Limitation In Arbitration Begins From Denial Of Claim, Not Section 21 Notice: Madhya Pradesh High Court

The Madhya Pradesh High Court on 4 May held that limitation for an arbitral claim begins when the claim is denied or repudiated, and not from the date of issuance of notice under Section 21 of the Arbitration and Conciliation Act, 1996. It further held that an arbitral tribunal commits patent illegality if it treats the Section 21 notice as the starting point of limitation.

A Bench of Justice Vivek Jain partly allowed the appeal filed by Northern Coal Fields Ltd. (NCL) and set aside portions of the arbitral award relating to overburden removal charges, withheld payments, and interest thereon, while upholding the award on escalation charges and interest on escalation amounts. He observed:

“the limitation to initiate Section 11 application is different from the limitation of claim. The limitation of claim is to be assessed up to the date of issuing notice under Section 21 and it will not start from the date of issuing notice under Section 21 and to that extent, the award of the Arbitrator is contrary to the law of the land by misconruing the law of limitation in Arbitration.”

The dispute arose from a contract awarded by NCL for construction of a haul road at the Dudhichua Project. During execution of the work, disputes arose regarding payment for removal of “overburden”, namely soil and rock layers that had to be removed before construction could commence.

The contractor sought higher rates for overburden removal. By a communication dated 21 December 1995, NCL fixed the rate at Rs.44 per cubic metre, which it later reduced to Rs.32.46 per cubic metre, and stated that the rate was “firm and final”. Despite this, the contractor continued to seek higher rates and invoked arbitration in 2002.

The arbitral tribunal awarded substantial amounts towards overburden removal charges, escalation charges and other claims. The District Court upheld the award under Section 34 of the 1996 Act, following which NCL filed an appeal under Section 37.

The arbitral tribunal held that limitation commenced from the date of issuance of notice under Section 21 of the 1996 Act.

Rejecting this reasoning, the High Court held that the finding was perverse and contrary to settled law. It noted that the cause of action arose on 21 December 1995 itself, when NCL expressly communicated that the rates for overburden removal were final and would not attract further escalation.

The Bench observed that Section 21 only determines the commencement of arbitral proceedings and stops the running of limitation; it does not postpone accrual of the cause of action. It reiterated that limitation must be assessed up to the date of issuance of notice under Section 21 and cannot begin from that date.

Relying on the Supreme Court's decision in Major (Retd.) Inder Singh Rekhi v. Delhi Development Authority, the Court noted that a cause of action arises once a claim is asserted and denied. Since the contractor's claim stood rejected in 1995, invocation of arbitration after seven years rendered the claim time-barred. It held:

“The existence of dispute is essential for appointment of an arbitrator. There should be dispute and there can only be a dispute when a claim is asserted by one party and denied by the other on whatever grounds. In the present case, the charges for the overburden removal were demanded and was decided at one particular rate on 21.12.1995 and therefore the cause of action arose on that date and there was no question to wait for 7 years before issuing notice under section 21 of Act of 1996 for the purpose of over burden removal charges.”

The Court also relied on the Supreme Court's decision in Steel Authority of India Ltd. v. J.C. Budharaja, which held that a contractor cannot wait indefinitely before invoking arbitration after the cause of action arises. Therefore, it set aside the award relating to overburden removal charges and interest thereon.

However, the Bench upheld the arbitral award on escalation charges. NCL argued that escalation charges should have been frozen on the original scheduled completion date and not on the extended completion date.

Rejecting the contention, Justice Jain interpreted Clause 13.3(b) of the contract to hold that where time for completion had been extended, the “completion date” referred to the extended completion date and not the originally stipulated date. He noted:

“because in the present case, extension of time has been granted and therefore, the words “completion date” would mean the completion date as per extension granted and in absence of any specification in the aforesaid clause 13.3(b), the view taken by the Arbitrator in favor of the contractor does not deserve any interference by this Court in its limited jurisdiction under Section 37 of Act of 1996.”

On the issue of withholding payments for non-production of Royalty Clearance Certificates, the Court held that insistence on No Mining Dues certificates in construction contracts was valid. It relied on the Full Bench decision in Pankaj Kumar Rai v. State of Madhya Pradesh and set aside the arbitral tribunal's direction to release withheld amounts and interest thereon. It held:

“the action of the respondents in withholding the payments for non-furnishing of Royalty Clearance Certificate cannot be said to be unlawful and therefore, the impugned award of the Arbitrator and the Order of the District Court in upholding the aforesaid order cannot be given stamp of approval to that extent and therefore, the claim as ordered in issue number 7 to the extent of Rs.89,143/- and Rs.38,450/- alongwith interest thereon stand set aside.”

The Court also upheld the interest awarded on escalation charges and rejected NCL's contention that the contract barred such interest. It noted that Clause 5 barred interest only on amounts withheld due to defects in work and not where no defect liability arose, concluding that “there is no defence of the NCL that the amount was withheld on account of defect liability. Therefore, aforesaid clause 5 will not apply in the present case.”

Accordingly, the High Court partly allowed the appeal.