To get payment for final bills raised in 1983 and 1989, Geo Miller invoked arbitration in 2002 and, since the respondent did not appoint its nominee arbitrator, filed an application under Section 11(6) of the Arbitration and Conciliation Act, 1996 (“ACA”). The High Court dismissed the application as time-barred. The Supreme Court confirmed the High Court’s decision and dismissed the special leave petition.

The questions considered and answered are described below.

A. Which enactment applied—the 1940 Act, which was in force at the time of the agreement, or the ACA?

The Arbitration Act, 1940, (“1940 Act”) would apply only if notice of arbitration was sent before 25 January 1996, which is the cut-off date.^[1] [1] citing Fuerst Day Lawson Ltd. v. Jindal Exports Ltd., (2001) 6 SCC 356, and OP Malhotra, Law and Practice of Arbitration and Conciliation (3rd ed., Thomson Reuters India, 2014). Show More Here, the notice was sent later. The court had jurisdiction to entertain applications under Section 11 ACA.

B. What is the limitation to file an application under Section 11 ACA?

It is three years from the date on which the cause of action or the claim which is sought to be arbitrated first arises. Limitation was/is governed:

1. In the 1940 Act, by Sections 37(1) and 37(4).
2. In the ACA, by the similarly worded Sections 43(1) and 43(3). ^[2] [2] Section 43(1) makes the Limitation Act, 1963, applicable to arbitrations and sub-section (3) bars a claim unless some step to commence arbitration has been taken in time contractually fixed. The bar is subject to court’s discretion to extend the limitation as justice in the case may require. Show More

Article 137 of the First Schedule to the Limitation Act, 1963^[3] [3] Residuary clause. Limitation of three years from when the right to apply accrues. Show More applies both to the 1940 Act (as per State of Orissa v. Damodar Das, (1996) 2 SCC 216) and to the ACA (as per Grasim Industries Limited v. State of Kerala, (2018) 14 SCC 265).

C. “When the right to apply accrue(s)”, under Article 137 of the Limitation Act?

1. (In this case) On the date when the final bills were raised (in 1983 and 1989).
2. (Distinguishing Inder Singh Rekhi v. DDA, (1988) 2 SCC 338 (“Inder Singh”), on facts, but citing on principle) The claim in Inder Singh was delayed because the bills were not finalized. It was held that the existence of a dispute is essential (for the right to apply to accrue). A ‘dispute’ entails a positive element, and mere inaction to pay does not lead to the inference that a dispute exists. Where a party does not finalise the bills, cause of action arises not from the date on which the payment became due, but from the date when the first communication was made requesting finalization.
3. Moreover, in a commercial dispute, while mere failure to pay may not give rise to a cause of action, once the applicant has asserted the claim and the respondent fails to respond, such failure will be treated as a denial of the applicant’s claim giving rise to a dispute, and therefore the cause of action for reference to arbitration. Merely writing representations and reminders do not extend the limitation period.

D. How does the time taken for settlement talks affect the limitation period? 

1. On a certain set of facts and circumstances, the period during which parties bona fidely negotiated a settlement may be excluded when computing limitation. (citing but distinguishing Hari Shankar Singhania Gaur v. Hari Singhania, (2006) 4 SCC 658 and Shree Ram Mills v. Utility Premises, (2007) 4 SCC 599).
2. However, in such cases the entire negotiation history must be specifically pleaded and placed on record. 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 referring the dispute to arbitration.
3. This ‘breaking point’ would be the date on which the cause of action arises. The threshold for determining when the ‘breaking point’ will be lower in commercial disputes (where the party’s primary interest is in securing the payment due) than in family disputes (where it may be said that parties have a greater stake in settling the dispute amicably).
4. In this case the pleading requirements were not met. They were silent on the specific actions taken for several years to recover the payments. Under Section 114(g) of the Indian Evidence Act, 1872 the court can presume that evidence which could be and is not produced would, if produced, be unfavourable to the person who withholds it.