This article is written by Sanjay M Jawle pursuing Certificate Course in Arbitration: Strategy, Procedure and Drafting from LawSikho.
Having come across several instances where one of the parties to an arbitration agreement, generally the one in a dominant position, inserts into the contract a clause that limits the time available to the opposite party to raise or escalate an issue to a date that is not inconvenient to them. From the ensuing disputes, I felt the desire to carry out a study of some such cases to have a better understanding of the subject matter under study.
Very often, the parties to the contract or even the drafters of such a clause of the contract, are not even aware of the contravention of the time limiting clause with the provisions of the Indian Contract Act, 1872 read along with the provisions of the Limitation Act, 1963.
It is the purpose of this article to pen down the outcome of my study and understanding of the aforesaid topic so that it will enable the readers of the article to have a better understanding of the law, their actions, and its consequences. Hopefully, it will even contribute towards reducing the contravention of the law in business contracts and ensure fair play in the conduct of businesses.
The framework of a contract agreement in an organization
In an organization, the overall framework or structure of a contract agreement is generally made and given by the legal department to its procurement or supply chain team. The members of the procurement team use this framework with modifications on a case-to-case basis while placing orders depending upon the manufacturing cycle time, the time of requirement of the product in the employers’ process, its criticality, etc.
The idea to limit the time available to the opposite party to raise or escalate an issue comes in at various levels in an organization. They are as given below:
- Deviations made in a contract by lower, middle, or senior level managerial staff to keep tighter control on the contractors to achieve the organizational targets, being unaware of the fact that such limitation periods are not enforceable in law.
This strategy stems from the fact that due to the flooding of cases in the courts & because of the not very easy dispute resolution or arbitration process, a large majority of the contractors or vendors will not challenge the clause unless it is grievously hurt.
- Contracts are dubiously designed to deprive a contractor of making any genuine claims against the dominant employer company.
One of the most frequently used methods by the dominant-employer companies for preventing or reducing claims being made against them is by inserting a clause that limits the time period available to the opposite party for action. For this the dominant party often drafts a clause;
- To limit the time period available to the opposite party to raise an issue or to make claims or seek remedies; or
- To extinguish the rights of the opposite party after a particular time period; or
- To consider the liability of the party, against whom the claim is to be made, as discharged after a particular period of time.
Background of the case: Balaji Infraro (I) Ltd vs Chanakya National Law University
In Balaji Infraro Ltd, the petitioners had entered into an agreement with Chanakya National Law University, the respondents, for the construction of a boys hostel. The petitioners Balaji Infraro Ltd completed the construction work and, according to the respondents, were paid all its due by way of the full and final settlement.
The petitioners raised a demand for the cost incurred towards “carriage of materials‟ amounting to Rs 63.18 lakhs and interest on the security deposit held by the respondents. In August 2012, the respondents informed the petitioners that as the material was not mentioned in the BOQ of civil work, the extra claim for the carriage was not admissible and also refused to pay any interest on the security deposit. It further said that no correspondence in this regard would be entertained.
On 7th May 2013, the petitioners requested the respondents for the appointment of an arbitrator as per the terms of the contract.
In response, the respondents in their communication pointed to clause-25 of the Contract which stipulated a 45 days’ limitation period for making a demand for appointment of an arbitrator, in respect of any claim ‘from the date of intimation of a final bill being ready for payment’.
When the respondent failed to make the payments and did not respond to the request for appointing an arbitrator, the petitioner approached the court for the appointment of an arbitrator.
Facts of the case
The several conditions that the respondent University had put in the Contract (Clause 252) briefly are given below:
- For any disagreement related to work, the contractor was required to give notice to the employer within 30 days from receipt of the decision of the employer for appointment of the arbitrator, failing which the decision of the employer would be treated as final & binding and would not be referable for arbitration.
- For disagreements related to bills and claims, the contractor was required to make a demand for the appointment of an arbitrator in writing within 45 days of receiving the intimation from the employer that the final bill is ready for payment, failing which the claim of the contractor would be deemed to have been waived and absolutely barred and that the employer would be discharged and released of all liabilities under the contract in respect of such claims.
- The contract also mandated that ‘no person other than a person appointed by the Employer or the administrative head of the department appointed by the Employer should act as arbitrator and if that was not possible, the matter should not be referred to arbitration at all.
Issues raised before the Patna High Court
The questions before the Patna High Court were;
- Whether any clause in the agreement would be able to extinguish the right and the remedy of the petitioner before the period prescribed in the statutory provision?
- Whether the right of appointment of an arbitrator by the court has been extinguished by the term of 45 days as stipulated in clause 25 of the agreement?
- Whether the right of the arbitrator to adjudicate on the issue has been extinguished on account of the expiry of the period specified in clause 25 of the agreement?
- Whether the payment received by the petitioner without demur amounts to ‘the issue no longer exists’ i.e. in view of the payment having been received without demur, whether the issue is still arbitrable?
