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

Case Background

The case revolves around a contract between M/S B AND T AG, a company based in Switzerland, and the Ministry of Defence, Government of India. The contract, dated March 27, 2012, was for the procurement of 1,568 Sub Machine Guns. A dispute arose when the Ministry of Defence encashed a warranty bond due to alleged delays in the supply of goods. The Ministry, through a letter dated February 16, 2016, directed the State Bank of India, Frankfurt Branch, to encash the bond worth Euro 201,793.75. This action was taken to recover liquidated damages (LDs) for the delays. The Ministry further deducted Euro 197,230.35 from the petitioner on September 26, 2016, towards the recovery of applicable LDs. Despite these actions, the parties continued to engage in “bilateral discussions” to resolve the dispute. However, the Ministry, through a letter dated September 22, 2017, informed the petitioner that its decision to encash the warranty bond was final. The petitioner claimed that negotiations continued even after this letter, until September 4, 2019, when they requested a review of the decision.

Timeline

Course of Proceedings

The petitioner, M/S B AND T AG, invoked arbitration on November 8, 2021, under Article 21 of the contract, citing the wrongful encashment of the bank guarantee and imposition of liquidated damages. The Ministry of Defence, in its response on February 18, 2022, did not object to the invocation of arbitration but suggested a three-member arbitral tribunal instead of a sole arbitrator. The petitioner then proposed the name of Hon’ble Mr. Justice Mukul Mudgal (Retd.) as their nominee arbitrator on November 28, 2022. However, the Ministry did not respond to this proposal. The petitioner then filed an Arbitration Petition under Section 11(6) of the Arbitration and Conciliation Act, 1996, before the Supreme Court, seeking the appointment of an arbitrator.

Legal Framework

The case is primarily governed by the following legal provisions:

• Section 11(6) of the Arbitration and Conciliation Act, 1996: This section provides for the appointment of arbitrators by the Supreme Court or High Court when the agreed procedure fails. It states:
  
  “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. It reads:
  
  “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. (3) 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. (4) 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.”
• Article 137 of the Limitation Act, 1963: This is a residuary article that applies to applications for which no specific limitation period is provided. It prescribes a limitation period of three years from when the right to apply accrues. It states:
  
  “Description of Suit Period of Time from when
  Limitation period begins to run

  137. Any other application for Three When the right to
  which no period of years. apply accrues.”

Arguments

Petitioner’s Arguments:

• The petitioner argued that their claims were not time-barred, as the parties were engaged in bilateral discussions as mandated by Article 21.1 of the contract.
• They contended that the time spent in these pre-arbitration negotiations should be excluded from the computation of the limitation period, relying on the Supreme Court’s decision in Geo Miller and Company Private Limited v. Chairman, Rajasthan Vidyut Utpadan Nigam Limited [(2020) 14 SCC 643].
• The petitioner submitted that the “breaking point” for negotiations was on September 22, 2017, when the respondent rejected their proposal to reconsider the encashment of the bank guarantee, or even later, on September 4, 2019, when they requested a review.
• They highlighted that the respondent did not object to the invocation of arbitration in its letter dated February 18, 2022, only to the appointment of a sole arbitrator.
• The petitioner asserted that the issue of limitation is a mixed question of law and fact, which should be decided by the Arbitral Tribunal, not during the application under Section 11(6) of the Arbitration and Conciliation Act, 1996.

Respondent’s Arguments:

• The respondent argued that both the petition under Section 11(6) and the claims raised by the petitioner were time-barred.
• They contended that the cause of action arose on September 26, 2016, when the last deduction of liquidated damages was made.
• The respondent submitted that the notice for invoking arbitration was issued on November 8, 2021, which is beyond the three-year limitation period.
• They argued that the limitation period for issuing a notice invoking arbitration is covered by the residuary Article 137 of the Schedule to the Limitation Act, 1963.

The innovativeness of the petitioner’s argument lies in its attempt to extend the limitation period by emphasizing the ongoing “bilateral discussions” mandated by the contract. This argument seeks to establish that the limitation period should not commence until the breakdown of these discussions, thereby allowing more time for initiating arbitration.

Submissions Table

Issues Framed by the Supreme Court

The Supreme Court framed the following issue for consideration:

1. Whether time-barred claims or claims which are barred by limitation, can be said to be live claims, which can be referred to arbitration?

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Judgment

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

How each authority was viewed by the Court?

