Period Of Limitation For Referring The Dispute To Arbitration Commences Only After The Failure Of Pre-Arbitration Mechanism: Delhi High Court

The High Court of Delhi has held that the period of limitation for referring the dispute to arbitration would only commence after the internal dispute resolution mechanism fails. The bench of Justices Vibhu Bakhru and Amit Mahajan held that if the agreement between the parties provides for a pre-arbitration dispute resolution mechanism, a party cannot be expected to invoke arbitration unless the said mechanism fails, therefore, the limitation period cannot start prior to that. Facts An Engineering, Procurement and Construction (EPC) contract was entered into between Indian Oil Corporation Limited (IOCL) and Nafto Gaz India Private Limited (Nafto Gaz). Subsequently, Nafto Gaz awarded the said EPC in favour of NCC (Respondent) who in turn sub-contracted the work in favour of MSK Projects (India) Ltd which was subsequently acquired by Welspun (Appellant). The mechanical completion certificate was issued in favour of appellant on 12.06.2010. Thereafter, on 03.08.2010, a meeting was held between the parties wherein the respondent agreed to pay certain amounts to the appellant. Subsequently, on 30.10.2010, the Final Bill was duly certified and on 30.11.2010, the completion certificate was issued. Thereafter, the appellant claimed to have issued several notices to the respondent claiming payment under the Final Bill, however, the respondent denied its liability to pay the due amount at that stage. Resultantly, a dispute arose between and appellant issued a notice claiming certain amounts within the specified period, failing which it would invoke the dispute resolution mechanism. In reply to the notice, the respondent contended the claims to be pre-mature for the reason that the contract was on a back-to-back basis and it can claim the amount only when the respondent is given the payment by the principal employer i.e. Nafto Gaz. Thereafter, on 26.11.2012, the appellant invoked the dispute resolution clause and the dispute was referred to the Chief Executives of both the parties. However, the same was terminated on 21.12.2012 as the parties were unable to settle the dispute. Accordingly, the appellant invoked the arbitration by issuing a notice dated 27.01.2014. The award The appellant filed its statement of claim and raised 5 claims. The first three claims were related to payment due under the Final Bill dated 30.10.2010, the other two claims were regarding, payment made to suppliers on behalf of the respondent and refund of retention money. The respondent filed its statement of defence and contented that the claims of the appellant are pre-mature as the contract was awarded on back-to-back basis, therefore, the appellant could claim payment only after the respondent received the same from the principal employer. Without prejudice to this contention, it also contended that the claims of the appellant are barred by limitation as they arise out of Final Bill dated 30.10.2010 and the arbitration is invoked after the expiry of three years period. The arbitrator held that the contract was not awarded on back-to-back basis, however, it accepted the objection regarding claims being beyond limitation. The tribunal held that first three claims arise out of final bill dated 30.10.2010, therefore, the cause of action arose on that date and the arbitration was invoked beyond three years limitation period. It held that the claim for payment made to suppliers on behalf of respondent is also time-barred as the last invoice in this regard is of the year 2008. However, it allowed the claim for refund of retention money by observing that respondent had promised to pay the same on receipt from Nafto Gaz and therefore, appellant would be entitled to receive the same as and when the said amount was received from Nafto Gaz. Aggrieved by the award the appellant challenged the award under Section 34 of the A&C Act. Impugned order The arbitrator rejected the challenge to the award and upheld the award. It held that cause of action arose on the date of final bill, however, the arbitration was invoked after a period of three years, therefore, the claims are barred by limitation. It observed that the appellant did not consider the reference before parties Chief Executives as pre-condition to arbitration but merely an attempt to amicably settle the dispute. It further held that mere exchange of communication would not save the period of limitation once it has started to run. Contention of Parties The appellant challenged the arbitral award and the impugned order on the following grounds: The tribunal, as well as the single judge, erred in not appreciating the fact that the respondent had taken alternate pleas which are mutually destructive as on one hand it contended that the claims were pre-mature and on the other contented them to be time-barred. The appellant had invoked the dispute resolution clause on 26.11.2012, ...

Period Of Limitation For Referring The Dispute To Arbitration Commences Only After The Failure Of Pre-Arbitration Mechanism: Delhi High Court

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Period Of Limitation For Referring The Dispute To Arbitration Commences Only After The Failure Of Pre-Arbitration Mechanism: Delhi High Court

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