The Supreme Court, vide its judgement dated 18th May 2023 in M/s B and T AG versus Ministry of Defence held that the cause of action to appoint an arbitrator would commence from the “Breaking Point” between the Parties. The Court also observed that the negotiations between the parties for the settlement of the dispute would not save their petition if it falls under the attack of limitation.

Facts leading up to the present dispute were as follows:
In the year 2009, Respondent, (Ministry of Defense, Government of India) floated a tender for procuring Sub Machine Guns under a fast-track procedure. The Petitioner (M/s B and T AG), a company based in Switzerland, was declared a successful bidder. In 2012, a contract was executed and signed between the parties. The dispute arose between the parties in relation to the alleged wrongful encashment of bank guarantee by the Respondent. There was an alleged delay on the part of the Petitioner in the supply of goods to the Respondent. The Respondent, in view of the alleged violation of the terms of the contract, directed the Bank to encash the bank guarantee which was submitted by the Petitioner in order to recover liquidated damages imposed on the Petitioner. The Petitioner was informed about the same by a letter by the Respondent that instructions have been issued for encashment of bank guarantee in 2016 and thereafter, it was consequently credited into the account of the Government of India. The parties were under negotiation till 2019 and could not arrive at any settlement. On 18.11.2021, the Petitioner issued a notice to the Respondent invoking Arbitration.

The Petitioner filed a petition under Section 11(6) of the Arbitration and Conciliation Act, 1996¹ before the Supreme Court seeking appointment of an arbitrator and the same was opposed by the Respondent on account of being time-barred and therefore, non-maintainable. The Respondent claimed that the petition was barred by limitation as the cause of action would be considered to have arisen when the bank guarantee was encashed by the Respondent.

Contention of the Petitioner
The Petitioner contended that the claims of the Petitioner were not time-barred as the parties have been in bilateral discussions as they were trying to amicably resolve the dispute. It was further pointed out that as per the clause of the contract, the parties shall settle the disputes through bilateral discussions. The Petitioner also relied on the judgement rendered in Geo Miller and Company Private Limited² which observed that time spent in pre-arbitration negotiations, held in good faith may be excluded for the purpose of computation of the period of limitation. The Petitioner contended that the ratio of the decision in Geo Miller and Company Private Limited applied to the present dispute and therefore, once the parties got involved in bilateral discussion up until 2019, the limitation ceased and therefore the petition is not time-barred.

The Petitioner also argued that the communication sent by the Respondent declining to reconsider the alleged illegal encashment of the bank guarantee should be considered to be the “Breaking Point” in the present dispute and the limitation would be calculated from that point and therefore, the petition was not barred by limitation.

Observation of the Supreme Court
The Court opined that an application under Section 11 of the Arbitration and Conciliation Act of 1996 is governed by Article 137 of the Schedule to the Limitation Act 1963 and therefore, it must 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. The claim for arbitration must be raised as soon as the cause for arbitration arises. If a party simply delays sending a notice seeking reference under the Act 1996 because they are unclear of when the cause of action arose, the claim can become time-barred even before the party realises the same.

The Court also observed that the Petitioner cannot take shelter under the judgement rendered in Geo Miller and Company Private Limited because in order to do so, the entire history of the negotiation between the parties must be specifically pleaded and placed on record.

It was further observed that the cause of action to appoint an Arbitrator commences from the ‘Breaking Point’ when any reasonable party would abandon efforts to settle amicably and would rather refer the dispute to arbitration and in the present matter, Breaking Point should be treated as the date at which the cause of action arose i.e. when the bank guarantee came to be encashed in 2016.

As far as the issue of bilateral discussions between the parties up until 2019 was concerned, the Court observed that 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.

Conclusion
In the present matter, the Supreme Court observed thatif an infringement of a right happens at a particular time, the whole cause of action will be said to have arisen then and there and, 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. The Court also clarified that negotiations may continue even for a period of ten years or twenty years after the cause of action had arisen but that does not change the very fact that the cause of action has already arisen and instead of negotiations, parties had sufficient grounds to submit to arbitration for the resolution of the dispute. Negotiation cannot be adopted as an excuse to escape statutory limitation. The present petition was dismissed by the Court on grounds of being hopelessly barred by limitation.

By - C. George Thomas and Prachi Pandey