Mutual Talks And Period Of Limitation

In an event of disagreement, the parties, more often than not, engage in mutual talks cum negotiations to prevent it from resulting in a formal dispute.

In the context of Arbitration Act of 1940, the Supreme Court in Hari Shankar Singhania v. Gaur Hari Singhania^[15] held that an endeavour should always be made for mutual settlement between the parties and any period where the parties were in dialogue to resolve the dispute would not be included in the limitation period, thus, the right to apply as given under Section 137 of Limitation Act would only accrue on the parties when the dialogue fails. The Court held that any other interpretation would result in parties resorting to adjudication even in cases where there is serious hope for mutual settlement. The same position followed in the context of the Arbitration and Conciliation Act, 1996 as the Supreme Court in Shree Ram Mills Ltd v. Utility Premises (P) Ltd^[16]

The Supreme Court in Geo Miller and Company v. Rajastan Vidyut Utpadan Nigam^[17] has given a brilliant exposition on the interplay between pre-arbitration negotiation and period of limitation for invoking formal arbitration. The Court held that where the parties are found to be bona fide negotiating to arrive at an amicable solution before resorting to arbitration, then the time consumed in that negotiation would not be included in the period of limitation and the limitation would only start running from the date of ‘breaking point’ which is the date on which the parties would have reasonably abandoned efforts for negotiation, provided the history of negotiation is adequately placed before the court for its perusal. However, the Court clarified that once the period of limitation has begun to run, mere correspondence or reminder letters would neither stop nor extend the limitation.

The Court also distinguishes between the threshold required to determine the ‘breaking point’ in commercial and family matters. The Court held that in the former category, the parties would abandon their efforts at an earlier stage as their intention would be to secure the amount in dispute whereas, in family matters, the parties would be more inclined to reach an amicable settlement as the personal relationships would be at stake.

Contractual Mediation/Conciliation And Period Of Limitation

Most of the contract nowadays provides for mediation before taking resorting to formal adjudication, thus, it is pertinent to highlight how the Courts have calculated the limitation period when the agreement contemplates mediation.

The High Court of Delhi in Alstom Systems India v. Zillion Infraprojects^[18] held that where the agreement between the parties makes an attempt at mediation a pre-requisite for invoking the arbitration, then the cause of action for referring the dispute to arbitration would only arise on the failure of the mediation and only then the period of limitation would begin, thus, the time consumed in the mediation process would non be taken into account while calculating the limitation period.

In TVC India v. ABN Networks^[19], the Delhi High Court considered a situation where the agreement provided for one day mediation before invoking the arbitration, however, the mediation extended for a considerably longer period. The Court held that regardless of the time taken in the mediation, the period of limitation would only commence on the failure of mediation.

The judgment in TVC India (supra) assumes more significance in view of the fact that mediations can consume a considerable time, thus, if this period is not excluded from the purview of calculation of limitation period, then in most of the cases the claims would become time barred before the parties would have the chance to invoke arbitration.

Internal Dispute Resolution Boards And Period Of Limitation

It is a standard practice especially in construction contracts for the parties to provide for dispute boards to internally resolve any dispute between the parties and it is only in the event of non-satisfaction of the parties with the decision of the board that formal arbitration can be invoked.

Various courts have held this mechanism to be mandatory requirement to be satisfied before invoking the arbitration, thus, it assumes great significance in view of its mandatory nature.

The High Court of Delhi in In NHAI v. Progressive Construction^[20] the Court held that the period of limitation for the purpose of Section 21 of the Act cannot commence once the dispute is referred to internal Dispute Review Expert (DRE) as there would always be a likelihood that the parties agree with the decision of DRE, thus, no dispute would survive and it is only in the eventuality that the parties do not agree with the recommendations of DRE that the cause of action for referring the dispute to arbitration would arise. Similar view has been taken in several other judgments wherein the Court has held that period of limitation, in cases where an internal dispute reference committee is created, would commence only after that committee renders its decision and the parties do not agree with its decision.^[21]

In Delhi Jal Board v. Mohini Electricals^[22] the Court held that the period of limitation would stop the moment a dispute is referred to an internal dispute redressal by the parties. A Similar view was taken in Satluj Jal Vidyut Niga, v. Jaiprajash Hyundai Consortium^[23] wherein the Court held that the period of limitation would stop once the dispute is referred to Engineer-in-Charge.

In the context of limitation period for counter-claims, the decision of Madras High Court in Chennai Water Desalination v. Chennai Metropolitan Water Supply and Sewerage Board^[24] is a relevant authority. The Court in a situation where the agreement between the parties provides for a step ladder dispute mechanism, then the period of limitation for both the claims as well as the counter-claims would commence only when the internal dispute board communicate its decision and any party shows its disagreement with the decision.

Statutes That Exclude The Time Taken In Mediation From The Purview Of Limitation

Proviso to sub-section 3 of Section 12A of Commercial Courts Act provide that the time during which the parties remained occupied in the pre-suit mediation should be excluded while calculating the period of limitation^[25].

Similarly, clause 31 of the Mediation Bill, 2021 provides that the time during which the parties were engaged in mediation shall be excluded while calculating the period of limitation^[26]. It will be interesting how this clause, if the bill becomes the act, would operate and affect the other laws that although provides for mediation but are silent on the effect of time taken in unsuccessful mediation on the calculation of limitation period.

Limitation: An Issue Of Jurisdiction Or Admissibility?

Another important issue question that arises for consideration is whether the issue of limitation is an admissibility issue or an issue of jurisdiction. The Supreme Court in BSNL v. Nortel Networks^[27] has laid down ‘tribunal v. claim’ test to determine the whether an objection is an issue of jurisdiction or admissibility. The Court held that an objection is said to be directed at tribunal if it challenges the very jurisdiction of the tribunal to decide the issue, however, an objection is said to be directed at claim if it relates to the admissibility of the claims.

The Court held that an objection related to limitation is an admissibility issue as it attacks the claim and not the jurisdiction of the tribunal. Further, the Court held that pre-arbitration requirements are admissibility issues. The Court held admissibility issues cannot be determined under Sections 8 or 11 of the Act.

Indian Judiciary is overburdened with a huge pendency of over 60 lakh cases,^[28]therefore, the importance of these pre-arbitration mechanisms cannot be gainsaid. These mechanisms are important tools for effectively resolving a dispute without a need for adjudication. These serve four important purposes, firstly, they are effective in the prevention of disputes as they take place usually at the early stages of disagreement, secondly, they are time-bound, less formal and inexpensive, thirdly, prevent much Court litigation that usually comes with the arbitration and lastly, they help in maintaining the friendly relationship between the parties which ultimately affects the completion of the project work on time.

However, due to the lack of a legislation that answers the effect of these pre-arbitration mechanisms on the law of limitation and on account of diverging views taken by the different High Courts on their nature, confusion still subsists that sometimes results in the parties avoiding these steps due to the fear of expiry of their claims. There is a need for the Supreme Court to clarify the position and declare all these mechanisms to be mandatory and exclude time taken in these processes from the purview of limitation as that will lead to a lot of disputes settling without any intervention of the Court, also, the Court should set a time limit for these mechanisms otherwise these can also be used a dilatory practice.

The author is an Arbitration reporter at Live Law & student at Jamia Millia Islamia. Views expressed are personal.