- Whether an arbitrator should be appointed to adjudicate the dispute?
Judgement of the court
After advertising on several judgements, including the judgements of the Supreme Court, the court finally gave its judgment on the petitioner’s prayer for the appointment of an arbitrator & held that the dispute persisted and referred the matter to arbitration.
Provisions of the law
It may be noted that all of the conditions included in Clause 25 were untenable in law. The provisions of Section 28 of the Indian Contracts Act, 1872 state that agreements in restraint of legal proceedings are void.
It provides that every agreement –
- by which any party thereto is restricted absolutely from enforcing his rights under or in respect of any contract, by the usual legal proceedings in the ordinary tribunals, or which limits the time within which he may thus enforce his rights; or
- which extinguishes the rights of any party thereto, or discharges any party thereto, from any liability, under or in respect of any contract on the expiry of a specified period so as to restrict any party from enforcing his rights, is void to that extent.
Analysis of the case
From a joint reading of clause 25 of the contract between the parties & the provisions of Section 28 of the Indian Contracts Act, 1872, it is clear that sub-clause (i) & (ii) of clause 25 of the Contract are void as they restrict the time given to a party for enforcing its rights to less than the period specified in the Limitations Act, 1963. The Limitations Act, 1963 is applicable to the Indian Contracts Act, 1872. The general rule for the applicability of the Limitation Act, 1963 is that;
- Unless a specific Act provides a period of limitation different from that prescribed under the Limitation Act, the limitation period given in the Limitation Act is applicable; or
- Unless a special local Act does not specifically exclude the application of the Limitation Act, the limitation period given in the Limitation Act is applicable.
With reference to sub-clause (iii) of clause 25 of the contract, the sub-clause would fail the test of neutrality, fairness, and justice and any person appointed as arbitrator in accordance with the terms and conditions of the same would be ineligible to be an arbitrator as the provisions of the Seventh Schedule (1) of the Arbitration and Conciliation Act, 1996, make an employee, consultant, advisor or a person with any other past or present business relationship with a party ineligible for appointment as an arbitrator. The contents of this sub-clause point to the intention of the dominant party to have a prejudiced arbitral tribunal appointed, in case a dispute arises between the parties, to adjudicate upon it and get a favourable judgement.
The court decided on question “B” above and said “an agreement which in effect seeks to curtail the period of Limitation & prescribes a shorter period of Limitation than that prescribed by the statute would be void under Section 28 of the act.
In respect of whether the employer would be discharged and released of all liabilities under the contract in respect of such claims, the court pointed to the judgment in Rahmatunnisa v. Price in the courts of England, wherein the court said “No man can exclude himself from the protection of the courts”.
On question “D”, ie in view of the final bill being accepted without demur, the court noted that
- The dispute regarding the final bill arose prior to its acceptance i.e., the bill was prepared by the Respondent but not agreed upon in its entirety by the petitioner.
- The appellant had not pleaded that any settlement took place as a result of any negotiations whereby the final bill was accepted by the petitioner without any reservations.
- Immediately after receiving the payment of the final bill, the petitioner had lodged a protest and reiterated his claim.
It was therefore held by the court that the dispute persisted.
On issues such as whether the claim is a dead claim or a live claim or a long barred claim and other questions which required the adjudicating authority to get into the facts on the matter, the Court adverted on the SBP & Co v. Patel Engg Ltd where the Court had said that it would be appropriate to leave that question to be decided by the arbitral tribunal on taking evidence along with the merits of the claims involved.
On the question “E” above, ie Whether an arbitrator should be appointed to adjudicate on the dispute, the Court said, in dealing with an application under Section 11 of the Arbitration and Conciliation Act, 1996, the Chief Justice has to decide on the following matters;
- Whether he (ie the Chief Justice) has the jurisdiction to decide on the matter i.e., whether the applicant has approached the right High Court.
- Examine as to whether there is an arbitration agreement, as defined in the Act, &
- Whether the person who has made the request before him is a party to the agreement.
- Whether the applicant has satisfied the conditions for appointing an arbitrator under 11(6) of the Act.
- The qualifications of the arbitrator or arbitrators.
- The existence or otherwise of a live claim, ie the arbitrability of the issue, the existence of the condition is necessary for the exercise of his power, and
- Whether the adoption of the arbitration procedure would best serve the purpose sought to be achieved by the Act, i.e. of expediting the process of dispute resolution without too many approaches to the court.
Though the judgement is silent about the clause ‘no person other than a person appointed by the employer or the administrative head of the department appointed by the Employer should act as arbitrator’, the court appears to have pondered over the clause and its likely violation of the contents of the Seventh Schedule if the employer was to appoint the arbitrator as per that clause & hence has not called upon the employer to appoint an arbitrator.
After giving a thought to all of the above, the court rightly held that the dispute persisted and said “Let this case be listed for appointment of the arbitrator”.
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