TaxTMI 
TaxTMI 
2023 (5) TMI 853
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....18.11.2009 floated an urgent tender for procurement of 1,568 Sub Machine Guns under a Fast Track Procedure. The petitioner 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. 3. The dispute between the parties arose in relation to the alleged wrongful encashment of warranty bond by the respondent. The respondent vide its letter dated 16.02.2016, directed the Joint Chief Executive Officer, State Bank of India, Frankfurt Branch, Germany to encash the WBG No. 12/380 for its full value i.e., Euro 201,793.75 and remit the amount through direct bank transfer to the Principal Controller of Defence Account (PCDA, Government account) in accordance with the details stated in the letter. One copy of the letter dated 16.02.2016 was also forwarded to the petitioner. This action on the part of the respondent, i.e., of encashing Liquidated Damages (LDs) for the requisite amount was on account of delay in the supply of goods beyond the contractual time period. 4. The respondent, vide its letter dated 24.02.2016....
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....s arose between the parties in relation to 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. 22.09.2017: It is pertinent to state that between 16.02.2016 and 22.09.2017, the parties were constantly engaged in "bilateral discussion" as specifically mandated by Article 21 of the Contract in order to resolve their disputes regarding the wrongful deduction of Liquidated damages and encashment of the BG. The Petitioner had urged the Respondent to reconsider the wrongful Encashment of BG. However, the Respondent, vide letter dated 22.09.2017 for the first time communicated to the Petitioner that it would not reconsider the request. 2017-2019: Even after the communication dated 22.09.2017, the Parties were constantly trying to negotiate and resolve their disputes. In relation to which the Petitioner even attended a meeting with Director General (Acquisition.) and Additional Secretary. 04.09.2019: The Petitioner further requested the Respondent to review and discuss the wrongful imposition of Liquidated Damages and give a fair chance to t....
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....n connection with the present Contract, including the one connected with the validity of the present Contract or any part thereof, shall be settled by bilateral discussions. 21.2. Any dispute, disagreement of question arising out of or relating to this Contract or relating to construction or performance (except as to any matter the decision or determination whereof is provided for by these conditions), which cannot be settled amicably, shall within sixty (60) days or such longer period as may be mutually agreed upon, from the date on which either party informs the other in writing by a notice that such dispute, disagreement or question exists, will be referred to the Arbitration Tribunal consisting of three arbitrators. 21.3 Within sixty (60) days of the receipt of the said Notice, one arbitrator shall be nominated in writing by SELLER and one arbitrator shall be nominated by BUYER. 21.4. The third arbitrator, who shall not be a citizen or domicile or of the country either of the parties or of any other country unacceptable to any of the parties shall be nominated of the parties within (90) days of the receipt of the notice mentioned above, failing which ....
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....contract, including the one connected with the validity of the present contract or in part thereof, shall be settled by 'bilateral discussions'. 13. According to the learned counsel, the aforestated is one of the distinguishing features of the Contract in question as in defence procurement contracts, it would be in the interest of the parties to resolve the disputes if any by way of 'bilateral discussions' rather than by initiating arbitration proceedings. The learned counsel submitted that the respondent for the first time informed the petitioner by letter dated 22.09.2017 that the proposal put forward by the petitioner to reconsider the decision of wrongful deduction of LD and encashment of bank guarantee was rejected. According to the learned counsel, even thereafter, i.e., after 22.09.2017, the parties continued to negotiate with each other until 04.09.2019. 14. Relying on the decision of this Court in the case of Geo Miller and Company Private Limited v. Chairman, Rajasthan Vidyut Utpadan Nigam Limited, reported in (2020) 14 SCC 643, it was submitted that the time spent in pre-arbitration negotiations, held in good faith may be excluded for the purpose of computation of ....
