In a recent ruling, the Supreme Court of India has clarified that a plea for the appointment of an arbitrator in a dispute becomes time-barred if one party engages in bilateral discussions for an indefinite period of time without taking appropriate action when a cause of action arises.
The Supreme Court, comprising Chief Justice D Y Chandrachud and Justice J B Pardiwala, elucidated that negotiations between parties may continue for an extended period, even years after the cause of action arises. However, the mere act of negotiation does not delay the cause of action for the purpose of limitation. The legislature has set a three-year limit for the enforcement of claims, and this statutory time period cannot be circumvented on the basis of ongoing negotiations alone.
The court stressed that parties involved in a dispute must be aware of when a cause of action arises. Failure to send a notice seeking reference under the Arbitration and Conciliation Act, 1996, due to uncertainty about the timing of the cause of action can result in the claim becoming time-barred before the party realizes it. It is essential to promptly identify the occurrence of a cause of action to avoid jeopardizing the claim.
The court emphasized that the determination of whether specific facts constitute a cause of action must be made on a case-by-case basis, considering the substance rather than the form of the action. If a right is infringed at a particular time, the cause of action is considered to have arisen at that moment. In such cases, a party cannot delay filing an application for the settlement of their dispute within the time provided by the Limitation Act. Waiting for another cause of action to arise after the expiry of the limitation period renders the claim extinguished and non-revivable.
The bench rejected a petition filed under Section 11(6) of the Arbitration and Conciliation Act, 1996, by M/s B and T AG, a Swiss-based company engaged in the manufacturing of arms. The company sought the appointment of an arbitrator to adjudicate disputes arising from a contract with the Union Government’s Ministry of Defence. The disputes, concerning the wrongful encashment of a bank guarantee and the imposition of liquidated damages, had arisen in February 2016. The court agreed with the Union government’s contention that these events represented the breaking point and concluded that the petitioner’s negotiations for an amicable settlement would not save the claim from being time-barred.
Referring to the case of ‘Major (Retd) Inder Singh Rekhi v. Delhi Development Authority’ (1988), the bench highlighted three fundamental principles of law. Firstly, the right to receive payment commences upon the completion of work. Secondly, a dispute arises when one party makes a claim, which is then denied or repudiated by the other party. Lastly, repeatedly writing letters or sending reminders does not postpone the accrual of the cause of action.