In 2012, the Ministry of Defence (MoD) and B and T AG (BTAG) entered into a contract for BTAG to supply sub-machine guns to the MoD. As BTAG delayed supplying the goods, the MoD on 16 February 2016 claimed against a warranty or maintenance bond for liquidated damages (LDs).
On 24 February 2016, the MoD confirmed the claim had been met, with the approval of its competent authority. On 26 September 2016, the MoD, having considered the representations made by BTAG, rejected its claims and, under the contract, deducted amounts towards the recovery of the LDs. The parties continued to communicate. On 22 September 2017, the MoD informed BTAG of its final position, saying it had acted according to the contract, and had given BTAG an opportunity to present its case. BTAG claimed that the parties continued to negotiate after that. On 4 September 2019, BTAG asked the MoD to review its position, and finally, on 8 November 2021, invoked arbitration. On 18 February 2022, the MoD objected to the appointment of a sole arbitrator. BTAG then nominated its arbitrator on 28 November 2022 and applied to the Supreme Court for the appointment of an arbitrator under the Arbitration and Conciliation Act, 1996 (act). By then, the MoD was no longer communicating with BTAG.
BTAG relied on the dispute resolution clause in the contract, which provided that disputes were to be settled by bilateral discussions and contended that while the MoD had informed BTAG its claims had been rejected on 22 September 2017, negotiations had in fact continued until 4 September 2019. BTAG relied on Geo Miller and Company Private Limited v Chairman, Rajasthan Vidyut Utpadan Nigam Limited, which held that the time spent in good faith, pre-arbitration negotiations may be excluded in computing the limitation period, and on Re: Cognizance for Extension of Limitation which excluded the period from 15 March 2020 to 28 February 2022 from limitation periods because of Covid-19. BTAG also contended that arbitration would show that its claims were not time-barred. It argued that the court could not consider the breaking point of negotiations as limitation was a question of both law and fact. The MoD contended that BTAG’s claims were time-barred as the bond had been paid out in September 2016, while BTAG had invoked arbitration only in November 2021. The MoD also argued that since the Limitation Act, 1963 did not prescribe a limitation period for invoking arbitration, article 137 of its schedule applied the general limitation period of three years. The court held that this article did apply to arbitrations, and then considered when the right to apply first arose.
The court held that the right to receive payment begins on the completion of the work; a dispute arises when there is a claim which is denied by another, and a cause of action will not be delayed simply by addressing correspondence to the other side. The court relied on NTPC Ltd v SPML Infra Ltd in affirming that in appointing an arbitrator, a court may reject claims which are on the face of it, time-barred. The court rejected BTAG’s application, holding that a court must identify the breaking point at which a party decides to abandon settlement in order to determine whether claims are time-barred. The court held that while settlement talks may be excluded from limitation where there is a continuing cause of action, the cause of action here had crystallised, as the bond had been encashed and LDs deducted. Accordingly, limitation ran from 16 February 2016.
The court, in finding that time spent in good faith negotiations may be excluded only where there is a continuing cause of action, departs significantly from the previous position at law. Parties must act expeditiously where a cause of action may be crystalised by an event.
The court also called for legislation on the limitation period for appointing arbitrators under section 11 of the act, as the general limitation of three years is contrary to the act’s principle of expeditious disposal of disputes. Guidance will likely come from the recommendations of the expert committee on the reform of arbitration law. It will be interesting to see if the Supreme Court’s findings and suggestion are considered.
Sneha Jaisingh is a partner and Abraham Fernandes is an associate at Bharucha & Partners.
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