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....es around the deduction of LDs by encashment of the bank guarantee. The last of such deduction was made on 26.09.2016. According to the learned ASG, the cause of action in the present case, could be said to have arisen on 26.09.2016. However, the notice for invoking of arbitration in accordance with Article 21 of the Contract was issued only on 08.11.2021, i.e., after a period of more than five years and much beyond the limitation period of three years. According to the learned ASG, the claim of the petitioner is hopelessly time barred. 22. The learned ASG requested the Court to look into the following dates and events for the purpose of deciding the present petition: 27.03.2012: Contract was executed between the Petitioner and Respondent. 26.09.2016: CAUSE OF ACTION arose Liquidated damages were finally deducted. 25.09.2019: The limitation period of 3 years expired. 08.11.2021: Advocate for claimant sent 'Notice for invoking of Arbitration under Article 21 of the Contract'. 16.11.2021: Respondent received the Notice invoking arbitration. 03.02.2023: The Petitioner filed Arbitration Petition No. 13 i.e. the Present Petition u....
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....ations 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." 30. In context....
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....where in this Division. Three Years When the right to apply accrues." 33. A plain reading of the aforesaid Article would indicate that the period of limitation in cases covered by Article 137 is three years and the said period would begin to run when the right to apply accrues. 34. The starting point of limitation under Article 137 according to third column of the Article is the date when 'the right to apply arises'. This being a residuary Article to be adopted to different classes of applications, the expression 'the right to apply' is an expression of a broad common law principle and should be interpreted according to the circumstances of each case. 'The right to apply' has been interpreted to mean 'the right to apply first arises'. (See: Merla Ramanna v. Nallaparaju and Others, (1955) 2 SCR 938) 35. Further, it would be necessary to refer to Section 9 of the Act 1963 of the Act which reads thus: "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: Provided that, where letters of administration to the estate of a creditor have been granted to h....
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.... did such dispute arise. The High Court proceeded on the basis that the work was completed in 1980 and, therefore, the appellant became entitled to the payment from that date and the cause of action under Art. 137 arose from that date. But in order to be entitled to ask for a reference under S. 20 of the Act there must not only be an entitlement to money but there must be a difference or a dispute must arise. It is true that on completion of the work a right to get payment would normally arise but where the final bills as in this case have not been prepared as appears from the record and when the assertion of the claim was made on 28th Feb. 1983 and there was non-payment, the cause of action from that date, that is to say, 28th of Feb. 1983. It is also true that a party cannot postpone the accrual of cause of action by writing reminders or sending reminders but where the bill had not been finally prepared, the claim made by a claimant is the accrual of the cause of action. A dispute arises where there is a claim and a denial and repudiation of the claim. The existence of dispute is essential for appointment of an arbitrator under S. 8 or a reference under S. 20 of the Act. See Law ....
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....ulated in Section 20 of the Act. xxx xxx xxx 8. In view of the well settled principles we are of the view that it will be entirely a wrong to mix up the two aspects, namely, whether there was any valid claim for reference under Section 20 of the Act and, secondly, whether the claim to be adjudicated by the arbitrator, was barred by lapse of time. The second is a matter which the arbitrator would decide unless, however, if on admitted facts a claim is found at the time of making an order under Section 20 of the Arbitration Act, to be barred by limitation. In order to be entitled to ask for a reference under Section 20 of the Act, there must be an entitlement to money and a difference or dispute in respect of the same. It is true that on completion of the work, right to get payment would normally arise and it is also true that on settlement of the final bill, the right to get further payment gets weakened but the claim subsists and whether it does subsist, is a matter which is arbitrable. In this case the claim for reference was made within three years commencing from April 16, 1976 and the application was filed on December 13, 1976. We are, therefore, of the view t....
