TMI Blog2022 (10) TMI 1175X X X X Extracts X X X X X X X X Extracts X X X X ..... with. Import of the provision of the pre-arbitration dispute resolution process on the question of limitation - whether, in the context of the aforesaid dispute resolution mechanism, the period of limitation would commence prior to the parties exhausting the agreed pre-reference procedure/remedies? - HELD THAT:- Several dispute resolution clauses provide for multi-tier or water fall dispute resolution mechanisms. These require the parties to undertake mediation or to first attempt to resolve the dispute in an alternative forum before resorting to arbitration. The entire purpose is to provide the parties an opportunity to resolve the disputes in an amicable manner before resorting to adversarial proceedings. In PANCHU GOPAL BOSE VERSUS BOARD OF TRUSTEES FOR PORT OF CALCUTTA [ 1993 (4) TMI 302 - SUPREME COURT ], the Supreme Court referred to the decision of the Queen's Bench in West Riding of Yorkshire Country Council v. Huddersfield Corporation and held that the rule of limitation would be applicable to arbitration proceedings in the same manner as it applies to litigation before courts. In that case, the party had invoked the arbitration process under the Arbitratio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the parties were bound to refer the disputes to their respective Chief Executives. The parties could refer the disputes to arbitration only if the Chief Executives failed to arrive at a consensus - It is not clear as and when the negotiations between the parties to amicably resolve the disputes commenced and failed. However, it is clear that Welspun had escalated resolution of the disputes to the second tier by seeking a reference to the respective Chief Executives well within the period of limitation. Clearly, Welspun could not have sought a reference to arbitration prior to referring the disputes for resolution to the respective Chief Executives. Concededly, an attempt to resolve the disputes by the Chief Executives failed on 21.12.2012. It is clear that the decision of the Arbitral Tribunal (majority) to reject the claims made by Welspun as being barred by limitation is erroneous and the impugned award is liable to be set aside - Appeal allowed. - FAO (OS)(COMM) No. 9/2019 and CM No. 2239/2019 - - - Dated:- 10-10-2022 - VIBHU BAKHRU AND AMIT MAHAJAN, JJ. For the Appellant : Sandeep Sethi, Sr. Adv., Sameer Parekh, Sonali Basu Parekh, Smita Bhargava, Tanya Chaudhary, P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion Limited (hereafter 'IOCL') and Nafto Gaz India Private Limited (hereafter 'Nafto Gaz'). The scope of work under the said EPCC-9 Package included Design, Engineering Procurement, Supply Transport, Fabrication, Construction, Painting, Insulation, Testing and Commissioning of Raw Water Storage and Treatment Plant, Fire water Storage Pump House, Storm Water Storage Pump House, Flare System, interconnecting Process Streams between Refinery and Panipath Naphtha Cracker Project (PNCP) including hook ups with the existing system, Naphtha unloading and transfer from Panipat Marketing Terminal to PNCP and construction of inter-connecting flyover between Panipat Refinery and PNCP . 7. Subsequently, Nafto Gaz awarded the said EPC contract in favour of the respondent (hereafter 'NCC'). Thereafter, NCC subcontracted the work in respect of the inter-connecting flyover between the existing Panipat Refinery and Panipat Naphtha Cracker Project (PNCP) to Welspun. 8. By a Letter of Intent dated 24.10.2006 (hereafter 'the LoI'), NCC subcontracted the works in respect of the interconnecting flyover between Panipat Refinery and PNCP to MSK Projects (India) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... done by MSK as well as by NCC, was outstanding from Nafto Gaz. It stated that it had been continually appealing to MSK that the payments if any shall be cleared, if and only, upon the receipt of payments from the Ms. Naftagoz and till Nafto Gaz releases payments to NCC, it would not be liable to pay the amounts as claimed by Welspun. 19. Thereafter, on 26.11.2012, in accordance with the Dispute and Settlement Clause as contained in the MoA, Welspun referred the dispute to the Chief Executives of NCC and Welspun. However, on 21.12.2012, an attempt to resolve the disputes between the parties failed. 20. Thereafter, Welspun invoked the agreement to refer the disputes to arbitration by a notice dated 27.01.2014. ARBITRATION 21. Welspun filed its Statement of Claims before the Arbitral Tribunal. It, essentially, raised five claims. Claim no. I was for the amount certified in the Final Bill for supply (₹ 19,88,16,796/-), erection (₹ 31,68,51,167/-) and extra items (₹ 3,33,63,921/-). These amounts were claimed without accounting for the amounts already received. Claim no. II was for a sum of ₹ 3,90,86,244/- on account of reimbursement of service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice to this contention of NCC, assuming without admitting that Welspun can raise its claims at this stage, the claims of Welspun as set out in the Statement of Claim are barred by limitation. Consequently, the claims as set up are liable to be rejected on principles analogous to Order VII Rule 11 of the Code of Civil Procedure 1908. 