Can Negotiations Extend the Period of Limitation for Raising Claims Before an Arbitral Tribunal

A lengthy process and a 3-year limitation period

For most parties, arbitration is a last resort after negotiations and other mechanisms have broken down. In certain cases, especially ones involving highly technical details, such negotiations can be protracted and last months or even years after differences first emerge between parties. While on one hand it would be impracticable for a party to move a notice for arbitration while they continue to have a working relationship with the other party and efforts are on to resolve disputes, they risk waiting so long that the claims become barred by limitation.

Claims brought before an Arbitral Tribunal must be within the limitation period; the Arbitration and Conciliation Act, 1996 does not provide such a period.¹ However, Section 43² of the Arbitration and Conciliation Act, 1996 states that limitation periods prescribed by the Limitation Act, 1963³ would be applicable. In the absence of a specific applicable article, the residuary provision under Article 137⁴ is applicable. This article provides for a three-year period starting from “when the right to apply accrues”. Defining when this right to apply accrues is essential as it is the starting point of the entire process and correctly defining it can mean the difference between claims being admitted or being rejected as barred by limitation.

The Supreme Court’s judgment in B & T AG v. Ministry of Defence

Therein, it becomes relevant to determine if the negotiation period can be excluded for the purpose of calculating the limitation period and to what extent. While on the surface, the 2023 judgment of the Supreme Court in B&T AG v. Ministry of Defence⁵ may have stated that the negotiations cannot extend the period of limitation, the ratio of the judgment along with an analysis of precedents it relied on clearly demonstrates that the rule laid down favours inclusion and was rejected in that particular case for specific reasons discussed shortly.

The prior position on limitation for arbitral claims

The Supreme Court has held that a “mere failure to pay does not amount to a dispute” it is only when such a claim is unequivocally rejected by the other party that such a dispute can be said to have arisen, consequently starting the elapse of the period of limitation. The earliest enunciation of this precise position was in Inder Singh Rekhi v. DDA⁶ wherein it was held as follows:

4. … A dispute arises where there is a claim and a denial and repudiation of the claim…. Mere failure or inaction to pay does not lead to the inference of the existence of dispute. Dispute entails a positive element and assertion of denying, not merely inaction to accede to a claim or a request.

Subsequently, this position was refined by the Court in Geo Miller and Co. (P) Ltd. v. Rajasthan Vidyut Utpadan Nigam Ltd.⁷ and the Court promulgated the test of “the breaking point”:

28. … the period during which the parties were bona fide negotiating towards an amicable settlement may be excluded for the purpose of computing the period of limitation for reference to arbitration under the 1996 Act….

The Court thus laid down the test in the following words:

28. … The Court upon careful consideration of such history must find out what was the “breaking point” at which any reasonable party would have abandoned efforts at arriving at a settlement and contemplated referral of the dispute for arbitration. This “breaking point” would then be treated as the date on which the cause of action arises, for the purpose of limitation….

The position after B & T case

Since B & T case⁸ held that negotiations cannot extend the limitation period, at first glance, it may seem that the Court in that case has diverged from the prior position. However, quite the opposite is true; the Court in its judgment specifically held that there would be no right to apply until there was a clear and unequivocal denial of that right by the respondent.⁹ Furthermore, the Court specifically applied¹⁰ the breaking point test as laid down in Geo Miller case¹¹. The crucial difference, however, was that the negotiations referenced in this case took place after the respondent had already encashed bank guarantees furnished by the petitioner towards recovery of liquidated damages. The Court held that the same amounted to a clear rejection of the petitioner’s claims and would constitute the said “breaking point”. Therefore, any negotiations that took place subsequently would be irrelevant and would not extend the period of limitation.

Confirmation in Arif Azim Co. Ltd. v. Aptech Ltd.

Thus, a consistent position emerges wherein the Court needs to look at the specific facts of each case from the standard of a reasonable person and determine at what point the relationship between the parties could be considered to have broken down, starting the elapse of the period of limitation. This does not in any way mean that when two parties continue to have a working relationship and are negated in bona fide negotiations to resolve disputes the same would not extend the limitation period specially in the absence of an overt act such as encashment of bank guarantees in B & T case¹². Once such a breaking point is reached however any subsequent negotiations and correspondences would be meaningless.

This approach was applied by the Supreme Court in 2024 judgment in Arif Azim Co. Ltd. v. Aptech Ltd.¹³ wherein it was held that the period of limitation would not start when the claims were first raised, but rather when the other party had clearly denied such claims and shown unwillingness to engage in further discussions regarding the same. Subsequent letters by one party were considered irrelevant.

Conclusion

Thus, the doctrine of “breaking point” continues to be settled law with regard to determining the starting point of the period of limitation for raising claims before an Arbitral Tribunal. The period of limitation would start running when the right to sue accrues, which would occur on clear denial of the claims raised or an overt act which demonstrates a lack of willingness to consider such claims. However, negotiations between the parties up to such a breaking point, being conducted with a reasonable expectation of disputes being resolved without resorting to arbitration would be excluded.