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....hich the arbitration is deemed to have commenced. 26. Section 37(3) of the Act provides that for the purpose of the Limitation Act, an arbitration is deemed to have been commenced when one party to the arbitration agreement serves on the other party thereto, a notice requiring the appointment of an arbitrator. Such a notice having been served on 4-6-1980, it has to be seen whether the claims were in time as on that date. If the claims were barred on 4-6-1980, it follows that the claims had to be rejected by the arbitrator on the ground that the claims were barred by limitation. The said period has nothing to do with the period of limitation for filing a petition under Section 8(2) of the Act. Insofar as a petition under Section 8(2) is concerned, the cause of action would arise when the other party fails to comply with the notice invoking arbitration. Therefore, the period of limitation for filing a petition under Section 8(2) seeking appointment of an arbitrator cannot be confused with the period of limitation for making a claim. The decisions of this Court in Major (Retd.) Inder Singh Rekhi v. DDA [(1988) 2 SCC 338], Panchu Gopal Bose v. Board of Trustees for Port of Cal....
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....eriod 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. The threshold for determining when such a point arises will be lower in the case of commercial disputes, where the party's primary interest is in securing the payment due to them, than in family disputes where it may be said that the parties have a greater stake in settling the dispute amicably, and therefore delaying formal adjudication of the claim. 29. Moreover, in a commercial dispute, while mere failure to pay may not give rise to a cause of action, once the applicant has as....
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.... in 2002, and requested the appointment of an arbitrator before a court only by the end of 2003, his claim is clearly barred by limitation." (Emphasis supplied) 46. Relying on the observations made in para 21 referred to above, the submission canvassed on behalf of the respondent is that para 28 of Geo Miller (supra) may be applicable in a given set of facts where there is subsisting/continuing cause of action. However, in the present case, the Liquidated Damages were deducted by encashment of bank guarantee. This was a positive action on the part of the respondent, crystalising the rights/cause of action and the same should not be interpreted as a continuing cause of action. 47. In Bharat Sanchar Nigam Limited and Another v. Nortel Networks India Private Limited, reported in (2021) 5 SCC 738, this Court undertook a comprehensive analysis of the relevant provisions and held that in cases where claims are ex facie time barred, the Court may refuse to make reference under Section 11 of the Act 1996. This decision assumes importance and we should look into the same in little details. The appellant BSNL issued a tender notification inviting bids for planning, engineering, supply,....
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.... taken by a claimant must necessarily fall within the statutory period of 3 years from the date on which the right to apply accrues. The respondent submitted the following- * The amendment to Section 11 by the Arbitration and Conciliation (Amendment) Act, 2015 provides for a limited scope of enquiry at the pre-reference stage which is restricted only to the 'existence; of an arbitration agreement under Section 11(6A). * The objection with respect to the claims being allegedly time barred, could be decided by the arbitral tribunal. * The High Court rightly limited the enquiry at the pre-reference stage to the 'existence' of the arbitration agreement. * The starting point of limitation for initiating a proceeding under Section 11 is the expiry of 30 days from the date of issuing notice of arbitration on 29.04.2020. The cause of action was, therefore, a continuing one. The High Court had rightly held that the issue of limitation must be decided by the arbitral tribunal. The following two questions fell for the consideration of this Court- * The period of limitation for filing an application under Section 11 of the Act 1996; and ....
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.... invoked on 29-4-2020. There is not even an averment either in the notice of arbitration, or the petition filed under Section 11, or before this Court, of any intervening facts which may have occurred, which would extend the period of limitation falling within Sections 5 to 20 of the Limitation Act. Unless, there is a pleaded case specifically adverting to the applicable section, and how it extends the limitation from the date on which the cause of action originally arose, there can be no basis to save the time of limitation. 49. The present case is a case of deadwood/no subsisting dispute since the cause of action arose on 4-8-2014, when the claims made by Nortel were rejected by BSNL. The respondent has not stated any event which would extend the period of limitation, which commenced as per Article 55 of the Schedule of the Limitation Act (which provides the limitation for cases pertaining to breach of contract) immediately after the rejection of the final bill by making deductions. 50. In the notice invoking arbitration dated 29-4-2020, it has been averred that : "Various communications have been exchanged between the petitioner and the respondents eve....
