Supreme Court Dismisses Arbitration Petition Due to Limitation: B&T AG vs. Ministry of Defence (2023)

Date of the Judgment: 18 May 2023

Citation: 2023 INSC 549

Judges: Dr. Dhananjaya Y. Chandrachud, CJI, and J. B. Pardiwala, J.

Can a party initiate arbitration proceedings after a significant delay, or are there time limits that must be followed? The Supreme Court of India recently addressed this question in a case involving a dispute over a defense contract. The Court had to decide whether the arbitration petition should be dismissed as the claims were time-barred. The bench comprised of Chief Justice of India Dr. Dhananjaya Y. Chandrachud and Justice J. B. Pardiwala.

Case Background

The case involves a contract between M/S B AND T AG (a Swiss company) and the Ministry of Defence, Government of India, for the supply of sub-machine guns. The Ministry of Defence issued a tender on 18 November 2009, for the procurement of 1,568 Sub Machine Guns under a Fast Track Procedure. M/S B AND T AG participated in the tender and was declared the lowest acceptable bidder on 21 December 2010. The contract was executed on 27 March 2012.

A dispute arose when the Ministry of Defence encashed a warranty bond on 16 February 2016, due to delays in the supply of goods. The Ministry further deducted liquidated damages on 26 September 2016. M/S B AND T AG contested these actions, claiming that the deductions were wrongful. Despite this, the parties engaged in discussions to resolve the dispute. However, the Ministry of Defence, vide letter dated 22 September 2017, informed M/S B AND T AG that all actions were in accordance with the contract terms. M/S B AND T AG continued to request a review of the matter and initiated arbitration proceedings on 8 November 2021.

Timeline

Course of Proceedings

The petitioner, M/S B AND T AG, approached the Supreme Court under Section 11(6) of the Arbitration and Conciliation Act, 1996, seeking the appointment of an arbitrator. The Ministry of Defence contended that the claims were time-barred, as the cause of action arose on 26 September 2016, when the liquidated damages were deducted. The Ministry argued that the notice for arbitration was issued on 8 November 2021, which was beyond the three-year limitation period.

Legal Framework

The Supreme Court considered the following legal provisions:

• Section 11(6) of the Arbitration and Conciliation Act, 1996: This section deals with the appointment of arbitrators when parties fail to agree on the procedure.

  “11(6). 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.”

• Section 43 of the Arbitration and Conciliation Act, 1996: This section states that the Limitation Act, 1963, applies to arbitrations as it applies to court proceedings.

  “43. Limitations.— (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.”

• Article 137 of the Schedule to the Limitation Act, 1963: This is a residuary article that prescribes a three-year limitation period for applications where no specific period is provided.

  “137. Any other application for which no period of limitation is provided elsewhere in this Division. Three years. When the right to apply accrues.”

• Section 9 of the Limitation Act, 1963: This section states that once the time has begun to run, no subsequent disability or inability stops it.

  “9. Continuous running of time. — Where once time has begun to run, no subsequent disability or inability to institute a suit or make an application stops it:”

Arguments

Submissions on behalf of the Petitioner (M/S B AND T AG)

• The petitioner argued that the claims were not time-barred because the parties were engaged in “bilateral discussions” as per Article 21.1 of the contract.
  • Article 21.1 of the contract mandates that all disputes shall be settled by bilateral discussions.
  • The petitioner contended that the time spent in these discussions should be excluded from the limitation period.
• The petitioner relied on the decision of the Supreme Court in Geo Miller and Company Private Limited v. Chairman, Rajasthan Vidyut Utpadan Nigam Limited, [(2020) 14 SCC 643], arguing that time spent in good-faith negotiations should be excluded from the limitation period.
  • The petitioner argued that the “breaking point” was when the respondent rejected the request for reconsideration on 22 September 2017.
  • The petitioner contended that even after 22 September 2017, the parties continued to negotiate until 4 September 2019.
• The petitioner pointed out that the respondent did not object to the invocation of arbitration in its letter dated 18 February 2022, but only to the appointment of a sole arbitrator.
  • The petitioner argued that the issue of limitation is a mixed question of law and fact that should be decided by the Arbitral Tribunal.

Submissions on behalf of the Respondent (Ministry of Defence)

• The respondent argued that the petition was time-barred because the cause of action arose on 26 September 2016, when the liquidated damages were deducted.
  • The respondent submitted that the notice for invoking arbitration was issued on 8 November 2021, which was beyond the three-year limitation period.
• The respondent contended that the limitation period for issuing a notice invoking arbitration is covered by Article 137 of the Schedule to the Limitation Act, 1963, which prescribes a three-year limitation period.
  • The respondent argued that the claim of the petitioner was hopelessly time-barred.

