India: Pre-Arbitral Dispute Resolution Process - Whether Excluded From The Limitation Period For Invoking Arbitration?

Introduction

A multi-tier dispute resolution clause is a clause containing a sequentially arranged set of dispute resolution processes stipulating different dispute resolution methods if the dispute between the parties had not been resolved via a previously stipulated dispute resolution process.

Usually, but not necessarily, such clauses provide for the resolution of disputes via negotiation, conciliation, mediation etc. prior to reference to arbitration. Such clauses are eminently suitable from a commercial standpoint as they allow parties to benefit from the whole gamut of dispute resolution processes while at the same time reducing the incidences of invocation of costly and time-consuming arbitration proceedings.

However, when different dispute resolution processes are clubbed together, there is some confusion as to the computation of the limitation period for each subsequent dispute resolution method contemplated under a multi-tier dispute resolution clause. Simply put, the question is about the legal effect of the time spent on the previous tier of dispute resolution on the computation period for the subsequent dispute resolution procedure invoked by the parties.

Indian law does not provide for a separate scheme of limitation for multi-tier dispute resolution processes. Resultantly, each step of the multi-tier dispute resolution clause must be independently studied insofar as the bar of limitation under the Limitation Act, 1963 is concerned. Also, it is important to note the legal treatment of the time spent on one step of the multi-tier dispute resolution clause on the computation of the limitation period for another step of the multi-tier dispute resolution clause.

Two recent cases of the Hon'ble Delhi High Court have dealt with the issue of limitation for invocation of arbitration vis-à-vis the pre-reference procedure/remedies. In M/s Welspun Enterprises Ltd v. M/s NCC Ltd¹ (hereinafter "Welspun"), Hon'ble Delhi High Court had ruled that if the arbitration agreement requires the parties to exhaust the dispute resolution process as a pre-condition for invoking arbitration, the right of parties to refer the dispute to arbitration would arise only after the parties have exhausted the procedure. More recently, in Kiddle India v. National Thermal Power Corpn Ltd,² the failure to approach the appointing authority within a period resulting in the bar of limitation was challenged.

The Hon'ble Delhi High Court had ruled that pursuant to the "breaking point," negotiation if any, would not defer the accrual of the cause of action.

The Limitation Period for Arbitral Proceedings

The computation of the limitation period is a mixed question of fact and law. However, at the outset, it is important to note that there exists a clear difference between the "cause of action" for prosecuting a claim and the "cause of action accruing" for invoking arbitration. The Hon'ble Supreme Court in Panchu Gopal Bose v. Board of Trustees for Port of Calcutta³ held that "the period of limitation for commencement of arbitration runs from the date on which, had there been no arbitration clause, the cause of action would have accrued." Section 43(1) of the Arbitration and Conciliation Act, 1996 ("Act") provides that the Limitation Act, 1963 shall apply to arbitration as it applies to proceedings in Court. Section 43(2) of the Act provides that for the purpose of the Limitation Act, 1963, the arbitration is deemed to have commenced on the date referred to in Section 21 of the Act. Under Section 21 of the Act, the arbitral proceedings in respect of a particular dispute commence on the date on which a request for that dispute to be referred to arbitration is received by the Respondent.

In this backdrop, the question that arises for consideration is whether a party is entitled to invoke arbitral proceedings before the completion of pre-reference processes.

Subsequently, whether the time spent for complying with the pre-reference procedure is required to be excluded while calculating the period of limitation for referring the disputes to arbitration, and secondly, whether the period of limitation would commence after the procedure has been exhausted.

Cause of action for invocation of arbitration in multi-tier clause

Dispute entails a positive element and assertion of denying, not merely inaction to accede to a claim or a request. Pertinently, mere failure or inaction to pay does not lead to interference in the existence of a Dispute.⁴ Under Indian Law, the Limitation period to commence arbitration starts from the date when the Claimant first acquired either a right of action or a right to require that arbitration takes place upon the dispute concerned.

In the landmark judgment of Geo Miller & Co v. Chairman, Rajasthan Vidyut Utpadan Nigam Ltd⁵ (hereinafter, "Geo Miller"), it was held by the Hon'ble Supreme Court that the right for reference to arbitration accrues when the differences between the parties to the arbitration agreement were evident and when the parties reach a 'breaking point,' that is when a settlement with or without conciliation is no longer possible.

This "breaking point" would then be treated as the date on which the cause of action arises, for the purpose of limitation. In Geo Miller, the 'breaking point' i.e., the point when a reasonable party would abandon settlement efforts and contemplate referring the dispute to arbitration based on the specific pleadings and evidence qua the parties' bona fide negotiation history. The Court upon careful consideration must find out what was the "breaking point" at which any reasonable party would have abandoned efforts at arriving at a settlement.

In Welspun, the Hon'ble Delhi High Court ruled that the period of limitation for referring the dispute to arbitration cannot commence till the parties have exhausted the necessary pre-reference procedure. The right to refer the dispute to arbitration would arise only after the negotiation for an amicable settlement has failed and the parties have exhausted their endeavours to resolve the disputes through mediation/conciliation. What is however interesting is that the meaning of what constitutes a pre-reference procedure is not derived only from the dispute resolution clause and any dispute resolution process being undertaken would impact the cause of action for invoking arbitration. The Hon'ble Delhi High Court cited the judgment of TVC India Pvt Ltd v. ABN Amro Bank N.V.⁶ and National Highways Authority v. Progressive Construction Ltd.⁷ Thus, the period of limitation for referring the disputes to arbitration does not commence prior to the parties exhausting the agreed pre-reference procedures.