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.... months. In view of the legislative intent, the period of 3 years for filing an application under Section 11 would run contrary to the scheme of the Act. This Court, therefore, considered it necessary for the Parliament to effect an amendment to Section 11 of the Act 1996, prescribing a specific period of limitation within which a party may move the court for making an application for appointment of arbitrators under Section 11 of the Act. [Reference: Article titled as 'Limitation for Filing Application for Appointment of Arbitrator' by Mr. M. Govindarajan] 48. In Secunderabad Cantonment Board v. B. Ramachandraiah and Sons, reported in (2021) 5 SCC 705, while taking note of both BSNL (supra) and Geo Miller (supra), it is held as under: "19. Applying the aforesaid judgments to the facts of this case, so far as the applicability of Article 137 of the Limitation Act to the applications under Section 11 of the Arbitration Act is concerned, it is clear that the demand for arbitration in the present case was made by the letter dated 7-11-2006. This demand was reiterated by a letter dated 13-1-2007, which letter itself informed the appellant that appointment of an arbitrato....
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....ermine and decide all questions of non-arbitrability. As an exception to the rule, and rarely as a demurrer, the referral court may reject claims which are manifestly and ex-facie non-arbitrable [Vidya Drolia supra note 7, para 154.4.]. Explaining this position, flowing from the principles laid down in Vidya Drolia (supra), this Court in a subsequent decision in Nortel Networks (supra) held [Nortel Networks supra note 22, para 45.1.]: "45.1 ...While exercising jurisdiction under Section 11 as the judicial forum, the court may exercise the prima facie test to screen and knockdown ex facie meritless, frivolous, and dishonest litigation. Limited jurisdiction of the courts would ensure expeditious and efficient disposal at the referral stage. At the referral stage, the Court can interfere "only" when it is "manifest" that the claims are ex facie time-barred and dead, or there is no subsisting dispute..." 27. The standard of scrutiny to examine the non-arbitrability of a claim is only prima facie. Referral courts must not undertake a full review of the contested facts; they must only be confined to a primary first review [Vidya Drolia supra note 7, para 134.] and let f....
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....the parties have agreed that they would first endeavour to resolve the disputes amicably in a particular manner, it is necessary for them to first exhaust that procedure before exercising any right to refer the disputes to arbitration. 59. In Hari Shankar Singhania v. Gaur Hari Singhania [(2006) 4 SCC 658], the Supreme Court categorically held that a reference to arbitration "is required to be filed within a period of three years when the right to apply accrues". It is, therefore, crucial to determine when such 'right to apply' accrues in a case. As per the Court, the right to apply would accrue when differences between the parties to the arbitration agreement were evident - when the parties reach a 'breaking point', that is, when a settlement with or without conciliation is no longer possible. Pertinently, the Court noted that the limitation period would not start so long as the parties were in dialogue even if differences surfaced during such period, as an interpretation to the contrary would inevitably "compel the parties to resort to litigation/arbitration even where there is serious hope of the parties themselves resolving the issues". Thus, the right to apply can be ....
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....tach to a claim for which there is as yet no right of action and does not run against a right for which there is no corresponding remedy or for which judgment cannot be obtained. Consequently the true test to determine when a cause of action has accrued is to ascertain the time when plaintiff could first have maintained his action to a successful result. ...." (Emphasis supplied) 54. "Cause of action" means the whole bundle of material facts, which it is necessary for the plaintiff to prove in order to entitle him to succeed in the suit. In delivering the judgment of the Board in Mussummat Chand Kour and Another v. Partab Singh and Others, reported in ILR (1889) 16 Cal 98, Lord Watson observed: "Now the cause of action has no relation whatever to the defence which may be set up by the defendant, nor does it depend upon the character of the relief prayed for by the plaintiff it refers entirely to the grounds set forth in the plaint as the cause of action, or in other words to the media upon which the plaintiff asks the court to arrive at a conclusion in his favour." (Emphasis supplied) 55. Cause of action becomes important for the purposes of calculating the limitatio....
