Arbitration Dispute in Construction Contract: Supreme Court Verdict

The case involves two appeals, Civil Appeal No. 7184 of 2008 and Civil Appeal No. 7185 of 2008, filed by M/S. Emm Enn Associates against Commander Works Engineer & Ors. The appeals raise identical legal questions and are decided through a common judgment.

Background of the Case

M/S. Emm Enn Associates, a partnership firm, was awarded a contract on November 10, 1998, for additional security fencing at Mullanpur. The work was completed on July 10, 2000, and the final bill was prepared on February 20, 2001, with payment made on April 10, 2001.

The dispute arose when the contractor claimed that the final payment did not include all the amounts due under various items. On February 23, 2005, the contractor sent a notice demanding the balance amount, stating that a decision must be communicated within 30 days or arbitration would be sought. The respondents rejected the claim, stating that the contractor had already signed the final bill without protest.

Legal Issues

• Whether the contractor’s claim was a ‘live claim’ or a ‘dead claim’ under the Arbitration and Conciliation Act, 1996.
• Whether the application under Section 11 for the appointment of an arbitrator was valid, given that the dispute arose more than three years after the final bill was settled.
• Whether Clause 67 of the contract, which allowed a two-year period for recoveries by the government, extended the limitation for the contractor’s claims.

Petitioner’s Arguments

The petitioner contended that the final bill paid on April 10, 2001, only covered the undisputed amount and that additional amounts were still due. They argued that Clause 67 of the contract provided a two-year period for recovery by the government, after which they could legally raise their claim.

The petitioner further argued that since the disputed amount was never adjudicated, the dispute should have been referred to arbitration.

Respondent’s Arguments

The respondents argued that any claim should have been filed within three years of the final bill payment in 2001. Since the arbitration request was made in 2005, they contended that the claim was barred by limitation.

They also stated that the contractor had issued a ‘No Further Claim’ certificate while receiving the final bill, thereby waiving any additional claims.

Supreme Court’s Ruling

The Supreme Court referred to the landmark judgment in SBP & Co. vs. Patel Engineering Ltd. (2005) which held that the Chief Justice, while deciding an application under Section 11, could examine whether a claim was time-barred or a live claim.

The court also referred to Indian Oil Corporation Ltd. vs. SPS Engineering Ltd. (2011), where it was held that a claim could only be rejected at the preliminary stage if it was patently time-barred and required no detailed consideration of evidence.

The Supreme Court ruled that the petitioner’s claim was not a ‘dead claim.’ The limitation period for arbitration should be examined by the arbitrator rather than being summarily dismissed by the Chief Justice. The court observed:

“The Chief Justice exercises judicial power under Section 11 of the Act and can examine whether a claim is live or dead. However, this should only be done when the claim is patently time-barred, requiring no further scrutiny of evidence.”

The court also noted that the contractor’s certificate clearly stated that the payment made in April 2001 was for the ‘undisputed portion’ of the final bill. This indicated that there were additional claims that were not settled, supporting the petitioner’s argument.

Therefore, the court set aside the Punjab and Haryana High Court’s order and directed the High Court to appoint an arbitrator for deciding the dispute.

Conclusion

The judgment reinforces that arbitration should not be denied on the ground of limitation unless it is evident that the claim is entirely time-barred. It also highlights the importance of examining contract clauses and certificates issued at the time of final payment to determine whether a contractor has waived their right to additional claims.

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