24. NCC also set out in detail its reasoning for claiming that the contract with MSK was on a back-to-back basis. It also relied upon the LoI, in support of its defence. In addition to the above, NCC claimed that Welspun had failed to perform its obligation in a time-bound manner. It claimed that it also had counter-claims against MSK/Welspun arising as a result of various defaults on its part. However, at that stage, it was unable to quantify the claims. According to NCC, the same could be done only after certification and approvals from Nafto Gaz and EIL/IOCL. 25. The Arbitral Tribunal (majority) considered the aforesaid defence and did not find any merit in NCC's claim that its contract with MSK/Welspun was on a back-to-back basis. The Arbitral Tribunal concluded that back to back' payment was not contemplated by the parties in enteri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #39;Dissenting Award'. The minority (Dissenting Award) found that Welspun was entitled to its claims (Claim nos. I, II and III) being the amounts due in terms of the certified Final Bill. However, Welspun's Claim no. IV was not accepted on the ground that Welspun had not satisfied the requirement of Section 70 of the Indian Contract Act, 1872. In terms of the Dissenting Award, Welspun's claim for interest was also liable to be allowed to the extent of 9% per annum from 27.01.2014 till the date of payment. Justice (Retd.) K. Ramamoorthy was of the opinion that Welspun was entitled to costs quantified at ₹ 1,14,15,169/- along with interest at the rate of 9% per annum. SECTION 34 OF THE A C ACT 31. Welspun challenged the impugned award by filing an application under Section 34 of the A C Act [being OMP COMM. 468/2018 captioned Welspun Enterprises Limited v. NCC Limited]. Welspun assailed the impugned award on the ground that its claims were raised within the period of limitation and the Arbitral Tribunal had erroneously rejected its claims on the said ground. Welspun had also contended that the defence of NCC was intrinsically inconsistent inasmuch as on one ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the invocation of the arbitration, but as a step for making an attempt to amicably resolve the disputes. No reason has been given by the petitioner for not invoking arbitration between 21.12.2012 to 27.01.2014. 12. The Arbitral Tribunal has also considered the issue of limitation in detail and has held that the letter dated 26.11.2012 by itself did not stop the period of limitation from running. It further held that mere exchange of correspondence between the parties would not extend the period of limitation and the petitioner was bound to take recourse to the legal remedy within the prescribed period of limitation, failing which it was to suffer the consequences thereof. it has held that all claims falling under the final bill are therefore, barred under the Law of Limitation. 35. The learned Single Judge also found no cause to interfere with the impugned award whilst accepting NCC's contention that the retention money was refundable once the same was received by NCC from Nafto Gaz. The learned Single Judge, accordingly, held that the Arbitral Tribunal was right in holding that the claim for refund of retention money was pre-mature in nature and therefore, within th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an v. The Aluminium Corporation of India Ltd. AIR 1971 SC 1482. 39. Lastly, Mr. Sethi submitted that the period of limitation would commence only when the right to refer the matter to arbitration had arisen. He stated that a reference to arbitration could be made only once the parties had exhausted the remedy for resolving their disputes through intervention of their respective Chief Executives. The said settlement failed on 21.12.2012 and thus, the right to refer the dispute to arbitration arose on the said date. The arbitration was invoked within a period of three years from the said date and therefore, was within the period of limitation. He referred to the decisions in the case of Hari Shankar Singhania Ors. v. Gaur Hari Singhania Ors. (2006) 4 SCC 658, PD. Pillai v. Mrs. Kaliyanikutty Amma and Ors. AIR 1995 Ker 78 and In Re: Deepika Housing Projects Ltd. Ors. AIR 2007 Cal 280, in support of his contention. 40. Ms. Priya Kumar, learned counsel appearing for NCC, countered the aforesaid submissions. She submitted that the time spent by the Chief Executive Officers of the respective parties in the conciliation proceedings could not be excluded for the purpose of limit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntatives of the parties on 03.08.2010. Thus, notwithstanding any controversy in regard to these facts, the same must be accepted to be true for the purpose of determining the question whether Welspun's claims were barred by limitation, as was done by the Arbitral Tribunal. 