The Supreme Court acknowledged the distinctive characteristics of statutory arbitrations and implications under the Limitation Act, 1963. The Court specifically stated that the cause of arbitration begins when one party serves notice to the other, requesting the appointment of an arbitrator. This clarification was essential in addressing situations where the cause of arbitration is delayed due to a prolonged absence or omission of notice issuance after the contract's execution.
Brief Facts of the Case:
An Arbitration Petition was filed before the Supreme Court under Section 11(6) of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as the “Act, 1996”), on behalf of a Swiss-based company involved in arms manufacturing. The purpose of the petition was to seek the appointment of an arbitrator to resolve disputes and claims arising from a contract, which was entered into with the Ministry of Defence, Government of India.
Brief Background of the Case:
The Ministry of Defence issued an urgent tender, on 18.11.2009 for the procurement of 1,568 Sub Machine Guns through a Fast Track Procedure. The petitioner participated in the tender and submitted its bid. After the tender was opened on 21.12.2010, the petitioner was declared as the lowest acceptable bidder. Following negotiations, the Contract was executed and signed on 27.03.2012.
Procedural History:
A dispute arose between the parties regarding the alleged wrongful encashment of a warranty bond by the respondent. In a letter dated 16.02.2016, the respondent directed the Joint Chief Executive Officer of State Bank of India, Frankfurt Branch, Germany to encash for its full value, Euro 201,793.75, and transfer the amount to the Principal Controller of Defence Account (hereinafter referred to as “PCDA”) via direct bank transfer. The petitioner was also provided with a copy of the letter. This action was taken by the respondent due to the delay in the supply of goods beyond the contractual period, resulting in the encashment of Liquidated Damages (hereinafter referred to as “LD”).
In response, the respondent, through a letter, informed the petitioner that the encashment instructions for the warranty bond were issued after a thorough review of the case presented by the petitioner in a letter. The encashment was approved by the competent authority at the Ministry of Defence. The President of India also authorized the deduction of Euro 197,230.35 from the petitioner towards the recovery of applicable LD, as per the terms of the Contract, in a letter. The respondent deducted the amount for the recovery of the applicable LD, which was then credited to the Government Account. Consequently, the petitioner's claims were rejected.
Despite these developments, the parties continued to engage in bilateral discussions to explore the possibility of resolving the dispute concerning the imposition of LD and the encashment of the warranty bond. However, in a letter, the respondent informed the petitioner that all actions taken were in accordance with the Contract's terms and that the petitioner had been given ample opportunity to present its case. The petitioner asserts that communication between the parties persisted after the issuance of the letter, with ongoing negotiations to resolve the dispute. Nevertheless, in a letter, the petitioner requested the respondent to review and discuss the wrongful imposition of LD.
Contentions of the petitioners:
The petitioners contended that the respondent wrongfully deducted LD and encashed the bank guarantee. They explained that the parties attempted to resolve the disputes amicably through bilateral discussions as provided in Article 21.1 of the Contract. The petitioners drew the Court's attention to Article 21 of the Contract, which outlined the dispute resolution mechanism. They highlighted that Article 21.1 stipulated the resolution of all disputes or differences through bilateral discussions, even those related to the validity of the contract. petitioners noted that this feature was distinctive in defence procurement contracts, as it favoured resolving disputes through bilateral discussions rather than initiating arbitration proceedings. She argued that the respondent informed the petitioner for the first time that the proposal to reconsider the wrongful deduction of LD and encashment of the bank guarantee was rejected.
The petitioners asserted that the time spent in pre-arbitration negotiations, conducted in good faith, could be excluded when calculating the period of limitation. The petitioner contended that they could present appropriate evidence during the arbitration proceedings to demonstrate that negotiations and discussions continued until as late as 04.09.2019. They argued that the respondent's communication declining to reconsider the alleged illegal deduction of LD in a letter could be considered the “Breaking Point”. Excluding the “Covid period” following the Court's order in Cognizance for Extension of Limitation, In re, the three-year period from 22.09.2017 would end on 22.09.2022. However, the petitioner sent the notice of arbitration on 08.11.2021. The petitioners also pointed out that the respondent, in its letter dated 18.02.2022, did not object to the invocation of arbitration but only objected to the appointment of a sole arbitrator.
