Pointers on Pre-Arbitral Steps and the Law of Limitation

Gibran Naushad, Advocate | Srinivas Kokul, FCIArb (UK), ICC (USA)
Pre-arbitral steps and their consequences on the law of limitation for invocation of arbitration proceedings has been a contentious issue since very long. Settlement talks, negotiations, conciliation and mediation are common phenomenon in commercial contracts and accordingly the application of the law of limitation on such pre-arbitral steps is highly significant for parties looking to eventually resolve disputes through arbitration. The recent ruling of the Supreme Court in B and T AG v. Ministry of Defence [Arbitration Petition (C) No. 13 of 2023] provides for a good reflection point on the consequences of pre-arbitral steps for invocation of arbitration proceedings with respect to limitation. Further, the Delhi High Court, recently, in its ruling in M/s Oasis Projects v. MD, National Highway and Infrastructure Development Corporation [Arbitration Petition No. 1364/2022] has held that the contractually mandated pre-arbitral stage, i.e., conciliation in the said case, was discretionary in nature and therefore the ruling has reignited the issue of pre-arbitral steps being mandatory or discretionary.
Supreme Court’s ruling in Panchu Gopal Bose v. Board of Trustees for the Port of Calcutta [(1993) 4 SCC 338] is an interesting starting point when one looks at the law of limitation for invocation of arbitration. The Court, while dealing with delayed invocation of arbitral proceedings, held that in view of Section 37 of the Arbitration Act, 1940, the provisions of Limitation Act 1963 would apply to arbitration proceedings. Additionally, the Court held that the period of limitation would start from the date on which the ‘cause of action’ has accrued. The Supreme Court, subsequently in its ruling in Hari Shankar Singhania and Others v. Gaur Hari Singhania and Others [(2006) 4 SCC 658], while referring to Section 137 of the Limitation Act 1963, held that references of disputes to arbitration are to be made within three years from when the ‘right to apply’ accrues.
It was, however, in Supreme Court’s ruling in Shree Ram Mills Ltd. v. Utility Premises (P) Ltd [(2007) 4 SCC 599] that the interplay between pre-arbitral steps and limitation was brought out in more express terms. The Court, while paraphrasing the ruling in Hari Shankar Singhania, held as follows:
30. Once we have come to the conclusion that the learned designated Judge was right in holding that there was a live issue, the question of limitation automatically gets resolved. This Court in Hari Shanker Singhania case [(2006) 4 SCC 658] held that till such time as the settlement talks are going on directly or by way of correspondence no issue arises and with the result the clock of limitation does not start ticking.
A full bench of the Supreme Court, thereafter, looked at this issue in more detail in its ruling in Geo Miller and Co. Pvt. Ltd. v. Chairman, Rajasthan Vidyut Utpadan Nisgam Ltd. [(2020) 14 SCC 643] and enunciated the following principles which need to be considered by the parties:
- The entire negotiation history between the parties must be specifically pleaded and placed on the record.
- The Court would have to ascertain a ‘breaking point’ which is the stage where parties abandon reasonable settlement efforts and contemplate referring the dispute to arbitration.
- This ‘breaking point’ would then be treated as the date on which the cause of action arises for purposes 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, as compared to 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.
- A claimant should not wait for an unreasonably long time to refer the dispute to arbitration merely on account of the respondent’s failure to settle their claim and on the pretext of writing representations and reminders to the other party.
Having the benefit of the above precedents, the Supreme Court, in its ruling in B and T AG v. Ministry of Defence [Arbitration Petition (C) No. 13 of 2023], was once again met with the issue of pre-arbitral steps and its consequences on the law of limitation. While spelling out judicial precedents on the issue, the Court reiterated that it is important to find the breaking point at which efforts were abandoned by the parties to arrive at a settlement. The Court, however, cautioned that undue delays would not extend limitation and accordingly the parties need to be prudent at the time of invoking arbitration.
Whether any particular facts constitute a cause of action has to be determined with reference to the facts of each case and with reference to, the substance, rather than the form of the action. If an infringement of a right happens at a particular time, the whole cause of action will be said to have arisen then and there. In such a case, it is not open to a party to sit tight and not to file an application for settlement of dispute of his right, which had been infringed, within the time provided by the Limitation Act, and, allow his right to be extinguished by lapse of time, and thereafter, to wait for another cause of action and then file an application under Section 11 of the Act 1996 for establishment of his right which was not then alive, and, which had been long extinguished because, in such a case, such an application would mean an application for revival of a right, which had long been extinguished under the Act 1963 and is, therefore, dead for all purposes. Such proceedings would not be maintainable and would obviously be met by the plea of limitation under Article 137 of the Act 1963.
