Period Of Limitation For Referring The Dispute To Arbitration Commences Only After The Failure Of Pre-Arbitration Mechanism: Delhi High Court

The bench of Justices Vibhu Bakhru and Amit Mahajan held that if the agreement between the parties provides for a pre-arbitration dispute resolution mechanism, a party cannot be expected to invoke arbitration unless the said mechanism fails, therefore, the limitation period cannot start prior to that.

Facts

An Engineering, Procurement and Construction (EPC) contract was entered into between Indian Oil Corporation Limited (IOCL) and Nafto Gaz India Private Limited (Nafto Gaz). Subsequently, Nafto Gaz awarded the said EPC in favour of NCC (Respondent) who in turn sub-contracted the work in favour of MSK Projects (India) Ltd which was subsequently acquired by Welspun (Appellant).

The mechanical completion certificate was issued in favour of appellant on 12.06.2010. Thereafter, on 03.08.2010, a meeting was held between the parties wherein the respondent agreed to pay certain amounts to the appellant. Subsequently, on 30.10.2010, the Final Bill was duly certified and on 30.11.2010, the completion certificate was issued.

Thereafter, the appellant claimed to have issued several notices to the respondent claiming payment under the Final Bill, however, the respondent denied its liability to pay the due amount at that stage. Resultantly, a dispute arose between and appellant issued a notice claiming certain amounts within the specified period, failing which it would invoke the dispute resolution mechanism. In reply to the notice, the respondent contended the claims to be pre-mature for the reason that the contract was on a back-to-back basis and it can claim the amount only when the respondent is given the payment by the principal employer i.e. Nafto Gaz.

Thereafter, on 26.11.2012, the appellant invoked the dispute resolution clause and the dispute was referred to the Chief Executives of both the parties. However, the same was terminated on 21.12.2012 as the parties were unable to settle the dispute. Accordingly, the appellant invoked the arbitration by issuing a notice dated 27.01.2014.

The award

The appellant filed its statement of claim and raised 5 claims. The first three claims were related to payment due under the Final Bill dated 30.10.2010, the other two claims were regarding, payment made to suppliers on behalf of the respondent and refund of retention money.

The respondent filed its statement of defence and contented that the claims of the appellant are pre-mature as the contract was awarded on back-to-back basis, therefore, the appellant could claim payment only after the respondent received the same from the principal employer. Without prejudice to this contention, it also contended that the claims of the appellant are barred by limitation as they arise out of Final Bill dated 30.10.2010 and the arbitration is invoked after the expiry of three years period.

The arbitrator held that the contract was not awarded on back-to-back basis, however, it accepted the objection regarding claims being beyond limitation. The tribunal held that first three claims arise out of final bill dated 30.10.2010, therefore, the cause of action arose on that date and the arbitration was invoked beyond three years limitation period. It held that the claim for payment made to suppliers on behalf of respondent is also time-barred as the last invoice in this regard is of the year 2008. However, it allowed the claim for refund of retention money by observing that respondent had promised to pay the same on receipt from Nafto Gaz and therefore, appellant would be entitled to receive the same as and when the said amount was received from Nafto Gaz.

Aggrieved by the award the appellant challenged the award under Section 34 of the A&C Act.

Impugned order

The arbitrator rejected the challenge to the award and upheld the award. It held that cause of action arose on the date of final bill, however, the arbitration was invoked after a period of three years, therefore, the claims are barred by limitation. It observed that the appellant did not consider the reference before parties Chief Executives as pre-condition to arbitration but merely an attempt to amicably settle the dispute. It further held that mere exchange of communication would not save the period of limitation once it has started to run.

Contention of Parties

The appellant challenged the arbitral award and the impugned order on the following grounds:

• The tribunal, as well as the single judge, erred in not appreciating the fact that the respondent had taken alternate pleas which are mutually destructive as on one hand it contended that the claims were pre-mature and on the other contented them to be time-barred.
• The appellant had invoked the dispute resolution clause on 26.11.2012, therefore, the invocation cannot be held to be time barred.
• The tribunal as well as the single judge erred in holding that the cause of action was singular whereas the same arose on multiple occasions every time the respondent accepted its liability to pay, albeit, on back-to-back basis, therefore, the claims could not be held to be time-barred in view of specific acknowledgment by the respondent.
• Lastly, the period of limitation would commence only after the right to arbitration has arisen. The right to invoke arbitration in the present case arose only after the failure of resolution by the Chief Executives, therefore, the period of limitation would start running only from said date and the notice of arbitration was issued within the period of three years form the said date.

The respondent countered the above submissions on the following grounds:

• The time spent by the Chief Executives in the conciliation proceedings cannot be excluded from the period of limitation as Section 77 of A&C Act expressly permits a party to initiate proceedings to preserve its rights and therefore, it is open for any party to invoke the arbitration if any further delay would render the claims barred by limitation.
• There is no scope for imputing any equitable consideration in applying the law of limitation and any party seeking benefit of exclusion under any law was required to plead and prove the same. However, the appellant did not plead any such exclusion, thus, it is now precluded from raising any such plea.

Analysis by the Court

The Court observed that the dispute resolution clause in the agreement requires the parties to make an endeavour to resolve the differences by mutual negotiations. The parties had agreed that if such disputes could not be resolved within a period of one month from the date they had arisen, they would refer the same to their respective Chief Executives. It is only when the Chief Executives of the respective parties fail to resolve the same then such differences and disputes would be referred to arbitration.

It held that when the parties have provided for such a multi-tier dispute mechanism, it is mandatory for them to exhaust the mechanism before invoking the arbitration, thus, the period of limitation for referring the dispute to arbitration cannot begin anytime before the mechanism has been exhausted.

The Court differed from its earlier judgment in Ravinder Kumar Verma, BPTP Ltd., 2014 SCC OnLine Del 6602 wherein the Court had held that period of limitation cannot be stopped merely because there are conciliation/meditation proceedings pending between the parties.

The Court then referred to the position of law on this point across various countries. The Court observed that in countries like Canada, Austria, Poland and, Hungary, the period of pre-arbitration/litigation mediation is excluded from limitation period. Similarly, Section 27 of Arbitration Act, 1950 as well as Section 12 of the UK Arbitration Act, 1996 empowers the Court to extend period of limitation in cases where the parties were contemplating amicable dispute resolution before invoking arbitration.

Next, the Court referred to Section 12A of Commercial Courts Act and held that Sub-Section (3) to Section 12A provides that the period during which the parties remained occupied with the pre-institution mediation would not be computed for the purpose of limitation under the Limitation Act.

As regards the claim for payment made to suppliers on behalf of the respondent, the Court held that the cause of action for the said claim arose way back in the year 2008, however, the respondent did not raise the issue within the period of three years, therefore, it cannot now claim payment against such a claim.

Accordingly, the Court set aside the arbitral award to the extent it dismissed the first three claims of the petitioner arising out of Final Bill as being time barred. The Court held that the period of limitation began only after the pre-arbitration mechanism failed, therefore, the claims were within limitation.

Case Title: Welspun Enterprises Ltd. v. NCC Ltd.

Citation: 2022 LiveLaw (Del) 974

Counsel for the Appellant: Mr. Sandeep Sethi, Sr. Adv. with Mr. Sameer Parekh, Ms. Sonali Basu Parekh, Ms. Smita Bhargava, Ms. Tanya Chaudhary, Ms. Pavitra Singh & Mr. Manu Bajaj, Advs.

Counsel for the Respondent: Ms. Priya Kumar, Mr. Tejas Chhabra & Mr. Arpit Sharma, Advs.

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