Can pre arbitration negotiations be excluded while computing limitation

On 27 March 2012 a contract was entered between M/S B AND TAG and Ministry of Defence (MOD) for the supply of 1568 sub machine guns.

Supreme Court of India¹ Revisits Exclusion of Pre-Arbitration Negotiations in Computing Limitation for invoking Arbitration

Factual Matrix

On 27 March 2012 a contract was entered between M/S B AND TAG (TAG) and Ministry of Defence (MOD) for the supply of 1568 sub machine guns. A performance guarantee was issued by TAG. Owing to certain disputes, MOD, on 26 September 2016 encashed the BG for liquidated damages. Between September 2016 and November 2021 parties were in discussions to resolve the issues. On 8 November 2021, TAG invoked the arbitration clause, appointed an arbitrator and called upon MOD to appoint an arbitrator as well. MOD did not appoint an arbitrator. On 3 February 2023, TAG filed an arbitration petition before the Supreme Court of India for constitution of an arbitral tribunal.

Time Bar defence of MOD

MOD contend that the arbitration petition of TAG for constitution of tribunal should be rejected on the following grounds:

1. Cause of action for invoking arbitration arose on 26 September 2016 when BG was invoked and deducted.
2. The limitation period commenced on 26 September 2016 and three years later, expired on 25 September 2019.Arbitration Clause was invoked on 8 November 2021.

In view of the above, the Claim of TAG was time barred and the arbitration petition for constitution of tribunal should be rejected.

Arguments of TAG

TAG relied upon the decision of Supreme Court of India in Geo Miller² and argued that time spent in pre- arbitration negotiations, held in good faith may be excluded for the purpose of computation of the period of limitation. It was also argued by TAG that once the parties get involved in ‘bilateral discussions’ then the time stops to run as the contract mandates the parties to resolve the disputes by way of discussion and negotiations.

TAG relied upon the below observations of Supreme Court of India in Geo Miller to canvass their argument that pre-arbitration negotiations may be excluded for the purpose of computing limitation:

“28. Having perused through the relevant precedents, we agree that on a certain set of facts and circumstances, the period during which the parties were bona fide negotiating towards an amicable settlement may be excluded for the purpose of computing the period of limitation for reference to arbitration under the 1996 Act. However, in such cases the entire negotiation history between the parties must be specifically pleaded and placed on the record. The Court upon careful consideration of such history must find out what was the “breaking point” at which any reasonable party would have abandoned efforts at arriving at a settlement and contemplated referral of the dispute for arbitration. This “breaking point” would then be treated as the date on which the cause of action arises, for the purpose of limitation…

Decision of the Supreme Court of India

The Supreme Court of India held that the claims of TAG were time barred and rejected the arbitration petition for constitution of tribunal on the following grounds:

1. The period of limitation is three years, and the period would run when the right to applies accrues.
2. The observations of the Supreme Court of India in Geo Miller make it very clear that what is important for the Court is to find out what was the “Breaking Point” at which any reasonable party would have abandoned efforts at arriving at a settlement and contemplated referral of the dispute for arbitration.
3. When the bank guarantee was encashed in the year 2016 and the requisite amount stood transferred to the Government account that was the end of the matter. This “Breaking Point” should be treated as the date at which the cause of action arose for the purpose of limitation.
4. Negotiations may continue even for a period of 10 years or 20 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 3 years for the enforcement of a claim and this statutory period cannot be defeated on the ground that the parties were negotiating.
5. The case on hand is clearly and undoubtedly, one of a hopelessly barred claim, as the petitioner by its conduct slept over its right for more than five years. Statutory arbitrations stand apart.

Conclusion

This case high-lightens the importance of taking a conservative approach in invoking arbitration clause when negotiations to resolve outstanding issues takes an indefinite time. The claimant always has the option to invoke arbitration and explore a settlement while the arbitration process continues. This is a better option than running the risk of having the claims time barred.

Footnotes

1. 2023 SCC ONLINE SC 657 – M/S B AND TAG v/s Ministry of Defence

2. (2020) 14 SCC 643

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