Submissions Table

Issues Framed by the Supreme Court

The Supreme Court framed the following issue:

1. Whether time-barred claims can be considered live claims that can be referred to arbitration.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered the following authorities:

Cases:

• Consolidated Engineering Enterprises v. Principal Secretary, Irrigation Department and Others, [(2008) 7 SCC 169]: This case clarified that the Limitation Act applies to both court proceedings and arbitrations.
  • The Court observed that the purpose of Section 43 of the Arbitration and Conciliation Act, 1996, is to make the Limitation Act applicable to arbitrations.
• Merla Ramanna v. Nallaparaju and Others, [(1955) 2 SCR 938]: This case interpreted the term “right to apply” under Article 137 of the Limitation Act, 1963, to mean “the right to apply first arises.”
  • The Court noted that the starting point of limitation is when the right to apply first arises.
• Major (Retd.) Inder Singh Rekhi v. Delhi Development Authority, [AIR 1988 SC 1887]: This case held that a dispute arises when a claim is asserted by one party and denied by the other.
  • The Court noted that a dispute arises when there is a claim and a denial, not just inaction.
• Union of India and Another v. M/s L. K. Ahuja and Co., [(1988) 3 SCC 76]: This case distinguished between the limitation for a claim and the limitation for an application under Section 20 of the Arbitration Act, 1940.
  • The Court observed that the issue of whether the claim is time-barred is for the arbitrator to decide, unless it is time-barred on admitted facts.
• J.C. Budhraja v. Chairman, Orissa Mining Corporation Ltd. and Another, [(2008) 2 SCC 444]: This case distinguished between the limitation for filing a petition and the limitation for the claims themselves.
  • The Court clarified that the limitation for a claim is calculated on the date when the arbitration is deemed to have commenced.
• SBP & Co. v. Patel Engineering Ltd. and Another, [(2005) 8 SCC 618]: This case held that a party should not be dragged into arbitration when there is no arbitrable dispute.
  • The Court noted that dragging a party to arbitration when there is no arbitrable dispute can impose a serious liability.
• National Insurance Company Limited v. Boghara Polyfab Private Limited, [(2009) 1 SCC 267]: This case categorized the issues that a court must decide when appointing an arbitrator.
  • The Court observed that the court may choose to decide whether a claim is a dead or live claim.
• Geo Miller and Company Private Limited v. Chairman, Rajasthan Vidyut Utpadan Nigam Limited, [(2020) 14 SCC 643]: This case discussed the exclusion of time spent in negotiations for the purpose of limitation.
  • The Court noted that the “breaking point” at which a party would abandon settlement efforts should be considered for limitation purposes.
• Bharat Sanchar Nigam Limited and Another v. Nortel Networks India Private Limited, [(2021) 5 SCC 738]: This case held that courts may refuse to make a reference under Section 11 if the claims are ex facie time-barred.
  • The Court observed that mere exchange of letters or settlement discussions do not extend the limitation period.
• Secunderabad Cantonment Board v. B. Ramachandraiah and Sons, [(2021) 5 SCC 705]: This case reiterated that once the time has begun to run, no subsequent rejection gives a fresh start to the limitation period.
  • The Court held that the cause of action for appointment of an arbitrator accrues when no arbitrator is appointed within the stipulated time.
• NTPC Ltd. v. SPML Infra Ltd., [2023 SCC Online SC 389]: This case noted that the arbitral tribunal is the preferred first authority to determine questions of non-arbitrability.
  • The Court observed that the courts may reject claims that are manifestly and ex-facie non-arbitrable.
• Vidya Drolia and Ors. v. Durga Trading Corporation, [(2021) 2 SCC 1]: This case outlined the principles for determining the arbitrability of disputes.
  • The Court held that the arbitral tribunal is the preferred first authority to determine questions of non-arbitrability.
• Welspun Enterprises Ltd. v. NCC Ltd., [(2022) 295 DLT 286]: This case held that the limitation period runs when a party acquires the right to refer disputes to arbitration.
  • The Court noted that the right to apply accrues when the parties reach a “breaking point.”
• Zillon Infraprojects Pvt. Ltd. v. Bharat Heavy Electricals Limited, [2023 SCC OnLine Cal 756]: This case held that a cause of action can be of a “continuous” nature if the parties are in mutual discussion.
  • The Court observed that the limitation period does not operate if the parties are in mutual discussion to resolve the disputes.
• Dwijendra Narain Roy v. Joges Chandra De and others, [AIR 1924 Cal 600]: This case explained the true test to determine when a cause of action could be said to have accrued.
  • The Court observed that time runs when the cause of action accrues, and a cause of action accrues when all the facts have happened which are material to be proved.
• Mussummat Chand Kour and Another v. Partab Singh and Others, [ILR (1889) 16 Cal 98]: This case defined “cause of action” as the grounds set forth in the plaint.
  • The Court noted that the cause of action has no relation to the defense set up by the defendant.
• Panchu Gopal Bose v. Board of Trustees for Port of Calcutta, [(1993) 4 SCC 338]: This case held that the Limitation Act applies to arbitrations, and the cause of arbitration accrues when the right to require arbitration arises.
  • The Court observed that arbitration implies a timeous commencement of arbitration as soon as a dispute arises.
• State of Orissa v. Damodar Das, [(1996) 2 SCC 216]: This case reiterated that the defaulting party should bear the hardship.
  • The Court noted that the defaulting party should not transmit the hardship to the other party after the claim is time-barred.
• Hari Shankar Singhania v. Gaur Hari Singhania, [(2006) 4 SCC 658]: This case held that a reference to arbitration is required to be filed within three years when the right to apply accrues.
  • The Court noted that the right to apply accrues when the parties reach a “breaking point”.
• West Riding of Yorkshire County Council v. Huddersfield Corpn., [(1957) 1 All ER 669]: This case held that the Limitation Act applies to arbitrations as it applies to actions in the High Court.
  • The Court observed that the making of a submission to arbitration does not prevent the statute of limitation from being pleaded.

