Arbitration In IndiaBreaking Point to conclude Limitation in Section 11 Applications for appointment of an Arbitrator!

In AP 313 of 2021 of M/s. Zillon Infraprojects Pvt. vs Bharat Heavy Electricals Limited, the Calcutta High Court held that the Breaking point should be decisive for concluding on the limitation while deciding upon Section 11 Application under Arbitration & Conciliation Act,1996

Factum

The respondent issued two contracts vide Letter of Intent (‘LOI’), and work order for erection, testing, commissioning, trial run, and handing over of Boiler etc., ESP, rotating aux piping, insulation, painting, etc. (Part I) along with structural steel works, transfer points, conveyer galleries, connecting platforms, etc. (Part II) for Package A of 4 x 270 MW Unit – 1, Phase – I, Chandwa Thermal Power Plant, Jharkhand.

The first milestone activity related to the project was completed on December 21, 2011.

The Respondent was irregular in payment and hence Petitioner sought instruction for the fate of the project to which the Respondent directed them to put the work on Hold in May,2013 and submit the bills for final reconciliation. Thereafter, talks got initiated on  May 16, 2015, but nothings transpired.

This led to the issuance of a legal notice, by the Petitioner, in March,2017. This was followed by meetings between the parties to sort out the issues. The said meetings were held in April 2017,
and an exhaustive minutes of the meetings were exchanged wherein both the sides made certain specific commitments in relation to the pending work at site and bill payments. But, this exercise too became futile and this led to  Section 21 legal notice dated January 16, 2019 invoking arbitration by the petitioner.

Seminal Issues

What will be the Limitation in Section 11 of Arbitration & Conciliation Act,1996 for appointment of  an arbitrator?

Whether Limitation can be decided at the stage of appointment of an arbitrator?

Legality & Observations

The Court firstly decided on the limitation as to whether it can be addressed by them at the stage of an appointment of arbitrator or otherwise.

A. Cause of Action

The Court narrated the incidents and linked with continous cause of action with breaking point as below:

a. The Court held that the first cause of action arose on March 18,2013 when the project was kept on ‘Hold’ by the respondent.

b. Second cause of action was when the respondent informed the petitioner about short closure of the contract.

c. Third cause of action was triggered when failure of implementation of undertakings in MOM occurred, which in fact took place post  issuance of legal notice dated March 22, 2017 by the petitioner.

d. After exhausting the circle of amicable settlements, everything went upside down, the Petitioner finally invoked arbitration under its legal notice dated January 16, 2019.

e. The Court called this to be  a “Breaking Point” which the Petitioner reasonably realised to be a complete failure of any settlement.

f. The initial Breaking Point also led to a  meeting between the parties on March 06, 2019. The written claims were submitted by the petitioner later that month, and the same was duly acknowledged by the respondent with a request to withdraw the said legal notice.

h. The Final Break Down moment landed when rather than any settlement happening, the respondent again under its email dated October 24, 2019  was asked to bifurcate its claims despite petitioner’s earlier communication dated October 14, 2019 elaborating its inability to do so. This has reminder in between and also final Bill could not be issued by the Petitioner as the project was itself on hold.

Therefore, Court held that the cause of action herein has been of a ‘continuous’ nature. The claims of the petitioner never attained finality, and remained a ‘live claim’ as the parties were in mutual discussion to resolve the disputes between them.

B. Two Way No Limitation

The Court observed that there is no limitation on two counts;

Count One – The Court  emphasised on the fact that the arbitration petition was filed on July 28, 2021 that is within a period of one and half years from the respondent’s last communication vide email dated January 09, 2020, and within a period of two and half years from the issuance of Section 21 notice dated January 16, 2019.

Count Two – The petitioner company is undergoing CIRP proceedings and moratorium is in place since February 05, 2019. Further, as per Section 60(6) of the Insolvency and Bankruptcy Code, 2016, the entire moratorium period will be excluded in computing limitation in respect of proceedings at the hand of a corporate debtor. Reliance can be placed upon the decision of the Supreme Court in NDMC -v- Minosha (India) Ltd. reported in 2022 8 SCC 384.

C. Jurisdiction of Court

The Court went to record that the scope of judicial interference under section 11 finds its genesis in Vidya Drolia and Others -v- Durga Trading Corporation reported in (2019) 20 SCC 406, which was further moulded by the Supreme Court in Bharat Broadband Network Ltd. -v- United Telecoms Ltd. reported in (2019) 5 SCC 755 as extremely limited, and only in those cases, where no iota of doubt regarding a claim being ex-facie time-barred is present. If and when the Court is in doubt, it has to refer the matter to the arbitral tribunal for adjudication.

The Court went to quote as below:

“46. The upshot of the judgment in Vidya Drolia [Vidya Drolia v. Durga Trading Corpn., (2021) 2 SCC 1 is affirmation of the position of law expounded in Duro Felguera [Duro Felguera, S.A. v. Gangavaram Port Ltd., (2017) 9 SCC 729 ] and Mayavati Trading [Mayavati Trading (P) Ltd. v. Pradyuat Deb Burman, (2019) 8 SCC 714] , which continue to hold the field. It must be understood clearly that Vidya Drolia has not resurrected the pre-amendment position on the scope of power as held in SBP & Co. v. Patel Engg. Ltd. [SBP & Co. v. Patel Engg. Ltd., (2005) 8 SCC 618]

47. It is only in the very limited category of cases, where there is not even a vestige of doubt that the claim is ex facie time-barred, or that the dispute is non-arbitrable, that the court may decline to make the reference. However, if there is even the slightest doubt, the rule is to refer the disputes to arbitration, otherwise it would encroach upon what is essentially a matter to be determined by the tribunal.”

Conclusion

The Calcutta High Court decided on both the issues related to limitation as below:

.“….if it is manifestly evident on the face of it that the issues purported to be referred to arbitration are hopelessly time-barred, the courts can intervene beyond the bare existence of an arbitration clause to cut the deadwood and decline reference to arbitration in such cases.

“…… in order to determine whether the claims are time barred, it would be judicious on my part to revisit the entire negotiation history between the parties starting with the day when the cause of action first arose, and thus, attempt to ascertain the ‘breaking point’, if any, in the settlement discussions. 

AMLEGALS Remarks

This decision will open a pandora box to revisit on limitation and doctrine of breaking point in commercial litigation and especially in arbitration.

In this case, the contour of mutual discussions were always encircled to aim towards the resolution of the dispute between them but unfortunately it could not see the day light. Hence, the Court lamented the claim to be a ‘live claim‘ as it had by no probability could ever take the shape and format of final claim.

Authored by

Anandaday Misshra | Founder & Managing Partner