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

The Supreme Court has held that the cause of action to appoint an arbitrator would commence from the “Breaking Point” at which any reasonable party would abandon efforts for at arriving at a settlement and contemplate referral of the dispute for arbitration. “Breaking Point” should be treated as the date at which the cause of action arose for the purpose of limitation.

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 observed that the entire history of the negotiation between the parties must be specifically pleaded and placed on record, in order to facilitate the Court to find out what was the “Breaking Point” for the purpose of limitation computation.

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 an arbitrator for the 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.

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.

Cause to action to appoint an Arbitrator commences from the ‘Breaking Point’ when any reasonable party would abandon efforts to settle amicably and would rather refer the dispute to arbitration

The Bench interpreted “Cause of action” to mean material facts that are necessary to be proved by the plaintiff to succeed in a suit; and it plays a necessary role in computation of limitation period for bringing an action. “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 Bench opined.

What is the ‘Breaking Point’?

It was observed that it is imperative for the Court to ascertain the “Breaking Point” at which any reasonable party would have abandoned efforts at arriving at a settlement and would refer the dispute for arbitration.

“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 because, 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”, the Bench ruled.

History of the negotiation between the parties must be specifically pleaded and placed on record to find out the “Breaking Point”

The Bench held as under:

“The entire history of the negotiation between the parties must be specifically pleaded and placed on record. It is only after the entire history of negotiation is pleaded and placed on record that the Court would be in a position to consider such history so as 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.”

Further, the day when the Bank Guarantee was encashed and transferred to Government account would be the “Breaking Point” for the cause of action to arise and limitation must be computed thereon.

“At the cost of repetition, we state that when the bank guarantee came to be encashed in the year 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”, the Bench ruled.

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.

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

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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