Negotiations Don’t Extend Limitation Period for Arbitration, Rules Indian Supreme Court

The Supreme Court of India recently ruled that negotiations between parties do not extend the limitation period for filing applications for the appointment of an arbitrator under the Arbitration and Conciliation Act, 1996. The Court maintained that the three-year limitation period commences from the date when the cause of action arose, irrespective of any subsequent negotiations.

The ruling came during the adjudication of an application filed by M/s B and T AG, a Switzerland-based company, against the Ministry of Defence, Government of India. The company sought the appointment of an arbitrator to resolve disputes arising from a contract signed in 2012. Chief Justice Dr. Dhananjaya Y. Chandrachud and Justice J. B. Pardiwala presided over the case.

The case finds its roots in 2009, when the Ministry of Defence tendered for the procurement of Sub Machine Guns. M/s B and T AG won the bid, with the contract signed in 2012. Subsequently, the company was accused of delaying the supply of goods, prompting the Ministry to invoke a Bank Guarantee to recover the imposed Liquidated Damages.

The Ministry communicated its decision to M/s B and T AG in 2016 and deducted the liquidated damages amount, crediting it into the account of the Government of India. Despite ongoing negotiations until 2019, no settlement was reached. The company eventually issued a Notice invoking Arbitration in 2021 and filed a petition in 2023 for the appointment of an arbitrator.

The Ministry contested the petition, citing it as time-barred. They argued that the cause of action arose in 2016 when the amount was deducted, rendering the limitation period expired by 2019. However, M/s B and T AG contended that the cause of action was postponed due to the continuation of bilateral negotiations until 2019.

The Supreme Court was tasked with determining whether the application for appointment of an arbitrator was barred by limitation. The Bench acknowledged that while the Arbitration Act does not specify a time period for filing an application for appointment of an arbitrator, the three-year limitation provided under Article 137 of the Limitation Act, 1963 applies.

The Justices reasoned that negotiations might persist even decades after the cause of action has arisen. Nevertheless, these discussions do not delay the cause of action for the purpose of limitation. The Bench cited the legislative prescription of a three-year limit for enforcing a claim, emphasizing that this statutory time frame could not be circumvented on the pretext of negotiations.

In view of a letter issued in 2016, the Bench perceived that disputes between the parties had emerged in 2014, thus ruling out the contention of M/s B and T AG that the limitation period was extended due to ongoing negotiations until 2019.

The court also determined that the cause of action arose in 2016 when the Ministry deducted the liquidated damages amount. According to the Justices, the insistence by M/s B and T AG that it continued negotiations with the Ministry in hopes of a friendly settlement would not extend the limitation period.

Ultimately, the Supreme Court dismissed the arbitration petition, declaring it hopelessly time-barred. This ruling underscored the fixed limitation period for arbitration, regardless of prolonged negotiations, which is likely to shape future arbitration proceedings in India.

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