Can't Refer Dispute To Arbitration Unless There Is A Clear, Unequivocal Denial Of A Right: Kerala High Court

The Kerala High Court has held that the cause of action giving a party the right to refer a dispute to arbitration only accrues when there is a clear and unequivocal denial of a right by one party by the other.

Holding so, a Division Bench of Justice P.B. Suresh Kumar and Justice C.S Sudha dismissed the appeal moved by Southern Railway challenging the decision of the Additional District Court.

"Since a dispute entails a positive element, a mere inaction to pay does not lead to the inference that a dispute exists and there is no right to apply for reference of a dispute to arbitration until there is a clear and unequivocal denial of the right asserted by one party by the other." 

The respondent is a contractor who was awarded certain work from the appellant Southern Railway for the construction of an overbridge.

The work was completed in 2008 and periodical payments were made to the contractor during the execution. The Railway drew up the final bill of the work and the balance payment was released in 2012. In the meanwhile, in 2010, the contractor had raised a claim for Rs.1.19 crores.

Before the disbursement of the final payment, the contractor was asked to submit a No Claim Certificate in terms of the contract, and this was done on the condition that it shall not prejudice their right to pursue the claim of Rs. 1.19 crores.

However, the final payment was released without considering this claim, and the contractor sought resolution of the dispute by appointing an arbitral tribunal as provided for in the contract in 2014. Before the Tribunal, the Railways argued that the contractor's claim was barred by limitation and that it should have been raised within three years from the date of completion of the work. The Tribunal dismissed the contractor's claim on this ground. 

The contractor moved an appeal under Section 34 of the Arbitration and Conciliation Act 1996, and the Additional District Court set aside the award holding that the date of the final bill, and not the date of completion of the work, is the crucial date for determining the limitation period for an arbitral reference. Since the reference to arbitration was within 3 years from the date of the final bill, the claim was found to be within limitation.

Aggrieved by this, the Railways approached the High Court.

The Division Bench recalled that the period of limitation for applying for reference of a dispute for resolution by recourse to arbitration, or seeking appointment of an arbitrator is governed by Article 137 of the Schedule to the Limitation Act. The period prescribed in terms of Article 137 is 3 years from the date on which the right to apply accrues.

The next question before the Court was when the right to apply for reference of a dispute for resolution by recourse to arbitration accrues. 

Placing reliance on the Apex Court decision in State of Orissa v Damodar Das [, (1996) 2 SCC 216], it was found that the cause of action for a reference to arbitration begins when there is a clear and unequivocal denial of a right asserted by one party.

The Bench found that the agreement between the contractor and Railway contained a clause which provided that the final decision on the claims of the contractor would be taken by the Railway only at the time of drawing the final bill. In this case, this was in 2012. 

Therefore, the order of the Additional District Court was found to be correct. As such, the appeal was dismissed. 

Advocate P. Sanjay appeared for the appellant, Advocate Santha Varghese for the caveator and Advocate Ranjith Varghese for the respondent in the matter. 

Case Title: Southern Railway v. M/s Cherian Varkey Construction Co. Pvt Ltd 

Citation: 2022 LiveLaw (Ker) 315

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