The analysis of the above rulings makes it clear that pre-arbitral steps, when parties by their conduct do not sleep over their rights, extend the limitation for invoking arbitration proceedings to a certain reasonable time period. The establishment of this principle, however, has not taken into account the very nature of such pre-arbitral steps, i.e., whether such pre-arbitral steps are discretionary or mandatory. One would presume that since law of limitation is being affected by such pre-arbitral steps, the rulings quoted above would in turn establish pre-arbitral steps as mandatory. This situation becomes particularly engaging because in the event such pre-arbitral steps are not considered mandatory, the reasoning of the above rulings becomes faulty inasmuch Courts over the years have allowed a discretionary element to impact the statutory aspect of limitation for invoking arbitral proceedings.
In this regard, it is important to note that the Single Bench decision of the Delhi High Court in Ravindra Kumar Verma v. M/s BPTP Ltd. & Anr. [(2015) 147 DRJ 175], which has been repeatedly followed by Courts, categorically stipulated that pre-arbitral steps are discretionary in nature and cannot be considered binding on the parties. Additionally, the Supreme Court in its ruling in Demerara Distilleries Private Limited v. Demerara Distilleries Limited [(2015) 13 SCC 610], while not going directly into the aspect of pre-arbitral steps, gave a go-by to the pre-arbitral steps in the said case as the Court felt that it would merely be an ‘empty formality’.
The rulings in Ravindra Kumar Verma and Demerara Disterlleries Private Limited clearly point towards pre-arbitral steps being discretionary in nature. Accordingly, it could well be canvassed that since such pre-arbitral steps are discretionary, there arises no occasion for limitation to be extended due to such pre-arbitral steps.
The scenario becomes even more interesting if one takes a closer look at the rulings in Ravindra Kumar Verma and Demerara Disterlleries Private Limited. In Ravindra Kumar Verma, one of the primary reasons why the Delhi High Court held pre-arbitral steps to be discretionary was because as per the Court such pre-arbitral steps were not excluded from the limitation period and therefore making such pre-arbitral steps mandatory would have an impact on the limitation of the parties.
(ii) The first reason is that if the arbitration clause is read in a mandatory manner with respect to prior requirement to be complied with before invoking arbitration, the same can result in serious and grave prejudice to a party who is seeking to invoke arbitration because the time consumed in conciliation proceedings before seeking invocation of arbitration is not exempted from limitation under any of the provisions of the Limitation Act, 1963 including its Section 14. Once there is no provision to exclude the period spent in conciliation proceedings, it is perfectly possible that if conciliation proceedings continue when the limitation period expires the same will result in nullifying the arbitration clause on account of the same not capable of being invoked on account of bar of limitation i.e when proceedings for reference to arbitration are filed in court, the right to seek arbitration may end up being beyond three years of arising of the disputes and hence the petition for reference may be barred by limitation…. Another example would make this position clear that suppose on the last date of limitation period of three years a party wants to invoke an arbitration clause but the arbitration clause contains the requirement of invoking the precondition of ‘mutual discussion’. Surely, on the last date if a notice has to be given for invoking mutual discussion, no mutual discussion or conciliation can take place on the same date of the notice itself i.e no mutual discussion can take place before expiry of the period of limitation which expires on that very day on which the notice for mutual discussion is given. Therefore, if the pre-condition of mutual discussion is treated as mandatory, valuable rights of getting disputes decided by arbitration will get extinguished and which is not a position which should be acceptable in law. 9(i) Any doubt on this aspect as to whether conciliation proceedings as required by an arbitration clause are directory or mandatory is removed when we refer to Section 77 of the Act, and which is the second reason that the pre-condition of mutual discussion is only a directory requirement and not a mandatory one.
As we have already discussed above, the Supreme Court, through its multiple rulings, has established exclusion of time for pre-arbitral steps for purposes of computing limitation as a settled principle. Accordingly, the legal basis for the ruling in Ravindra Kumar Verma does not hold good anymore and therefore reliance on the said ruling to stipulate pre-arbitral steps as discretionary would be misplaced. Similarly, the ruling in Demerara Disterlleries Private Limited is extremely factual inasmuch in the facts of the said case, the pre-arbitral steps, in the opinion of the Court, would have been an empty formality and accordingly the said case cannot be treated as a binding precedent for the broad proposition that pre-arbitral steps are discretionary.
