Court’s Decision
The Supreme Court set aside the Madhya Pradesh High Court’s judgment that had dismissed Offshore Infrastructures Limited’s Section 11(6) petition under the Arbitration and Conciliation Act, 1996, as time-barred. The Bench of Justices Dipankar Datta and Augustine George Masih held that the High Court erred in computing limitation, failing to account for the Supreme Court’s own COVID-19 extension orders, and that the arbitration clause in the contract remains valid even if the appointment mechanism becomes inoperative due to statutory amendments.
The Court directed that the dispute be referred to the Delhi International Arbitration Centre (DIAC) for appointment of an independent arbitrator, observing that “the essence of the arbitration clause survives even if the method of appointment is no longer enforceable.”
Facts
Bharat Oman Refineries Limited (later merged with Bharat Petroleum Corporation Limited) had awarded a contract to Offshore Infrastructures Limited for the establishment of a Modular Penex Unit and revamp works at the Bina Refinery. The letter of acceptance was issued on 31 December 2016, with a stipulated completion period of five months.
The work was delayed and finally completed on 31 January 2018. The final bill (RA Bill No. 7) was raised on 20 March 2018, and a No Claim Certificate was signed on 3 October 2018. The completion certificate followed on 5 February 2019, and final payment was made on 26 March 2019 after deducting 5% liquidated damages.
Subsequently, Offshore raised a consolidated claim on 26 April 2021, demanding unpaid dues. On 14 June 2021, it issued a notice to the Managing Director of Bharat Oman Refineries Limited seeking appointment of an arbitrator under Clause 8.6 of the General Conditions of Contract (GCC). The Respondent refused via letter dated 2 July 2021.
When Bharat Petroleum failed to appoint an arbitrator, Offshore filed an application under Section 11(6) before the Madhya Pradesh High Court on 14 March 2022. The High Court dismissed the petition, holding that the claim was barred by limitation, counting time from the date of the “No Claim Certificate.” The Review Petition was also dismissed, leading to the appeal before the Supreme Court.
Issues
- Whether a court can appoint an arbitrator when the appointment mechanism in the arbitration clause has become invalid due to statutory amendments.
- Whether the application under Section 11(6) filed by the appellant was within limitation, considering the COVID-19 extension period.
Petitioner’s Arguments
The petitioner contended that the High Court erred in computing limitation from the date of the “No Claim Certificate” (3 October 2018). It argued that the right to invoke arbitration arose only after the Respondent’s refusal to appoint an arbitrator on 2 July 2021. Relying on Arif Azim Company Ltd. v. Aptech Ltd. [(2024) 5 SCC 313], counsel submitted that limitation for Section 11(6) petitions begins only after a valid notice invoking arbitration is followed by refusal or failure to act.
Further, it was argued that even assuming the limitation began in 2018, the part payment made on 11 June 2019 extended the limitation under Section 19 of the Limitation Act, 1963.
The appellant also invoked the Supreme Court’s ruling in In Re: Cognizance for Extension of Limitation [(2022) 3 SCC 117], where the Court excluded the period 15 March 2020 to 28 February 2022 from computation of limitation due to the COVID-19 pandemic.
On the validity of the arbitration clause, the petitioner relied on Perkins Eastman Architects DPC v. HSCC (India) Ltd. [(2020) 20 SCC 760], arguing that while the Managing Director of Bharat Oman Refineries was disqualified from acting as arbitrator after the 2015 Amendment (Section 12(5)), this did not invalidate the arbitration agreement itself.
Respondent’s Arguments
The respondent supported the High Court’s decision, asserting that the cause of action arose when the final bill was raised on 20 March 2018 and became due by 21 April 2018 (30 days thereafter). Therefore, the appellant had to invoke arbitration by 21 April 2021, but failed to do so.
It was further argued that Clause 8.6(a) of the GCC specifically vested appointment power in the Managing Director or his nominee, who became ineligible to act under Section 12(5) after the 2015 Amendment. Hence, the entire arbitration clause had become inoperative, disentitling Offshore from invoking arbitration.
The respondent contended that Perkins Eastman should not apply retrospectively and that the arbitration mechanism had ceased to exist once the appointing authority became statutorily disqualified.
Analysis of the Law
The Supreme Court analyzed two legal issues: the validity of the arbitration clause and computation of limitation for a Section 11(6) application.
A. Validity of Arbitration Clause
The Court referred to its rulings in TRF Ltd. v. Energo Engineering Projects Ltd. [(2017) 8 SCC 377], Perkins Eastman Architects DPC v. HSCC (India) Ltd. [(2020) 20 SCC 760], and Voestalpine Schienen GmbH v. DMRC Ltd. [(2017) 4 SCC 665]. It reiterated that after the 2015 Amendment, Section 12(5) disqualifies certain categories of persons (like Managing Directors or company officers) from acting as arbitrators.
