The Supreme Court, in a significant ruling, has held that an application for the appointment of an arbitrator, filed after the standard three-year limitation period, is not time-barred if the period of delay is covered by the court’s order extending limitation periods due to the COVID-19 pandemic. A bench of Justice Dipankar Datta and Justice Augustine George Masih set aside a Madhya Pradesh High Court judgment that had dismissed an arbitration application on grounds of limitation, clarifying that the period from March 15, 2020, to February 28, 2022, must be excluded when calculating the limitation period for any judicial proceedings.
The Court also reiterated that an arbitration clause does not become non-existent merely because the contractually named appointing authority becomes ineligible to act as an arbitrator due to subsequent legislative amendments.
Background of the Case
The dispute arose from a contract awarded by Bharat Oman Refineries Limited (now merged with M/s Bharat Petroleum Corporation Limited, the “Respondent”) to Offshore Infrastructures Limited (the “Appellant”) for composite works at the Bina Refinery. The letter of acceptance was dated December 31, 2016, with a stipulated completion period of five months, ending May 30, 2017.
The work was ultimately completed on January 31, 2018. The Appellant raised its final bill on March 20, 2018, and subsequently issued a “No Claim Certificate” on October 3, 2018. The final bill was released on March 26, 2019, and a part payment was made on June 11, 2019, after the Respondent deducted 5% as liquidated damages for the delay.
On April 26, 2021, the Appellant issued a consolidated claim for its outstanding dues. Following this, on June 14, 2021, the Appellant invoked the arbitration clause (Clause 8.6 of the General Conditions of the Contract) and requested the Respondent’s Managing Director to appoint an arbitrator. The notice pointed out that under the amended Arbitration and Conciliation Act, 1996 (“1996 Act”), neither the Managing Director nor his nominee could act as an arbitrator. The Respondent refused to entertain the claims in a communication dated July 2, 2021.
Aggrieved, the Appellant filed an application under Section 11(6) of the 1996 Act before the High Court of Madhya Pradesh for the appointment of a sole arbitrator. The High Court dismissed the application on December 19, 2023, holding it was barred by limitation. The High Court reasoned that the three-year limitation period began from the date the “No Claim Certificate” was issued (October 3, 2018) and thus expired on October 2, 2021. The Appellant’s application, filed on March 14, 2022, was deemed to be beyond this period. A subsequent review petition was also dismissed by the High Court on April 10, 2024.
Arguments of the Parties
Before the Supreme Court, the Appellant argued that its application was well within the limitation period. It contended that the limitation period was covered by the Supreme Court’s order in In Re: Cognizance for Extension of Limitation, which excluded the period from March 15, 2020, to February 28, 2022, from limitation calculations due to the COVID-19 pandemic. The Appellant also argued that an arbitration clause remains valid even if the named appointing authority is disqualified, citing the precedent in Perkins Eastman Architects DPC and Another v. HSCC (India) Limited.
The Respondent supported the High Court’s judgment, arguing that the cause of action arose when the final bill was raised on March 20, 2018, and the three-year period had expired. Furthermore, the Respondent contended that since the amendments to the 1996 Act rendered the contractual mechanism for appointing an arbitrator inoperative, “such arbitration clause ought to be deemed to have ceased to exist,” thereby effacing the entire arbitration mechanism.
Supreme Court’s Analysis and Decision
The Supreme Court framed two primary issues for consideration:
- Whether the court has the power to appoint an arbitrator when the contractual arbitration mechanism has become bad in law due to statutory amendments.
- Whether the application under Section 11(6) was within the period of limitation.
On the first issue, the Court rejected the Respondent’s argument. It held that the core intent of the parties to refer disputes to arbitration remains intact. The judgment stated, “Merely because the procedure to appoint an arbitrator provided in the clause has become inoperative due to subsequent changes in statutory provisions, would not mean that the core of the contract referring the dispute for adjudication to arbitrator would be rendered nugatory.” The Court emphasized that the legislative intent behind the 2015 amendment to the Act was to ensure the neutrality and impartiality of arbitrators, and the court is vested with the power under Section 11 to appoint an independent arbitrator in such cases.
On the second and decisive issue of limitation, the Court, citing Geo Miller and Company Private Limited v. Chairman, Rajasthan Vidyut Utpadan Nigam Limited, determined that the cause of action arose when the final bill became due. The final bill was raised on March 20, 2018, and became due 30 days later, on April 21, 2018. The three-year limitation period would therefore have ended on April 21, 2021.
While the Appellant’s application filed on March 15, 2022, was beyond this date, the Court applied its order in In Re: Cognizance for Extension of Limitation. The judgment noted, “it is essential to refer to Order dated 10.01.2022 of this Court… where a three-Judge Bench of this Court has held that in view of COVID-19 pandemic period from 15.03.2020 till 28.02.2022 shall stand excluded for the purpose of limitation”.
The Court concluded that it would be “unjust and detrimental” not to consider the pandemic-related difficulties. After excluding this specified period, the Court found the Appellant’s application to be within the limitation period.
In light of these findings, the Supreme Court set aside the impugned judgments of the High Court. The appeals were allowed, and the Court directed that the matter be referred to the Delhi International Arbitration Centre for the appointment of an arbitrator to adjudicate the dispute.