46. The first question to be addressed is whether the Arbitral Tribunal (majority) erred in not appreciating that NCC had taken contradictory stands. On one hand, it claimed that the claims preferred by Welspun were pre-mature as such claims could be made only after Nafto Gaz had certified the work and made the necessary payments. On the other hand, NCC claimed that they were belated. The contention that Welspun's claims were pre-mature was premised on the basis that the contract between the parties was on a back-to-back basis. As noticed above, NCC had also averred that the claims raised by Welspun were barred by limitation. According to NCC, such alternate pleas were permissible as they were premised on two alternative assumptions: one, that NCC was not liable to make any payments till it received further payments from Nafto Gaz and, second, that it was liable to make payments notwithstanding that it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... MSK by mutual consent. However, the parties fail to agree upon a Sole Arbitrator with mutual consent, as aforesaid, MCC and MSK will each nominate an Arbitrator of their choice, and the two arbitrators so nominated shall choose a Third Arbitrator. The award of the Arbitrator/s so appointed shall be final and conclusive and be binding on both the parties to this Memorandum of Agreement. The provisions of the Indian Arbitration Act of 1996 or any statutory modification or re-enactment thereof and the rules made there under for the time being in force shall apply to the arbitration proceedings under this clause. The venue of arbitration shall be Delhi 51. It is clear from the above that the said Dispute Resolution Clause requires the parties to make an endeavour to resolve the differences by mutual negotiations. The parties had agreed that if such disputes could not be resolved within a period of one month from the date they had arisen, they would refer the same to their respective Chief Executives. It is only when the Chief Executives of the respective parties fail to resolve the same then such differences and disputes would be referred to arbitration. 52. The question to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itation would run from the date when cause of arbitration would have accrued, but for the agreement . 57. In view of the above, the period of limitation would run when a party acquires a right to refer the disputes to arbitration. Clearly, if the arbitration agreement requires the parties to exhaust the dispute resolution process as a pre-condition for invoking arbitration, the right to refer the dispute to arbitration would arise only after the parties have exhausted the said procedure. The counterparty could raise a valid objection to any step taken to refer the disputes to arbitration in avoidance of the agreed pre-reference dispute resolution procedure. If the parties have agreed that they would first endeavour to resolve the disputes amicably in a particular manner, it is necessary for them to first exhaust that procedure before exercising any right to refer the disputes to arbitration. 58. In Hari Shankar Singhania Ors. v. Gaur Hari Singhania Ors. (2006) 4 SCC 658, the Supreme Court categorically held that a reference to arbitration is required to be filed within a period of three years when the right to apply accrues . It is, therefore, crucial to determine when s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lks were ongoing. This is because the issue between the parties would be live and therefore, the three-year limitation period stipulated under Article 137 of the Limitation Act cannot be said to have lapsed. In this regard, the Court also placed reliance on its earlier decision in Groupe Chimique Tunisien SA v. Southern Petrochemicals Industries Corpn. Ltd. (2006) 5 SCC 275 62. In the year 2019, after considering the law thus far on the issue of limitation period in the context of accrual of the cause of action for arbitration proceedings to commence, the three-Judge Bench of the Supreme Court in Geo Miller Company Pvt. Ltd. v. Chairman, Rajasthan Vidyut Utpadan Nigam Ltd. enunciated the following principles: (i) Mere exchange of correspondence between the parties would not be sufficient to extend the time of limitation - specific pleadings and evidence qua the parties' bona fide negotiation history should be placed on record for the careful consideration of the Court and for the benefit of limitation (as discussed above) to enure in favour of such party. On this basis, the Court ascertains the 'breaking point', that is, the point when a reasonable party would a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in such cases the entire negotiation history between the parties must be specifically pleaded and placed on the record. The Court upon careful consideration of such history must find out what was the breaking point at which any reasonable party would have abandoned efforts at arriving at a settlement and contemplated referral of the dispute for arbitration. This breaking point would then be treated as the date on which the cause of action arises, for the purpose of limitation. The threshold for determining when such a point arises will be lower in the case of commercial disputes, where the party's primary interest is in securing the payment due to them, than in family disputes where it may be said that the parties have a greater stake in settling the dispute amicably, and therefore delaying formal adjudication of the claim. 64. Although the Court observed that the period spent by the parties in negotiating an amicable settlement is required to be excluded, however, in the latter part of the aforesaid passage, the Court, in unambiguous terms stated that the cause of action for the purpose of limitation would commence from the 'breaking point' of the negotiations. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... These words are clear, unambiguous and unequivocal. [emphasis added] 66. We concur with the aforesaid view. The period of limitation for referring the disputes to arbitration cannot commence till the parties have exhausted the necessary pre-reference procedure. If the arbitration clause requires the parties to engage in negotiations or to attempt to resolve the disputes in mediation/conciliation, the right to refer the disputes to arbitration would arise only after the negotiations for an amicable settlement have failed and the parties have exhausted their endeavors to resolve the disputes through mediation/conciliation. 