Finally, the petitioner contended that the issue of limitation, being a mixed question of law and fact, should be addressed by the Arbitral Tribunal. They argued that determining the “Breaking Point” of negotiations was beyond the scope of deciding an application filed under Section 11(6) of the Act, 1996. Based on the above circumstances, petitioners requested that the petition filed under Section 11(6) of the Act, 1996, seeking the constitution of an Arbitral Tribunal within the period of limitation, be allowed and that the Arbitral Tribunal be constituted.
Contentions of the Respondents:
The respondents argued that not only was the petition filed under Section 11(6) of the Act, 1996 time-barred, but the claims raised by the petitioner were also considered time-barred. They contended that the petitioner's grievance centred around the deduction of LD through the encashment of the bank guarantee, with the last deduction occurring on 26.09.2016. They asserted that the cause of action in the case could be said to have arisen on 26.09.2016. However, the notice invoking arbitration in accordance with Article 21 of the Contract was issued only on 08.11.2021, which was more than five years later and well beyond the three-year limitation period. They further submitted that since the limitation period for issuing notice invoking arbitration was not specifically prescribed in the Schedule to the Limitation Act, 1963, it would fall under the residuary Article, namely Article 137 of the said Act. The respondents prayed that the petitioner's claim, being time-barred, should not be entertained, and therefore, the petition under Section 11(6) of the Act, 1996 should be rejected.
Observations of the Court:
The Supreme Court held that when the bank guarantee was encashed in 2016, and the requisite amount was transferred to the Government account, that signalled the conclusion of the matter, serving as the "Breaking Point" and establishing the date when the cause of action arose for limitation purposes. Negotiations can persist for many years after the cause of action arises. However, mere negotiations cannot delay the "cause of action" for limitation purposes. The legislature has set a three-year time limit for claim enforcement, which cannot be circumvented by ongoing negotiations between the parties.
In the Panchu Gopal Bose v. Board of Trustees for Port of Calcutta (1993) 4 SCC 338, it was held that the provisions of the Limitation Act, 1963 apply to arbitrations. Irrespective of any contractual provisions suggesting otherwise, the cause of arbitration, in terms of limitation, is deemed to have accrued when it should have, had it not been for the contract. The cause of arbitration commences when one party serves notice on the other, requesting the appointment of an arbitrator. The question arises when the cause of arbitration arises in the absence of issuing or omitting to issue notice for an extended period after the contract's execution. Arbitration implies promptly initiating arbitration proceedings using the arbitral agreement as soon as a difference or dispute arises. Delay undermines justice, and equity favours prompt action and its consequences. The party at fault should bear the consequences and not shift the burden to the other party after allowing the arbitration claim to be barred. It was further concluded that allowing the claim, after a significant delay, where the arbitration agreement does not genuinely exist or has ceased to exist, or where the dispute falls outside the scope of the arbitration agreement, would harass the opposing party.
The decision of the Court:
The Supreme Court dismissed the appeal, stating that the case clearly and undeniably represented a claim that was hopelessly barred, as the petitioner failed to assert their rights for over five years. The Apex Court recognised that statutory arbitrations have their unique characteristics.
Case Title: M/s. B and T AG Vs. Ministry of Defence
Case No.: Arbitration Petition (c) No. 13 of 2023
Citation: 2023 Latest Caselaw 496 SC
Coram: Hon'ble Mr. CJI D.Y Chandrachud, Hon'ble Mr. Justice P.S Narasimha and Hon'ble Mr. Justice J.B. Pardiwala
Advocates for Petitioner: Mr. Abhimanyu Bhandari, Adv., Ms. Rooh-e-hina Dua, AOR and Ms. Dhanakshi Gandhi, Adv.
Advocates for Respondent: Mr. K M Nataraj, A.S.G., Ms. Rukhmini Bobde, Adv., Mr. Vatsal Joshi, Adv., Mr. P V Yogeshwaran, Adv., Mr. Vinayak Sharma, Adv. and Mr. Arvind Kumar Sharma, AOR
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