SUPREME COURT HOLDS THAT TIME BARRED CLAIMS CANNOT BE ARBITRABLE

A two Judge Bench of the Supreme Court comprising of CJI. Dr. D.Y. Chandrachud and Justice J.B. Pardiwala passed a judgment dated 18.05.2023 in the case of M/S. B&T AG Vs. Ministry of Defence Arbitration Petition (C) No. 13 of 2023, and made observations regarding the disputes between the parties regarding the Petition filed under Section 11(6) of the Arbitration and Conciliation Act, 1996 for appointment of an arbitrator for adjudication of disputes and claims arising out of the Contract No. 78953/SMG/GS/WE-4(GS-IV) dated 27.03.2012 executed with the Respondent Ministry of Defence.

Facts-

i) The Respondent, Ministry of Defence vide the RFP No. 78953/SMG/GS/WE-4 dated 18.11.2009 floated an urgent tender for procurement of 1,568 Sub Machine Guns under a Fast Track Procedure. The Petitioner (M/s B&T AG) participated in the tender process and offered its bid. The tender was opened on 21.12.2010 and the Petitioner was declared to be the lowest acceptable bidder. After due negotiations, the Contract was executed and signed on 27.03.2012.

ii) Disputes arose over wrongful encashment of Warranty Bond by the Respondent. In a letter dated 16.02.2016, the Respondent directed the Joint Chief Executive Officer, State Bank of India, Frankfurt Branch, Germany, to fully encash WBG No. 12/380, amounting to Euro 201,793.75, and remit the funds via direct bank transfer to the Principal Controller of Defence Account.

iii) In their letter dated 24.02.2016, the Respondent informed the Petitioner that the instructions for encashing the warranty bond were issued after careful scrutiny of the Petitioner’s case presented in their letter dated 24.10.2014. The encashment was approved by the competent authority at the Ministry of Defence. Furthermore, the President of India granted authorization, through a letter dated 11.08.2016, to deduct Euro 197,230.35 from the Petitioner for the recovery of applicable liquidated damages, as per the contract terms.

iv) On 26.09.2016, the Respondent deducted the amount for the recovery of applicable liquidated damages. As per the instructions in the letter dated 11.08.2016 on behalf of the President of India, the deducted amount was credited to the Government Account. Consequently, the Petitioner’s claims were rejected.

v) Despite the aforementioned facts, the Petitioner initiated a discussion and persisted in bilateral discussions to seek a resolution for the dispute over liquidated damages imposition and warranty bond encashment. However, in a letter dated 22.09.2017, the Respondent notified the Petitioner that all actions were in line with the contract terms, and the Petitioner had ample opportunity to present their case.

vi) Following the issuance of the letter dated 22.09.2017, the Petitioner asserted that there was continuous communication between the parties in order to negotiate and settle the dispute. further, in a letter dated 04.09.2019, the Petitioner again requested the Respondent to review the wrongful imposition of liquidated damages and provide an opportunity to present their case.

Observation-

The Supreme Court observed that the only question that falls for their reconsideration is whether time-barred claims or claims which are barred by limitation, can be said to be live claims, which can be referred to arbitration?

Section 11 of the Arbitration and Conciliation Act 1996 provides for appointment of arbitrators. Sub section (6) of Section 11 reads thus:

Where, under an appointment procedure agreed upon by the parties,

(a) a party fails to act as required under that procedure; or

(b) the parties, or the two appointed arbitrators, fail to reach an agreement expected of them under that procedure; or

(c) a person, including an institution, fails to perform any function entrusted to him or it under that procedure,

a party may request the Supreme Court or, as the case may be, the High Court or any person or institution designated by such Court to take the necessary measure, unless the agreement on the appointment procedure provides other means for securing the appointment.

The provision in question does not specify a time limit for filing an application under Section 11(6) of the 1996 Act for arbitrator appointment.

Section 43 of the Limitation Act 1996 provides that the Limitation Act, 1963 would apply to arbitrations as it applies to the proceedings in Court. Section 43 reads thus:

(1) The Limitation Act, 1963 (36 of 1963), shall apply to arbitrations as it applies to proceedings in court.

