The Breaking Point to Determine limitation for an Appointment of an Arbitrator – An Analysis

In May 2023, the Supreme Court of India made a significant ruling regarding the appointment of an arbitrator. According to the court’s decision, the cause of action for the arbitration would start from the “Breaking Point,” which is defined as the moment when any reasonable party would abandon efforts to reach a settlement and consider referring the dispute for arbitration. The court clarified that the “Breaking Point” should be considered as the date on which the cause of action arose for the purpose of limitation. This ruling provides important guidance for arbitration proceedings in India.[1]

In a recent development, a company based in Switzerland engaged in the manufacturing of arms and related products filed a petition under Section 11(6) of the Arbitration and Conciliation Act, 1996. The petition sought the appointment of an arbitrator to resolve disputes and claims arising from a contract executed in the Ministry of Defence in the year 2012. However, the division bench, presided by Dr. DY Chandrachud, Chief Justice of India, and Justice J.B. Pardiwala, rejected the petition. The bench held that the petitioner’s claim was barred due to a significant delay in asserting its rights. The petitioner’s conduct indicated that it failed to realize its rights for a period exceeding five years, which led to the rejection of the petition.

This ruling emphasizes the importance of timely assertion of rights in arbitration cases, underscoring the need for parties to promptly pursue their claims to avoid potential legal consequences.

Issue: The central issue in the present case revolved around whether time-barred or limitation-barred claims, known as “live claims,” can be referred to arbitration.

Analysis: Section 11 of the Arbitration and Conciliation Act, 1996, deals with the appointment of arbitrators, and it does not impose any specific time restriction for filing an application for such appointment. On the other hand, Section 43 of the Act clarifies that the Limitation Act, 1963, is applicable to both arbitrations and court proceedings.

The Court expounded that when a petition under Section 11(6) of the Act seeks the appointment of an Arbitral Tribunal, which must be filed before the Supreme Court or High Court, Article 137 of the Schedule to the Limitation Act, 1963, comes into play. According to Article 137, the period of limitation for such cases is three years, commencing from the date when the right to apply arises.

In reaching its decision, the Court drew on the authority of the case of Merla Ramanna v. Nallaparaju, wherein it was clarified that the initial point of limitation under Article 137 is the date when the ‘right to apply’ materializes.[2] The term “the right to apply” is a broad common law principle and should be interpreted based on the specific circumstances of each case. It serves as a residuary article applicable  to several classes of applications, and its interpretation should consider the unique circumstances of the case at hand.

The Apex Court also referred the case of Major (Retd.) Inder Singh Rekhi v. Delhi Development Authority,[3] the bench laid down three principles of law:-

• When the work gets completed, the right to receive the payment starts.
• A dispute arises when there is a claim on one side and its denial by the other.
• The cause of action cannot be postponed by any person in writing repeatedly letters or sending reminders to him.

After analysing many decisions in the present case, the court stated that there is a very fine difference between the plea that the claims raised are barred by the limitation and the plea that the application for appointment of an arbitrator is barred by limitation.

The Court contended that whether any particular facts constitute a cause of action it has to be determined with the help of the facts of each and every case, rather than the form of the action. If there is any case of an infringement of a right that happens at a specific time, the complete cause of action will said to have arisen then and there. In such cases, the party cannot file an application for settlement of dispute of his right infringed, within the limited time period by the Limitation Act. It allows the right to distinguish by lapse of time and wait for another cause of action and file an application under Section 11 of the Act 1996 for the establishment of his right which was not then alive and had been extinguished. In such case, application means revival of a right, which had been extinguished under the Act 1963 and therefore, not available for any purposes. These kinds of proceedings are not maintainable and would meet by the plea of limitation under Article 137 of the Act 1963.

In the present case, when the bank guarantee came to be encashed in 2016 and the requisite amount is transferred to the Government account, the matter was closed there. It is explained that the “breaking point” should be treated from the date when the cause of action arose for the purpose of limitation.

Conclusion

The process of negotiations continues even for a period of ten years or twenty years depending on the different circumstances of case after the cause of action has arisen. It is stated by the legislature that a limit of three years for the enforcement of a claim and this statutory time period cannot be discarded on the ground that the parties were negotiating. Therefore, the Court rejected the petition and held that the case at hand is clearly a barred claim, as the petitioner by its conduct slept over its right for more than five years.

[1]B & T AG v. Ministry of Defence, Arbitration Petition (C) No. 13 of 2023.

[2]MerlaRamanna v. Nallaparaju, (1955) 2 SCR 938

[3]Major (Retd.) Inder Singh Rekhi v. Delhi Development Authority, (1988) 2 SCC 338.