67. Several courts in various decisions have consistently held that pre-reference arbitration mediation/settlement processes are required to run the full course. Even in cases where such processes have consumed a significant period of time, the courts have held that the cause of action to invoke the arbitration would arise only after such process has irrevocably broken down. 68. In TVC India Pvt. Ltd. v. ABN Amro Bank N.V. 2008 (1) Arb LR 579 Delhi, a Single Bench of this Court had considered a situation where the contractually mandated pre-arbitratio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laims were within the period of limitation. The arbitral award was challenged before this Court. The learned Single Judge of this Court upheld the arbitral award and observed as under: 20. On reading of the findings of the Arbitral Tribunal it would disclose that the arguments of the petitioner on the issue of limitation are without any force, as there is a finding of fact by the Arbitral Tribunal that the Variation Orders for the entire increased quantity were not issued on 26th March, 2003, and yet further the issue as to the revision of the rates was under the active consideration of the respondent for a very long time from 29th May, 2003, to 27th April, 2009, as the respondent had formed a Committee for revising the rates and forwarding the revised rates to NHAI for approval, and the respondent had also appeared before the Committee in an attempt to amicably resolve the issue. The respondent rejected the proposal for revised rates only on 27th April, 2009, and therefore the contention of the petitioner is that the cause of action began on 26th March, 2003, cannot be accepted. It is settled law that when the parties are actively trying to resolve the disputes, then the cause ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing for invoking arbitration. 72. In Delhi Jal Board v. Mohini Electricals Ltd., a Single Judge of this Court (one of us, Vibhu Bakhru, J.) upheld the decision of the dispute adjudicating board (DAB) holding that the limitation would not commence till the right to refer the disputes to arbitration had arisen. The relevant extract of the said decision reads as under: 43. In the facts of the present case, the respondent had made its claims and invoked the dispute resolution mechanism. The period of limitation in respect of the claims had stopped running once the claims had been referred to the DAB. There was inordinate delay in constituting the DAB. As noted above, this was the subject matter of protracted correspondence. Finally, one of the consortium partners of the respondent was compelled to approach this Court and the DAB was constituted thereafter. The DAB did not render its decision, however, the parties agreed to close the said proceedings and refer the disputes to arbitration. 44. The Arbitral Tribunal had referred to the aforesaid facts and concluded that the parties were involved in the resolution of the disputes through dispute redressal mechanism as contemplat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge in Ravinder Kumar Verma v. M/S. BPTP Ltd. Anr.2. Section 77 of the A C Act expressly proscribes the parties from initiating any judicial proceedings in respect of disputes that are subject matter of conciliation proceedings except where in the opinion of the party such proceedings are necessary for preserving his rights . The period of limitation to refer the disputes to arbitration commences only upon the parties exhausting the necessary pre-reference procedure, hence, the question of taking recourse to Section 11 of the A C Act for appointment of an arbitrator for preserving the right to arbitration does not arise. 76. The necessary question to be addressed is whether the period of limitation for referring the disputes to arbitration commences to run prior to the parties exhausting the agreed pre-reference procedures. In our view, the answer is in the negative. If the period of limitation does not commence running till the pre-arbitration processes have been exhausted - as has been held in various decisions- there is no need for protecting the remedy of arbitration against the bar of limitation prior to completion of the pre-reference procedure. We are unable to accept t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ignated port. The parties engaged in negotiations for settlement of the disputes. The settlement efforts consumed the limitation period of three months provided for initiating arbitration in terms of the charterparty. The owners, nine days after the time limit had expired, applied to the Court (Master Lawrence) under Section 27 and their plea for extending the period of limitation was allowed. 