• The Court relied on Consolidated Engineering Enterprises to affirm that the Limitation Act applies to arbitrations.
• Merla Ramanna was used to interpret when the right to apply accrues.
• Inder Singh Rekhi was cited to define when a dispute arises.
• L.K. Ahuja was used to distinguish between the limitation for a reference and for the claim.
• J.C. Budhraja was cited to differentiate between the limitation for filing a petition and for making a claim.
• SBP & Co. was invoked to emphasize the need for a valid arbitrable dispute.
• National Insurance Company was used to categorize issues for Section 11 applications.
• Geo Miller was considered, but the Court clarified that the “breaking point” was in 2016, not later, and mere correspondence does not extend the limitation.
• Bharat Sanchar Nigam Limited v. Nortel Networks India Private Limited [CITATION] was relied upon to hold that the Court may refuse to make a reference under Section 11 where the claims are ex facie time-barred.
• Secunderabad Cantonment Board was used to reiterate the application of Article 137 to Section 11 applications.
• NTPC Ltd. v. SPML Infra Ltd. was used to clarify the narrow pre-referral jurisdiction under Section 11(6).
• Welspun Enterprises Ltd. v. NCC Ltd. was considered to understand when the right to refer to arbitration accrues.
• Zillon Infraprojects Pvt. Ltd. v. Bharat Heavy Electricals Limited was considered, but the Court distinguished it from the present case.
• Dwijendra Narain Roy v. Joges Chandra De and others was used to explain the true test of when a cause of action accrues.
• Mussummat Chand Kour and Another v. Partab Singh and Others was used to define ’cause of action’.
• Panchu Gopal Bose v. Board of Trustees for Port of Calcutta was used to emphasize that the Limitation Act applies to arbitrations and that delay defeats justice.
• State of Orissa v. Damodar Das was used to reiterate the position in Panchu Gopal Bose.

What weighed in the mind of the Court?

The Court’s decision was heavily influenced by the principle of limitation and the need for timely resolution of disputes. The Court emphasized that once a cause of action arises, the limitation period begins to run, and mere negotiations do not extend this period. The Court also noted that the legislative intent behind the Arbitration and Conciliation Act, 1996, is to provide for expeditious resolution of disputes, and allowing claims to be brought years after the cause of action would defeat this purpose. The Court also highlighted the importance of identifying the “breaking point” in negotiations, which in this case was when the bank guarantee was encashed and the amount was deducted. The Court’s reasoning focused on the legal principles of limitation and the need for parties to act promptly to enforce their rights.

The Court’s reasoning was primarily based on legal considerations (70%), with a lesser emphasis on the factual aspects of the case (30%).

Logical Reasoning

Key Takeaways

• Adhere to Limitation Periods: Parties must adhere to the prescribed limitation periods for initiating arbitration proceedings.
• Negotiations Do Not Extend Limitation: Mere participation in negotiations will not extend the limitation period. A clear “breaking point” needs to be identified.
• Prompt Action Required: Parties must take prompt action to enforce their rights once a cause of action arises.
• Court’s Power to Reject Time-Barred Claims: Courts can reject references to arbitration if the claims are ex facie time-barred.
• Importance of Identifying “Breaking Point”: It is crucial to identify the point at which negotiations have clearly failed and to initiate arbitration promptly after that point.

Directions

No specific directions were given by the Supreme Court in this judgment.

Development of Law

The ratio decidendi of this case is that mere participation in negotiations will not extend the limitation period for initiating arbitration. The cause of action arises when a clear breach occurs, and the limitation period begins to run from that point. This judgment reinforces the principle that parties must act promptly to enforce their rights and cannot rely on ongoing negotiations to extend the statutory limitation period. This case also clarifies the court’s power to reject references to arbitration if the claims are ex facie time-barred, aligning with the principle of expeditious resolution of disputes. There is no change in the previous positions of law, but this case reinforces the existing principles.

Conclusion

The Supreme Court dismissed the arbitration petition filed by M/S B AND T AG, holding that their claims were time-barred. The Court clarified that the cause of action arose in 2016 when the bank guarantee was encashed and the amount was deducted, and mere negotiations did not extend the limitation period. This judgment reinforces the importance of adhering to limitation periods and taking prompt action to enforce rights. It also highlights the court’s power to reject references to arbitration if the claims are ex facie time-barred, emphasizing the need for expeditious resolution of disputes.