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.... be made within 3 years from the date when the right to apply first accrues. There is no right to apply until there is a clear and unequivocal denial of that right by the respondent. It must, therefore, be clear that the claim for arbitration must be raised as soon as the cause for arbitration arises as in the case of cause of action arisen in a civil action. 58. Whether any particular facts constitute a cause of action has to be determined with reference to the facts of each case and with reference to, the substance, rather than the form of the action. If an infringement of a right happens at a particular time, the whole cause of action will be said to have arisen then and there. In such a case, it is not open to a party to sit tight and not to file an application for settlement of dispute of his right, which had been infringed, within the time provided by the Limitation Act, and, allow his right to be extinguished by lapse of time, and thereafter, to wait for another cause of action and then file an application under Section 11 of the Act 1996 for establishment of his right which was not then alive, and, which had been long extinguished because, in such a case, such an applica....
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....ck in the year 2014 itself. This is evident by the date 24.10.2014 figuring in the aforesaid letter dated 24.02.2016. The letter indicates that after the disputes arose between the parties, the petitioner tried to offer its explanation and put forward its case vide letter dated 24.10.2014. The respondent by letter dated 24.02.2016 clarified or rather informed the petitioner that the justifications put forward by the petitioner vide its letter dated 24.10.2014 were duly considered and thereafter, a final decision was taken for encashment of the liquidated damages. Therefore, the petitioner is not justified in saying that it continued to negotiate till 2019. The mere bald assertion in this regard is not sufficient as observed by this Court in Geo Miller (supra). The entire history of the negotiation between the parties must be specifically pleaded and placed on record. It is only after the entire history of negotiation is pleaded and placed on record that the Court would be in a position to consider such history so as 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 disput....
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....om arbitration agreement under Sections 5 and 12(2)(b) of the Act. [See: State of Orissa v. Damodar Das, (1996) 2 SCC 216] 65. The observations made by this Court in Panchu Gopal (supra) in paras 10, 11, 12, 13, 14 and 15 respectively, are also relevant. The observations read as under: "10. In West Riding of Yorkshire County Council v. Huddersfield Corpn. [(1957) 1 All ER 669] the Queen's Bench Division, Lord Goddard, C.J. (as he then was) held that the Limitation Act applies to arbitrations as it applies to actions in the High Court and the making, after a claim has become statute-barred, of a submission of it to arbitration, does not prevent the statute of limitation being pleaded. Russel on Arbitration, 19th Edn., reiterates the above proposition. At page 4 it was further stated that the parties to an arbitration agreement may provide therein, if they wish, that an arbitration must be commenced within a shorter period than that allowed by statute; but the court then has power to enlarge the time so agreed. The period of limitation for commencing an arbitration runs from the date on which the cause of arbitration accrued, that is to say, from the date when the claiman....
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..... 549 it is stated that just as in the case of actions the claim is not to be brought after the expiration of a specified number of years from the date when the claim accrues, so also in the case of arbitrations, the claim is not to be put forward after the expiration of a specified number of years from the date when the claim accrues. For the purpose of Section 37(1) 'action' and 'cause of action' in the Limitation Act should be construed as arbitration and cause of arbitration. The cause of arbitration, therefore, arises when the claimant becomes entitled to raise the question, i.e. when the claimant acquires the right to require arbitration. The limitation would run from the date when cause of arbitration would have accrued, but for the agreement. 14. Arbitration implies to charter out timeous commencement of arbitration availing the arbitral agreement, as soon as difference or dispute has arisen. Delay defeats justice and equity aid the promptitude and resultant consequences. Defaulting party should bear the hardship and should not transmit the hardship to the other party, after the claim in the cause of arbitration was allowed to be barred. The question, therefore, as....