However, the Court clarified that such disqualification does not nullify the arbitration clause itself. The clause’s core objective — referring disputes to arbitration — remains intact. Only the method of appointment becomes inoperative.
The Court observed:
“Merely because the procedure to appoint an arbitrator has become inoperative due to statutory changes, it would not mean that the arbitration clause itself ceases to exist.”
Thus, even when a named arbitrator or appointing authority becomes ineligible, the parties retain the right to seek court intervention under Section 11(6) to appoint a neutral arbitrator.
B. Computation of Limitation
On limitation, the Court cited Geo Miller & Co. Pvt. Ltd. v. Chairman, Rajasthan Vidyut Utpadan Nigam Ltd. [(2020) 14 SCC 643], which held that limitation under Article 137 of the Limitation Act for Section 11(6) applications begins when the final bill becomes due, not when subsequent correspondence is exchanged.
Applying that principle, the Court held that the cause of action arose on 21 April 2018, making the limitation expire on 21 April 2021. However, this period overlapped with the COVID-19 extension period.
Citing the Supreme Court’s suo motu order in In Re: Cognizance for Extension of Limitation [(2022) 3 SCC 117], the Bench held that the period between 15 March 2020 and 28 February 2022 must be excluded from limitation computation. Hence, the appellant’s application filed on 14 March 2022 was within time.
Precedent Analysis
- TRF Ltd. v. Energo Engineering Projects Ltd. (2017) 8 SCC 377 — Established that a disqualified person cannot nominate another as arbitrator.
- Perkins Eastman Architects DPC v. HSCC (India) Ltd. (2020) 20 SCC 760 — Held that an appointing authority who is statutorily ineligible cannot make valid appointments.
- Voestalpine Schienen GmbH v. DMRC Ltd. (2017) 4 SCC 665 — Emphasized the neutrality of arbitrators post the 2015 Amendment.
- Geo Miller & Co. Pvt. Ltd. v. Rajasthan Vidyut Nigam Ltd. (2020) 14 SCC 643 — Clarified when limitation begins for Section 11(6) applications.
- In Re: Cognizance for Extension of Limitation (2022) 3 SCC 117 — COVID-19 extension ruling excluding specific periods from limitation.
Court’s Reasoning
The Court rejected Bharat Petroleum’s argument that the ineligibility of the Managing Director nullified the entire arbitration clause. The existence of the arbitration clause is independent of the appointment mechanism, and to interpret otherwise would defeat the legislative intent of promoting arbitration as an efficient dispute resolution process.
The Bench observed that the High Court’s mechanical computation of limitation ignored the COVID-19 extensions, thereby denying justice during extraordinary times. Once the excluded period is considered, the Section 11(6) application was clearly filed in time.
The Court concluded:
“It cannot be justified to interpret the clause literally in a manner that results in abandonment of arbitration. The core of the clause — reference of disputes to arbitration — survives and remains enforceable.”
Conclusion
The Supreme Court held that:
- The arbitration clause remains valid despite the ineligibility of the named arbitrator.
- The application under Section 11(6) was filed within limitation after applying the COVID-19 exclusion period.
The Court accordingly set aside the High Court’s judgments dated 19 December 2023 and 10 April 2024, and directed the Delhi International Arbitration Centre to appoint an independent arbitrator to adjudicate the dispute.
“The amendment ensures neutrality, not nullity. Arbitration cannot perish with the clause’s procedural flaw.”
Implications
This judgment strengthens the pro-arbitration stance of Indian jurisprudence by affirming that:
- Arbitration clauses survive despite procedural inoperability of the appointing authority.
- Courts must adopt purposive interpretation to uphold arbitration, aligning with legislative intent post the 2015 Amendment.
- COVID-19 limitation extensions continue to protect litigants from procedural injustice.
The ruling also ensures that technical defects in contract drafting do not defeat parties’ intent to arbitrate — a principle crucial for infrastructure and commercial contracts.
FAQs
1. Does disqualification of a named arbitrator invalidate the arbitration clause?
No. Only the appointment procedure becomes inoperative. The arbitration clause itself survives, allowing court appointment under Section 11(6).
2. How does the COVID-19 extension order affect limitation in arbitration?
The Supreme Court excluded the period from 15 March 2020 to 28 February 2022 from limitation computation, benefiting all judicial and arbitral proceedings.
3. Can courts appoint arbitrators when a clause names an ineligible officer?
Yes. Under Perkins Eastman, courts can appoint independent arbitrators when the named officer is disqualified under Section 12(5).