The Hon'ble Court also cited sub-section (3) of Section 12A of the Commercial Courts Act, 2015 which expressly provides that the period during which the parties remained occupied with the pre-institution mediation would not be computed for the purpose of limitation under the Limitation Act. In Welspun, the Hon'ble Delhi High Court ruled that it is only after the attempt to resolve the disputes by the Chief Executive failed on 21.12.2012 that the right to refer the dispute arose in favour of Welspun.

Non-exclusion of time spent in the pre-reference process for the cause of action for invoking arbitration.

In Welspun, the Hon'ble Delhi High Court ruled against the exclusion of time spent complying with the pre-reference procedure while calculating the period of limitation for referring the disputes to arbitration. This is consistent with the ruling of the Hon'ble Delhi High Court regarding the 'breaking point' being the cause of action for the commencement of the limitation period. The limitation would not commence till the right to refer the dispute to arbitration has arisen.⁸ That once the 'breaking point' being the date on which any reasonable party would have abandoned the efforts at settlement, is determined, the cause of action would be deemed to arise from that date, for referring the dispute to arbitration.

The Hon'ble Delhi High Court referred to its decision in Alstom Systems India Pvt Ltd v. Zillion Infra projects Pvt Ltd.⁹, wherein the single judge bench of Hon'ble Delhi High Court ruled that Para 28 of Geo Miller clearly goes on to hold that, once the 'breaking point', being the date on which any reasonable party would have abandoned the efforts at settlement, is determined, the cause of action would be deemed to arise from that date, for referring the dispute to arbitration. Pertinently, the Hon'ble High Court of Madras has in Enexio Power Cooling Solutions India Pvt. Ltd v. Gita Power and Infrastructure Pvt. Ltd¹⁰, interpreted the ruling of Geo Miller qua exclusion of time spent from limitation as not providing any more than what is already permissible in law. The Hon'ble Madras High Court had interpreted the ruling of Geo Miller in conjunction with Section 18 of the Limitation Act, 1963 whereby acknowledgement of a jural relationship between the parties gives a fresh lease of time under the Limitation Act, 1963.

In effect, the ruling of the Hon'ble Delhi High Court in Welspun clarifies that the determination of the 'breaking point' as regards to Geo Miller leads to ascertaining the cause of action for the invocation of arbitration. What is implicit herein is that there is no cause of action for invoking arbitration prior to the extinguishment of pre-arbitral procedures stipulated in the Agreement.

The parties to the dispute may plead the entire negotiation history for the Court to determine the breaking point which would be deemed to be the date on which the cause of action arises between the parties for the purpose of limitation. The right to apply can be said to have accrued "only on the date of the last correspondence between the parties and the period of limitation commences from the date of the last communication between the parties".¹¹ Thus, it is essential to establish that the parties cannot resolve the dispute between them.¹²

Pre-Dispute Procedure as Condition Precedent

Interestingly, the ruling of Welspun can be read as being limited only to a such arbitration agreement which requires the parties to exhaust the dispute resolution process as a pre-condition for invoking arbitration. The characterization of whether a particular pre-dispute process is a Condition Precedent is a question of interpretation. The impact of the ruling of Welspun on the arbitration agreement which does not require the parties to exhaust the dispute resolution process as a pre-condition is unclear from the standpoint of limitation. It is not apparent from the ruling of Welspun as to whether the time spent in pre-reference dispute processes would be excluded from the limitation period for the invocation of arbitration in cases involving arbitration agreements wherein pre-reference dispute processes are not mandatory.

Conclusion

The ruling of the Hon'ble Delhi High Court provides much greater clarity on the legal treatment accorded to the time spent in pre-arbitral dispute processes such as conciliation for the computation of the limitation period for invocation of arbitration. Based on the ruling of the Geo Miller, the Hon'ble Delhi High Court interpreted the pre-reference dispute processes agreed by the parties as Condition Precedent as delaying the cause of action for the commencement of the arbitration. The cause of action for the invocation of arbitration would require the completion of pre-reference dispute processes as the 'breaking point' as understood in Geo Miller. The parties are also required to plead the negotiation history and completion thereof in their pleadings as stated in Geo Miller case. Parties are thus required to prepare their pleadings and submissions accordingly to avoid the bar of limitation, especially in multi-tier dispute resolution clauses.

Footnotes

1. M/s Welspun Enterprises Ltd v. M/s NCC Ltd, 2022 SCC OnLine Del 3296.

2. Kiddle India Ltd v. National Themal Power Corpn Ltd, MANU/DE/0598/2023.

3. Panchu Gopal Bose v. Board of Trustees for Port of Calcutta, (1988) 2 SCC 338.

4. Major (Retd) Inder Singh Rekhi v. Delhi Development Authority, (1988 2 SCC 338.

5. Geo Miller & Company Pvt. Ltd. v. Chairman, Rajasthan Vidyut Utpadan Nigam Ltd, (2020) 14 SCC 643.

6. TVC India Pvt Ltd v. ABN Amro Bank N.V, 2008 (1) Arb LR 579 Delhi.

7. National Highways Authority v. Progressive Construction Ltd, 2014 SCC OnLine Del 3104.

8. Delhi Jal Board v. Mohini Electricals Ltd, 2022 SCC OnLine Del 1869.

9. Alstom Systems India Pvt Ltd v. Zillion Infraprojects Pvt Ltd, OMP(COMM) No. 351/2021 decided on 31.01.2022.

10. Enexio Power Cooling Solutions India Pvt. Ltd v. Gita Power and Infrastructure Pvt. Ltd (2021) 6 Mad LJ 545.

11. Hari Shankar Singhania & Ors v. Gaur Hari Singhania & Ors, (2006) 4 SCC 658.

12. Oriental Building and Furnishing Co. Ltd v. Union of India, AIR 1981 Del 293.

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