National courts and arbitral tribunals of various jurisdictions have chosen to give more emphasis to the language of pre-arbitral clauses to decide whether the pre-arbitral steps are mandatory or not. Rulings in many jurisdictions have held that pre-arbitral steps are discretionary in nature due to absence of concrete language.
In the case of International Research Corp. PLC vs Lufthansa Systems [(2013) SGCA 55], the Singapore Court of Appeals analysed the pre-arbitral clause to hold that only those pre-arbitral steps will be considered mandatory which are defined with ‘sufficient clarity and specificity’. There can be no mandatory enforcement of clauses that are vaguely worded and general in nature. Similarly, in the case of Sulamerica CIA Nacional de Seguros v. Enesa Engenharia [(2012) EWCA civ 638], the Court of Appeal of England and Wales has held that the pre-arbitral clause in question did not contain clear language and did not define the obligation to mediate with sufficient certainty and accordingly the Court held it to be discretionary in nature. The Court also held that mere undertaking to have the dispute resolved amicably by mediation without providing for the process of mediation would not make such pre-arbitral steps mandatory. Furthermore, in the case of Tang Chung Wah (AKA Alan Tang) And Anr. vs Grant Thornton International Limited and Ors. [2012 EWHC 3198 (Ch)], the High Court of Justice of England and Wales followed the ruling in Sulamerica to hold that the conciliation proceedings in question “…lack sufficient definition and certainty to constitute enforceable condition precedent to the commencement of arbitration…”. From the above, it is clearly evident that courts are reluctant to mandatorily enforce pre-arbitral steps whenever there is in lack of clear and specific language indicating such mandatory nature.
To better understand the nature of pre-arbitral steps, a test called “Tribunal versus Claims” has emanated from various international courts and tribunals. The test essentially stipulates that when the challenge of the pre-arbitral step is to the very jurisdiction of arbitral tribunal, it will be considered to be mandatory and when the challenge is to the admissibility of a claim, then the arbitral tribunal will have the jurisdiction to decide upon the claim, making the pre-arbitral step discretionary. Recently, the Supreme Court of India in the case of BSNL vs Nortel [2021 SCC Online SCC2017] also touched upon this test while dealing with the issue of limitation on a petition under Section 11 of the Arbitration Act.
34. The judgment in Lesotho (supra) was followed by in BBA & Ors. v. BAZ & Anr., wherein the Court of Appeal held that statutory time bars go towards admissibility. The Court held that the “tribunal versus claim” test should be applied for purposes of distinguishing whether an issue goes towards jurisdiction or admissibility. The “tribunal versus claim” test asks whether the objection is targeted at the tribunal (in the sense that the claim should not be arbitrated due to a defect in or omission to consent to arbitration), or at the claim (in that the claim itself is defective and should not be raised at all).
Applying the “tribunal versus claim” test, a plea of statutory time bar goes towards admissibility as it attacks the claim. It makes no difference whether the applicable statute of limitations is classified as substantive (extinguishing the claim) or procedural (barring the remedy) in the private international law sense.
35. The issue of limitation which concerns the “admissibility” of the claim, must be decided by the arbitral tribunal either as a preliminary issue, or at the final stage after evidence is led by the parties.
The Supreme Court in Nortel had highlighted that Article 137 provides an extremely lengthy period in terms of the limitation period for filing an application under Section 11 of the Arbitration Act, inasmuch the limitation period under Article 137 is three years while Section 29A of the Arbitration Act mandates that the arbitration proceedings be concluded within a timeframe of eighteen months. In view of this dichotomy, the Hon’ble Court had suggested the need for the Parliament to amend Section 11 of the Arbitration Act and provide for a specific period for preferring an application under the said section which will be in consonance with scheme of the Arbitration Act to make the arbitration process quicker.
The Supreme Court in B and T AG v. Ministry of Defence could have clarified on some of these aspects while spelling out the law on pre-arbitral steps and its impact on limitation. In the near future, considering the pro-arbitration regime, hopefully the Apex Court would weigh in on these issues and give more clarity on the aspect of pre-arbitral steps from the perspective of the law of limitation.