(2) For the purposes of this section and the Limitation Act, 1963 (36 of 1963), an arbitration shall be deemed to have commenced on the date referred to in section 21.

Where an arbitration agreement to submit future disputes to arbitration provides that any claim to which the agreement applies shall be barred unless some step to commence arbitral proceedings is taken within a time fixed by the agreement, and a dispute arises to which the agreement applies, the Court, if it is of opinion that in the circumstances of the case undue hardship would otherwise be caused, and notwithstanding that the time so fixed has expired, may on such terms, if any, as the justice of the case may require, extend the time for such period as it thinks proper.

(3) Where the Court orders that an arbitral award be set aside, the period between the commencement of the arbitration and the date of the order of the Court shall be excluded in computing the time prescribed by the Limitation Act, 1963 (36 of 1963), for the commencement of the proceedings (including arbitration) with respect to the dispute so submitted.

With reference to Section 43 of the Arbitration and Conciliation Act 1996 (Arbitration Act) and with regard to the case of Consolidated Engineering Enterprises v. Principal Secretary, Irrigation Department and Others, (2008) 7 SCC 169, where it was held Section 43 of the Arbitration Act makes the provisions of the Limitation Act applicable to arbitrations, while reiterating that the Limitation Act applies to court proceedings. Thus, the Limitation Act, 1963 applies to all proceedings under the Arbitration Act, including both court and arbitration proceedings, except where expressly excluded by the Arbitration Act.

In another case of Bharat Sanchar Nigam Limited and Another v. Nortel Networks India Private Limited (2021) 5 SCC 738, the Apex Court held:

After a comprehensive analysis of relevant provisions, this Court determined that in cases where claims are clearly time-barred, the Court may decline to make a reference under Section 11 of the 1996 Act. The Act is designed to expedite dispute resolution, incorporating provisions for time-bound arbitral proceedings. Since the Act does not specify a time limit for filing an application under Section 11(6), recourse is taken to the 1963 Act, as per Section 43, which applies the Limitation Act to arbitrations, akin to court proceedings. In the absence of a specific Article in the Limitation Act, the residual provision under Article 137 applies, with a three-year limitation period starting from the accrual of the right to apply. This Court’s ruling aligned with its previous decisions and relevant High Court rulings, affirms that the application under Section 11 has to be filed in a court of law, subject to the three-year limitation period from the date of refusal to appoint the arbitrator or the expiration of 30 days, whichever is earlier.

In the same judgement the Hon’ble Supreme Court refers to the book written by Justice Bachawat Chapter 37 at p. 549, Law of Arbitration that explains that similar to actions, claims in arbitrations must be brought within a specified time from when they accrue. The cause of arbitration arises when the claimant has the right to demand arbitration, and the limitation period starts from that point. Timely commencement of arbitration is crucial for justice and equity, and the defaulting party should bear the consequences instead of passing them onto the other party. The court may allow a contracting party to rescind the contract or revoke the authority for arbitration in appropriate cases. The arbitrator is obligated to consider all legal defences, including limitation, unless otherwise specified. Sections 3 and 14 of the Limitation Act apply analogously to arbitration proceedings, treating them as civil proceedings before the court. By mutual consent, the parties have chosen arbitration as a substitute for the court, allowing them to raise limitation as a defence in the proceedings.

Amendment required

In the aforementioned case, this Court noted the absence of a specific limitation period under Section 11 of the 1996 Act, leading to the application of Article 137 of the 1963 Limitation Act, which allows a three-year period from the accrual of the right to apply. However, this Court found this to be unreasonably long and contradictory to the Act’s objective of expeditious dispute resolution. Amendments in 2015 and 2019 introduced time limits, such as the 18-month period for concluding proceedings under Section 29A. Considering the legislative intent and the Act’s scheme, this Court urged Parliament to amend Section 11 to provide a specific limitation period for filing applications for arbitrator appointment.

Conclusion-

In conclusion, the case on hand serves as a clear illustration of the Petitioner’s significant lapse in failing to assert their claim for a period exceeding five years, leading to the claim becoming irreversibly time-barred. Based on these undeniable facts, it is evident that this Petition, pertaining to a time-barred statutory arbitration, is unsuccessful and hereby dismissed.

Udit Krishna

Associate

Indian Lawyer and Allied Services