On 18th May 2023, a two-judge bench of the Supreme Court in B&T AG v. Ministry of Defence[1](“B&T”) ruled that mere negotiations, as in the case of a civil suit, will not postpone the cause of action for the purpose of computing limitation for initiation of arbitration[2].
This decision, although consistent with a long line of judgments in the context of computation of period of limitation for arbitral claims, waters down the progressive view taken by the Supreme Court in the case of Geo Miller & Co. Pvt. Ltd. v. Rajasthan Vidyut Utpadan Nigam Ltd.[3] (“Geo Miller”).
In a previous blog, we examined the issue of whether time spent in good faith negotiations can be excluded for the purpose of computing the period of limitation for reference to arbitration. We analysed the 2019 Supreme Court decision in the Geo Miller Case, where a three-judge bench observed 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”, provided that (i) “the entire negotiation history between the parties” is “specifically pleaded and placed on the record”; and (ii) the party seeking reference to arbitration had not yet “asserted their claim”.
In this blog, we examine the B&T Case and re-visit the issue of whether bona fide negotiations towards an amicable settlement may be excluded for the purpose of computing the period of limitation for reference to arbitration.
Factual Background
In the B&T Case, the Supreme Court was deciding a petition under Section 11 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) filed by B&T AG, a Swiss defence supplier, seeking appointment of an arbitrator for adjudication of its disputes with the Ministry of Defence, Government of India (“GoI”) under a 2012 contract for supply of sub machine guns. Relevant facts are briefly set out.
| 2016 | GoI encashed a warranty bond and despite B&T AG’s objections, deducted a certain sum towards recovery of liquidated damages leviable on account of delayed supply of goods. | According to GoI, this is when B&T AG’s cause of action arose. |
| 2016-17 | Parties engaged in “bilateral discussions” to resolve their disputes. This was mandated under the 2012 contract. | According to B&T AG, this period was to be excluded for the purpose of computing limitation. |
| 2017 | GoI communicated to B&T AG that it would not reconsider its decision. | According to B&T AG, this was the “Breaking Point”. |
| 2021 | B&T AG issued a notice invoking arbitration. | According to B&T AG, after excluding the covid period[4], limitation for invoking arbitration would end sometime in 2022. Thus, its claim was not time-barred. |
| Feb, 2023 | B&T AG filed a petition before the Supreme Court seeking appointment of an arbitrator. | According to GoI since B&T AG’s claim itself was ex-facie time-barred the Section 11 also deserved to be dismissed. |
Limitation period in arbitrations
In the B&T Case, the Supreme Court held that even according to B&T AG, disputes arose between parties in 2016.[5] The justifications put forward by B&T AG were duly considered, and thereafter, GoI made its final decision to encash the bank guarantee for recovery of liquidated damages.[6] This was a positive action crystallizing the rights/cause of action of B&T AG.[7] This was the “Breaking Point” at which any reasonable party would have abandoned efforts at arriving at a settlement and contemplated referring the dispute to arbitration. This date should be treated as the date on which the cause of action arose for the purpose of limitation.[8] This was the end of the matter. To say that even thereafter, B&T AG kept negotiating with the GoI in anticipation of some amicable settlement would not save the period of limitation.[9] Notwithstanding an arbitration clause that may provide to the contrary, time would still run from the normal date when the cause of action would have accrued if there had been no arbitration clause.[10] In other words, “bilateral discussions” for an indefinite period of time would not save the situation so far as the accrual of cause of action and the right to apply for appointment of arbitrator is concerned.[11] Mere negotiations will not postpone the “cause of action” for the purpose of limitation. Negotiations may continue for a period of ten years or twenty years after the cause of action had arisen but the legislature has prescribed a statutory limit of three years for enforcement of a claim, which cannot be defeated on the ground that parties were negotiating.[12] In any case, a mere bald assertion in this regard is not sufficient and the entire history of negotiation is required to be pleaded and placed on record.[13]
Thus, rejecting the petition, the Supreme Court held that B&T AG slept over its right for more than five years and its claim is therefore, clearly, undoubtedly and hopelessly barred.[14]
Concluding Remarks
The two-judge bench decision of the Supreme Court in the B&T Case appears to dilute the view of the three-judge bench in the Geo Miller Case on exclusion of the period of negotiations from computation of limitation period for reference to arbitration. Whilst it takes note of the observations made in the Geo Miller Case in the context of the Court’s decision in that case[15], it does not elaborate on facts and circumstances that would permit exclusion of the negotiating period from computation of the limitation period.
Interestingly, the 2018 amendment to the Commercial Courts Act, 2015 introduced Section 12A on pre-institution mediation and settlement. Prior to institution of a commercial suit, which does not contemplate any urgent interim relief, Section 12A mandates exhaustion of pre-institution mediation. Further, the period during which parties remain occupied with pre-institution mediation is excluded when computing the limitation period for institution of a commercial suit. Similarly, even after a civil suit has been filed, parties are free to engage in settlement discussions for amicable resolution of their disputes[16].
Unlike in the case of a commercial suit, time spent in contractually mandated pre-arbitral negotiations is not excluded from computation of the limitation period for reference to arbitration. Even after issuance of the notice invoking arbitration, parties must be alert and should file a petition seeking appointment of an arbitrator within three years from the date of refusal to nominate the arbitrator or expiry of 30 days from the date on which a request to nominate the arbitrator was made, whichever is earlier.[17] Once an arbitration commences, Section 29A[18] of the Arbitration Act requires the tribunal to pass an award within twelve months from the date of completion of pleadings[19], extendable by six months by parties’ consent and extendable further only by an order of a competent court for sufficient cause.
Given that (i) one of the objectives of alternate dispute resolution is to reduce the burden on the judicial system, and (ii) Section 21 of the Arbitration Act permits parties to contractually agree upon the date of commencement of arbitral proceedings, excluding time-bound good faith negotiations while computing the limitation period for reference of disputes to arbitration may be a welcome change. It remains to be seen whether the courts or the legislature deem it fit to bring in such a change in the future.
For further information, please contact:
Indranil Deshmukh, Partner, Cyril Amarchand Mangaldas
indranil.deshmukh@cyrilshroff.com
[1] 2023 SCC OnLine SC 657
[2] B&T Case at Para 71; See also Panchu Gopal Bose v. Port of Calcutta (1993) 4 SCC 338 at Para 11.
[3] (2020) 14 SCC 643 at Paras 29, 30.
[4] In re Cognizance for Extension of Limitation (2022) 3 SCC 117.
[5] B&T Case Para 73.
[6] B&T Case Para 75.
[7] B&T Case Para 46 read with Para 73.
[8] B&T Case at Paras 44, 73, 76.
[9] B&T Case at Para 73.
[10] B&T Case at Para 70; See also Panchu Gopal Bose v. Board of Trustees for Port of Calcutta, (1993) 4 SCC 338 at Para 11.
[11] B&T Case at Para 37.
[12] B&T Case at Para 77.
[13] B&T Case at Para 75.
[14] B&T Case at Para 80.
[15] B&T Case at Para 45 (mere correspondence by way of writing letters/reminders would not extend the time of limitation once the cause of action has arisen).
[16] Section 89 of the Code of Civil Procedure, 1908.
[17] Bharat Sanchar Nigam Limited v. Nortel Networks India Private Limited, (2021) 5 SCC 738 at Para 19.
[18] In matters other than international commercial arbitration.
[19] Section 23(4) of the Arbitration Act requires the pleadings to be completed within six months of appointment of the tribunal.
