Once Parties Agree To Institutional Arbitration, Its Commencement Is Governed By Institutional Rules: Karnataka High Court:

The Karnataka High Court has recently observed that the commencement of arbitral proceedings will be governed by agreed institutional rules and not necessarily by Section 21 of the Arbitration and Conciliation Act, since the provision applies only “unless otherwise agreed by the parties."

Dismissing a contractor's appeal against a Rs 7.99-crore arbitral award, the court observed that “It is apparent from the plain language of Section 21 of the A&C Act that the arbitral proceedings are deemed to commence on the date when a request that the disputes be referred to arbitration is received by the non-claimant. However, the opening words of Section 21 make it clear that this is subject to the parties agreeing otherwise.”

The dispute arose between R.K. Infra and Engineering (India) Pvt. Ltd. and The Sandur Manganese and Iron Ore Ltd. in relation to a road construction contract.

A Division Bench of Chief Justice Vibhu Bakhru and Justice C.M. Poonacha held that the arbitration clause required disputes to be resolved under the Rules of the Indian Council of Arbitration (ICA). Therefore, the parties had agreed to a different mechanism for determining when arbitration would commence.

Referring to Rule 15(e) of the ICA Rules, the Court observed that arbitral proceedings are deemed to commence on the date the request for arbitration, the registration fee, and the statement of claim are received by the institution. In the present case, the ICA had received the statement of claim on July 1, 2013, and the Bench held that the arbitration must be treated as having commenced on that date.

The court rejected the contractor's contention that limitation should be counted only from 13 February 2015, when a petition under Section 11 of the Act was filed for appointment of an arbitrator.

Clarifying the law on limitation, the Bench observed:

“The limitation period for claims and the limitation period for appointment of an arbitral tribunal are two separate periods of limitation. The first period concerns the limitation period for commencing the arbitral proceedings. The second period is the period of limitation for taking steps to appoint an Arbitral Tribunal. The question of limitation for seeking appointment of an Arbitral Tribunal after the arbitral proceedings have commenced is covered under Article 137 of the Limitation Act, 1963.”

The court further held that the petition filed under Section 11 of the Act in 2015 was within limitation, but this did not affect the earlier commencement of arbitration in 2013.

The dispute arose from an agreement dated December 20, 2010 under which Sandur Manganese and Iron Ore Ltd. engaged R.K. Infra and Engineering (India) Pvt. Ltd. to construct a 12-kilometer road from Sandur to Kumaraswamy Temple for a contract value of Rs 23,49,51,123. The work was to be completed within six months.

Under the payment terms, the contractor was paid a mobilisation advance of Rs 1 crore. Further payments were to be made against running account bills, with ten percent retained as security deposit until the defect liability period ended.

The work was not completed within the stipulated time despite notices issued in September 2011 and January 2012. The contract was terminated on 7 June 2012.

The company thereafter invoked arbitration under the ICA Rules.

A request for arbitration, along with the statement of claim, was filed before the ICA on 1 July 2013.

The arbitral tribunal later delivered its award on 31 August 2023. It directed the contractor to refund Rs 7,99,49,003 with interest at 12% per annum from June 7, 2012 until realization, along with the costs of arbitration. The tribunal recorded that the contractor had received advance payments significantly exceeding the value of the work actually executed.

The award was challenged under Section 34 of the Arbitration and Conciliation Act before the Commercial Court in Bengaluru. That challenge was rejected. The contractor then carried the matter to the High Court in an appeal under Section 37(1)(c), contending that the claims themselves were barred by limitation.

The High Court did not accept the argument. It noted that the parties had agreed to resolve disputes under the ICA Rules, which specifically provide when arbitral proceedings are deemed to begin. In view of that agreement, the Court held that the arbitration must be treated as having commenced on 1 July 2013, when the request for arbitration and statement of claim were received by the institution, and that the limitation period for the claims stopped running from that date.

Holding that no ground was made out to interfere with the award, the Court dismissed the appeal and affirmed the arbitral tribunal's decision.

For Appellant (R.K. Infra and Engineering (India) Pvt. Ltd.): Advocates Dr. Venkat Reddy Donthi Reddy, Srikantha Rao Vemuganti

For Respondent (The Sandur Manganese and Iron Ore Ltd.): Advocate Rishikesh Madhav