81. Upon an appeal (before Donaldson J.) being preferred by the charterers, the same was reversed. Thereafter, when the matter was referred to the Court of Appeal, the issue essentially came down to whether the owners were time-barred from initiating arbitration because they were nine days out of time. The Court of Appeal rendered a 2:1 decision, in favour of the owners. The decision was based on the interpretation of the phrase 'undue hardship' provided in Section 27 of the Arbitration Act, 1950. Lord Denning, in his majority opinion, held that the owners would suffer undue hardship if they were barred. Lord Salmon, in his separate concurring decision, observed that although the parties were breathing fire against each other, it was obvious from the letters that they did express w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion was 'appropriate' until it was clear that the dispute could not be resolved through negotiations , in terms of the relevant statutory provision. Accordingly, the court found that it was only in the year 2018 that the respondent could have known that a settlement qua the Excluded Issue was not possible. On that basis, the respondent's application was considered to have been made within the two-year limitation period. 85. The Court of Appeal for Ontario upheld the aforesaid decision. 86. In PQ Licensing S.A., Vincent Herbert and Jean-Marie Josi v. LPQ Central Canada Inc. 2018 ONCA 331, the appellant and the respondent had executed a franchise agreement. In 2009, the respondent/franchisee served a rescission notice on the appellant/franchisor. This was disputed by the appellant/franchisor soon upon receipt. 87. In 2011, the respondent/franchisee commenced action before the superior court. The appellant/franchisor objected to these proceedings on the ground that the franchise agreement required that the parties mediate before commencement of arbitration. At that point, there was disagreement between the parties as to whether the requirement to mediate was inapp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccupied with the pre-institution mediation would not be computed for the purpose of limitation under the Limitation Act. 92. In the facts of the present case, the Arbitration Clause expressly required the parties to attempt resolving the disputes and differences by mutual negotiations. If the efforts to resolve the disputes did not yield fruit within a period of one month from the date the same had arisen, the parties were bound to refer the disputes to their respective Chief Executives. The parties could refer the disputes to arbitration only if the Chief Executives failed to arrive at a consensus. 93. NCC had agreed to make the payments at the meeting held on 03.08.2010 and the Minutes of the Meeting record the same. The Final/RA Bill no. 33 was certified on 30.10.2010 and the Completion Certificate was issued on 30.11.2010. According to Welspun, the amounts were due and payable in terms of the MoA. According to Welspun, the amounts were required to be paid within a period of one month from the date of certification of the bills, that is, on or before 30.11.2010. 94. Welspun sent a letter dated 17.05.2011 requesting for release of payments amounting to ₹ 13,17,12, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pect of the works executed by them. As the contract awarded to your Clients is on back to back basis, the liability to make the payment even in respect of the said amount of Rs. 2.56 Crores would arise only on receipt of the corresponding payment from Naftogaz. Your client is well aware that huge amounts for the works done by your client and also for the works done by NCC for Naftogaz are outstanding from Naftogaz for a very long time. Your Client is also well aware that on account of failure of the various contractors who have executed the various items of work forming part of the EPCC - 9 project awarded by IOCL to Naftogaz the said IOCL has levied LDs including on the scope of work executed by your client. We reliably understand that discussions are in progress between Naftogaz and IOCL for refunding the amount recovered by them towards LDs. Your Clint willfully withheld disclosing the aforesaid levy of LDs in respect of the works executed by them. You will also note that the amounts claimed by your Client towards extra items of works were never submitted on time. Our liability to pay the amounts that were recovered towards LDs and also the payments towards extra claims if an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the disputes to arbitration thus, must commence from the said date, that is, 21.12.2012. Welspun commenced arbitration on 27.01.2014, that is, after a period of thirteen months and six days, which was within the period of three years from the date on which the right to refer the disputes to arbitration arose. 98. In view of the above, it is clear that the decision of the Arbitral Tribunal (majority) to reject the claims made by Welspun as being barred by limitation is erroneous and the impugned award is liable to be set aside. The said error is self-evident from the record. 99. The learned Single Judge accepted that it was necessary for the parties to explore the possibility of settlement through reference of the disputes to the Chief Executives before invoking the arbitration. However, the learned Single Judge erroneously concluded that Welspun was not considering the reference to the Chief Executives as a precondition for invocation of the arbitration but as a step for attempting an amicable resolution of the disputes. 100. This Court is unable to concur with the said view. Once it is accepted that it is necessary for Welspun to make a reference of the disputes to th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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