Cause of Action to Appoint an Arbitrator Would Commence from the “Breaking Point”

In a major decision, the Supreme Court,  dismissed an arbitration petition filed by a Switzerland-based company, stating that it was hopelessly barred in time as the petitioner by its conduct slept over its right for more than five years.

The Division Bench of Chief Justice DY Chandrachud and Justice JB Pardiwala stated, “Bilateral Discussions for an indefinite period would not save the situation vis-a-vis accrual of the cause of action and the right to apply for the appointment of the arbitrator,”

The case involved a dispute between the petitioner and the Government of India in relation to the wrongful encashment of a warranty bond. The petitioner filed an arbitration petition under Section 11 (6) of the Arbitration and Conciliation Act, 1996 seeking the appointment of an arbitrator. 

The Court held that the petitioner’s claims were time-barred under Article 137 of the Limitation Act, 1963. Article 137 provides that the period of limitation for filing an application under Section 11 (6) of the Arbitration Act is three years. The Court held that the petitioner’s claim arose on September 26, 2016, when the respondent deducted the amount towards the recovery of LD. The petitioner filed the arbitration petition on September 4, 2019, which was more than three years after the cause of action arose.

The Court also held that the petitioner’s claim was not a live claim. The Court held that the LD was deducted by encashment of bank guarantee and this was a positive action on the part of the respondent, crystallizing the rights and cause of action. The petitioner’s continued negotiations with the respondent did not save the period of limitation.

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However, the Supreme Court held that the petition was time-barred and dismissed it.

“Negotiations may continue even for a period of ten years or twenty 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 three years for the enforcement of a claim and this statutory time period cannot be defeated on the ground that the parties were negotiating,”, the bench noted.

The court stated, “Parties must file their claims within the prescribed time period or they may lose their right to enforce them”.

Case Name: M/S B AND T AG Vs MINISTRY OF DEFENCE 

Case No.: ARBITRATION PETITION (C) NO. 13 OF 2023

Bench: Chief Justice DY Chandrachud and Justice JB Pardiwala

Order dated: 18.05.2023