The Calcutta High Court ruled that for claims that are denied as a result of it, the statute of limitations will start to expire on the date of final payment.
The Court ruled that once a claim that existed at the time the final bill was prepared was rejected in the final payment, the limitation period started and could not be stopped by letters sent by one party alone.
Justice Shekhar B. Saraf's bench ruled that courts should use their legal judgment to assess the case's arbitrability at the selection of the arbitrator stage rather than just referring to every matter to arbitration as a meager cosmetic exercise.
It further noted that if the exercise's sole purpose had been to determine if an arbitration agreement existed, this task may have been given to an AI-enabled computer system.
In addition, the Court ruled that Section 11(6A) does not prevent courts from considering the question of substantive claim restriction when those claims are ex-facie barred by limitation and the matter is moot.
The Court additionally found that the parties' actions could not be used to prolong a statute of limitations that had already run its course.
The parties signed a contract in 2008–2009 stipulating that the petitioner would perform specific construction and essential utility services for the respondent. The agreement originally had a completion date of August 2009, however, due to several delays and an expansion in the scope, the deadline was repeatedly extended until 31.08.2014, when the work was finally finished.
In a letter dated 15.03.2016, the petitioner acknowledged the respondent's final bill as the full and final settlement of all of its claims after it was delivered on 11.03.2016. The petitioner confirmed its approval of the final sum in a subsequent letter dated 17.03.2016, however this time a request for price escalation was made.
After that, the petitioner claimed in a letter dated May 16, 2016, that its claim for price escalation had not yet been resolved and requested authorization for arbitration. It sent the respondent a letter of reminder dated 25.08.2017, to which the respondent responded with a letter dated 12.09.2017, denying any obligation to pay escalation claims because the payment made on 15.03.2016 was excluded as a full and final settlement of its claim and that, as a result, no claim survives.
The petitioner responded to the letter dated 12.09.2017 with another letter in which it claimed for the first time that the final bill's approval was given under duress. Other letters were then sent and received by the parties. On March 8, 2021, a formal notice of arbitration was given. Finally, the petitioner asked the court to select an arbitrator because the agreement's appointment process only allows for the unilateral nomination of one arbitrator.
The contention of the Parties
For the following reasons, the petitioner requested the appointment:
The Court may appoint the arbitrator since the appointment process outlined in the agreement is not legitimate under the law.
The presence of the arbitration agreement is undisputable, hence the Section 11 condition that simply concerns the arbitration agreement's existence is satisfied.
Since Section 11(6A) forbids such an exercise, the Court is unable to consider the restriction of the substantive claims while exercising its Section 11 of the Act authority. Furthermore, because it involves both a legal and factual issue, the restriction should only be decided by the arbitrator.
The acceptance letter dated 15.03.2016 was provided under duress, and the respondent assured the petitioner that its claim for escalation costs would be taken into account. As a result, the acceptance letter cannot be interpreted as a waiver of the petitioner's right to demand price escalation.
The respondent rejected its duty to pay in a letter dated 12.09.2017, and only then did the three-year statute of limitations begin to run. The parties had been in negotiations or mutual conversations before this, and this letter would constitute the "breaking point" as defined by the Geo Miller Case.
As it had chosen its arbitrator, the respondent had waived its right to object to limitation. A powerful committee was also established to look into the petitioner's escalation allegation.
The following reasons were given by the respondent in opposition to the petition's maintainability:
The petition is time-barred because any claim's basis for action arose on the day the final bill was paid.
The petitioner's claims were resolved amicably and satisfactorily, and a no-claims certificate was given in the respondent's favour.
The claim of coercion is a last-minute attempt to back out of the agreement signed between the parties.
After the settlement, a simple request cannot qualify as a claim or demand, therefore the payment made following the final bill was the whole and final payment, and no further disagreements emerged.
The contract does not contain a price increase clause. The dispute is not covered by the arbitration provision because article 17 also forbids any kind of escalation.
The creation of an internal committee would not grant the petitioner the right to pursue legal action.
Even f a letter dated May 16, 2016, qualifies as notice under Section 21 of the A&C Act, the petition for the appointment of an arbitrator is time-barred.
Analysis by the Court
The problem of the appointment process for arbitrators specified in the agreement was first addressed by the court. The appointment must be made by the Court since, according to the Court, it allows for the respondent to unilaterally designate a single arbitrator.
Court's authority to decide whether an issue is arbitrable under Section 11
The Court concluded that when exercising its authority under Section 11 of the Act, the Courts must do more than merely refer every issue to arbitration; rather, they must use their judicial judgment to assess the case's arbitrability. It further noted that if the exercise's sole purpose had been to determine if an arbitration agreement existed, this task may have been given to an AI-enabled computer system.
The Court held that the scope of interference is limited, citing the Supreme Court's rulings in Vidya Drolia, DLF Home v. Rajapura Homes, BSNL v. Nortel, and Uttrakhand Purv Sainik. However, the Court retains the right to reject arbitration if, upon first glance, the claims appear to be time-barred and fall under the category of "deadwood claims."
When did the period of Limitation begin?
The Court then took into account the question of when the case's limitation period started. The petitioner accepted the final bill as a full and final settlement of its claim, and the petitioner filed a no-objection certificate in the respondent's favour, the court ruled that the statute of limitations started to run at that point. The Court decided that the subsequent letters only asked for the escalation cost to be taken into account. Furthermore, given that the petitioner confirmed its approval of the final bill in two additional letters, the petitioner has failed to demonstrate that the no-claim certificate was given under duress.
The Court decided that the cause of action would only arise when a claim that had already been rejected at the time of the final bill was included in the final payment. The Court ruled that a simple letter exchange cannot stop the passage of time once it has started.
Can the parties agree to extend the limitation period?
The petitioner's contention that the problem of limitation does not arise because the respondent had chosen its arbitrator in a letter dated April 10, 2021, was rejected by the court. The Court ruled that limitation is something that is statutorily required and judicially enforced rather than something that is to be decided by the parties consent.
The Court held that once the statute of limitations has run, it cannot be extended just because the other party agrees to submit the case to arbitration, citing the Delhi High Court's decision in Extramarks Education v. Shri Ram School.
The Court additionally noted that because the respondent had stated that the claims were time-barred in the letter itself, the letter could not be interpreted as accepting the claims and extending the statute of limitations.
As a result, the petition was rejected by the Court.
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