Books:

• Russell on Arbitration by Anthony Walton (19th Edn.): This book states that the limitation period runs from the date the cause of arbitration accrued.
• Law of Arbitration by Justice Bachawat: This book states that every arbitration must be commenced within the prescribed period, and the cause of arbitration arises when the claimant becomes entitled to raise the question.
• Mustiu and Boyd’s Commercial Arbitration (1982 Edn.): This book states that there is no jurisdiction to interfere to prevent a claim that can never lead to a valid award.

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• Consolidated Engineering Enterprises v. Principal Secretary, Irrigation Department and Others, [(2008) 7 SCC 169]: Followed to clarify that the Limitation Act applies to both court proceedings and arbitrations.
• Merla Ramanna v. Nallaparaju and Others, [(1955) 2 SCR 938]: Followed to interpret “right to apply” as “the right to apply first arises.”
• Major (Retd.) Inder Singh Rekhi v. Delhi Development Authority, [AIR 1988 SC 1887]: Followed to define when a dispute arises.
• Union of India and Another v. M/s L. K. Ahuja and Co., [(1988) 3 SCC 76]: Followed to distinguish between the limitation for a claim and an application.
• J.C. Budhraja v. Chairman, Orissa Mining Corporation Ltd. and Another, [(2008) 2 SCC 444]: Followed to distinguish between the limitation for filing a petition and the claims.
• SBP & Co. v. Patel Engineering Ltd. and Another, [(2005) 8 SCC 618]: Followed to emphasize that a party should not be dragged into arbitration when there is no arbitrable dispute.
• National Insurance Company Limited v. Boghara Polyfab Private Limited, [(2009) 1 SCC 267]: Followed to categorize issues a court must decide when appointing an arbitrator.
• Geo Miller and Company Private Limited v. Chairman, Rajasthan Vidyut Utpadan Nigam Limited, [(2020) 14 SCC 643]: Distinguished. The Court held that the “breaking point” was in 2016, not 2019.
• Bharat Sanchar Nigam Limited and Another v. Nortel Networks India Private Limited, [(2021) 5 SCC 738]: Followed to hold that courts can refuse to make a reference if claims are ex facie time-barred.
• Secunderabad Cantonment Board v. B. Ramachandraiah and Sons, [(2021) 5 SCC 705]: Followed to reiterate that a subsequent rejection does not give a fresh start to the limitation period.
• NTPC Ltd. v. SPML Infra Ltd., [2023 SCC Online SC 389]: Followed to note that the arbitral tribunal is the preferred first authority to determine questions of non-arbitrability.
• Vidya Drolia and Ors. v. Durga Trading Corporation, [(2021) 2 SCC 1]: Followed to outline the principles for determining the arbitrability of disputes.
• Welspun Enterprises Ltd. v. NCC Ltd., [(2022) 295 DLT 286]: Followed to hold that the limitation period runs when a party acquires the right to refer disputes to arbitration.
• Zillon Infraprojects Pvt. Ltd. v. Bharat Heavy Electricals Limited, [2023 SCC OnLine Cal 756]: Not followed. The Court held that the cause of action was not continuous.
• Dwijendra Narain Roy v. Joges Chandra De and others, [AIR 1924 Cal 600]: Followed to explain the true test to determine when a cause of action could be said to have accrued.
• Mussummat Chand Kour and Another v. Partab Singh and Others, [ILR (1889) 16 Cal 98]: Followed to define “cause of action” as the grounds set forth in the plaint.
• Panchu Gopal Bose v. Board of Trustees for Port of Calcutta, [(1993) 4 SCC 338]: Followed to hold that the Limitation Act applies to arbitrations, and the cause of arbitration accrues when the right to require arbitration arises.
• State of Orissa v. Damodar Das, [(1996) 2 SCC 216]: Followed to reiterate that the defaulting party should bear the hardship.
• Hari Shankar Singhania v. Gaur Hari Singhania, [(2006) 4 SCC 658]: Followed to hold that a reference to arbitration is required to be filed within three years when the right to apply accrues.
• West Riding of Yorkshire County Council v. Huddersfield Corpn., [(1957) 1 All ER 669]: Followed to hold that the Limitation Act applies to arbitrations as it applies to actions in the High Court.

