Limitation Period For Arbitration | Mere Negotiations Between Parties Will Not Postpone The Cause Of Action : Supreme Court

The Supreme Court while adjudicating an application filed under Section 11(6) of the Arbitration and Conciliation Act, 1996 for appointment of arbitrator, has held that the limitation period of three years for filing such application would commence from the date when the cause of action arose. Subsequent negotiations between the parties, which take place after the cause of action has arisen, will not postpone the cause of action for the purpose of limitation computation.

The Bench comprising of the Chief Justice Dr. Dhananjaya Y. Chandrachud and Justice J. B. Pardiwala, while adjudicating an appeal filed in M/s B and T AG v Ministry of Defence, has held 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.”

BACKGROUND FACTS

In 2009, the Ministry of Defence, Government of India (“Respondent/Ministry”) floated a tender for procurement of Sub Machine Guns under a Fast Track Procedure. M/s B and T AG (“Petitioner”), a company based in Switzerland, was declared as the successful bidder and a contract was executed in 2012. The Petitioner allegedly committed delay in supply of goods to the Ministry.

In view of the alleged violation of contractual terms, on 16.02.2016 the Ministry directed the Bank to encash the Bank Guarantee submitted by the Petitioner to recover Liquidated Damages so imposed on the Petitioner. The Ministry vide a letter dated 24.02.2016 informed the Petitioner that instruction for encashment of Bank Guarantee has been issued, after analyzing the Petitioner’s stand taken in letter dated 24.10.2014. On 26.09.2016, the Ministry deducted amount towards liquidated damages and credited it into the account of Government of India.

The Parties were under negotiation till 2019 and could not arrive at any settlement. Consequently, on 08.11.2021 the Petitioner issued a Notice invoking Arbitration to the Ministry.

In 2023, the Petitioner filed a petition under Section 11(6) of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”), seeking appointment of Arbitrator for adjudication of disputes arising out of Contract executed with the Ministry of Defence.

The Ministry opposed the petition for being barred by limitation. It was argued that the cause of action to appoint an Arbitrator arose 26.09.2016 when the amount was deducted and credited to the Government’s account. Therefore, the limitation period of three years expired way back on 25.09.2019. To the contrary, the Petitioner argued that since bi-lateral negotiations continued till 2019, thus the cause of action was postponed.

SUPREME COURT VERDICT

The issue before the Bench was whether the application under Section 11 of Arbitration Act for appointment of arbitrator was barred by limitation.

The Bench opined that the Arbitration Act does not prescribe any time period for filing an application under Section 11(6) for appointment of Arbitrator. Thus, the limitation of three years provided under Article 137 of the Limitation Act, 1963 would apply to such proceedings. The time limit of three years would commence from the period when the right to apply accrues.

Mere negotiations will not postpone the cause of action for the purpose of limitation

The Bench opined that negotiations in disputes may continue for ten or twenty years after the cause of action had arisen for appointment of an arbitrator. However, the limitation period of three years for filing an application under Section 11(6) of Arbitration Act would not be defeated on the ground that the parties were negotiating. The Bench held as under:

“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.”

While placing reliance on letter dated 24.02.2016, the Bench took the view that disputes between the Parties had cropped up in 2014 itself. Thus, the Petitioner cannot contend that the limitation period stood extended as it continued to negotiate till 2019.

Further, the cause of action arose on 26.09.2016 when the Ministry deducted amount towards liquidated damages and credited it into the account of Government of India. This was the end of the matter. 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.

The Bench has rejected the arbitration petition for being hopelessly barred by time.

Also Read - Limitation Period For Arbitration | Cause Of Action To Appoint Arbitrator Commences From The “Breaking Point” Between Parties : Supreme Court

Case Title: M/s B and T AG v Ministry of Defence

Citation: 2023 LiveLaw (SC) 466

Counsel for Petitioner: Ms. Dua (Adv.)

Counsel for Respondent: Mr. K. M. Nataraj, (Additional Solicitor General of India)

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