What weighed in the mind of the Court?

The Supreme Court emphasized the importance of adhering to the limitation period prescribed by law. The Court noted that the cause of action arose when the Ministry of Defence encashed the bank guarantee and deducted liquidated damages on 26 September 2016. The Court found that the petitioner’s attempt to extend the limitation period through continuous negotiations was not valid, as the “breaking point” had already occurred in 2016. The court also highlighted that the claims were ex facie time-barred, and there was no reason to refer the matter to arbitration.

Fact:Law Ratio

The Court’s decision was significantly influenced by legal considerations, particularly the application of the Limitation Act, 1963, and the interpretation of relevant case laws. While the facts of the case were considered, the legal framework and precedents played a more dominant role in the Court’s reasoning.

Logical Reasoning

Judgment

The Supreme Court held that the claims of the petitioner were time-barred. The Court emphasized that the cause of action arose on 26 September 2016, when the Ministry of Defence deducted the liquidated damages. The Court rejected the petitioner’s argument that the limitation period should be extended due to ongoing negotiations, stating that mere negotiations do not postpone the cause of action. The Court also noted that the “breaking point” was in 2016, when the bank guarantee was encashed and the liquidated damages were deducted.

The Court observed, “Even according to the petitioner, the disputes arose between the parties in relation to the wrongful encashment of bank guarantee vide letter dated 16.02.2016 for Euro 201,793.75 (“BG”) and for wrongful imposition of liquidated damages to the tune of Euro 399,0240.10. We are at one with the learned ASG that this was the “Breaking Point”.”

The Court further stated, “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.”

The Court also noted, “The case on hand is clearly and undoubtedly, one of a hopelessly barred claim, as thecause of action arose on 26.09.2016 and the notice invoking arbitration was issued on 08.11.2021, which is beyond the period of three years.”

The Supreme Court dismissed the petition filed by M/S B AND T AG, holding that the claims were time-barred and could not be referred to arbitration.

Ratio Decidendi

The ratio decidendi of the judgment is that claims which are time-barred under the Limitation Act, 1963, cannot be referred to arbitration. The cause of action for limitation purposes arises when a party has a right to seek relief, and mere negotiations do not extend the limitation period. The Court held that the “breaking point” for limitation was when the Ministry of Defence encashed the bank guarantee and deducted liquidated damages, not when the parties ceased negotiations.

Obiter Dicta

While the primary focus of the judgment was on the limitation issue, the Court also made some observations that can be considered obiter dicta:

• The Court reiterated the importance of adhering to statutory limitation periods and that these cannot be defeated on the ground of negotiations.
• The Court noted that the issue of limitation is a mixed question of law and fact, but in cases where the claims are ex facie time-barred, the court can refuse to refer the matter to arbitration.
• The Court emphasized that a party should not be dragged into arbitration when there is no arbitrable dispute, particularly when the claims are time-barred.
• The Court also noted that the arbitral tribunal is the preferred first authority to determine questions of non-arbitrability, but that courts may reject claims that are manifestly and ex-facie non-arbitrable.

Conclusion

The Supreme Court’s decision in M/S B AND T AG vs. MINISTRY OF DEFENCE reinforces the importance of adhering to limitation periods in arbitration proceedings. The Court clarified that mere negotiations do not extend the limitation period and that the “breaking point” should be considered when determining the accrual of the cause of action. This judgment serves as a reminder that parties must be diligent in pursuing their claims within the prescribed time limits, and that time-barred claims cannot be revived through arbitration.

Key Takeaways:

• Limitation periods apply to arbitration as they do to court proceedings.
• The cause of action for limitation purposes arises when the right to seek relief accrues.
• Mere negotiations do not extend the limitation period.
• Courts can refuse to refer a matter to arbitration if the claims are ex facie time-barred.
• Parties must be diligent in pursuing their claims within the prescribed time limits.