In Negotiations And Settlements, Is Time Spent = Good Faith?BloombergQuintOpinion
Complex commercial transactions and arrangements often contemplate a requirement to engage in good faith negotiations/discussions or mediation in order to resolve the dispute amicably before the parties can resort to arbitration. It is also common in these arrangements that the parties are required to spell out their claim in writing and provide the other party with an opportunity to respond before good faith negotiations can commence. Given the complex nature of arrangements, stakes involved and multitude of relationships between the parties, often a considerable amount of time is spent in exploring ways to amicably resolve matters instead of “washing dirty linen in public”.
It has been a matter of considerable debate whether the time spent in good faith negotiations/discussions/mediation can be excluded for the purpose of computing the period of limitation for reference to arbitration.
The recent Supreme Court judgment in the case of Geo Miller & Co. Pvt. Ltd. v. Rajasthan Vidyut Utpadan Nigam Ltd. has explained the legal position on this aspect and paved the way for making a carve out for time spent in exhausting pre-arbitration procedures for the purpose of computing the period of limitation for reference to arbitration.
It is settled law that as is the case with civil actions before courts, in arbitrations, a claim cannot be made after the expiration of three years from the date when the claim has accrued. Therefore, the limitation period for invocation of arbitration runs from the date on which, had there been no arbitration clause, the cause of action would have accrued. In other words, the limitation period for making an arbitral claim/proceeding is three years from the date of accrual of the cause of action.
For the purpose of limitation, an arbitral proceeding is deemed to have commenced on the date a request for arbitration is received by the other party. The traditional view on this aspect has been that the period for invocation of arbitration runs from the date on which, had there been no arbitration clause, the cause of action would have accrued. This position did not per se take into account any pre-arbitration requirement that may be specified in the arbitration agreement/clause itself like mandatory good faith negotiations/discussions particularly in cases where the period of limitation as per the Limitation Act, 1963 is not dependent on assertion or denial of claim.
For example, Article 54 of the Schedule to the Limitation Act requires that a suit for specific performance of contract shall be filed within three years from the date fixed for the performance. Similarly, Article 55 of the Schedule to the Limitation Act mandates that a suit for compensation for breach of contract shall be filed within three years from the date the contract was broken. In these cases, the onus was put on the claimant to either exhaust pre-arbitration remedies before the period of limitation expired or wrap up negotiations and precipitate arbitration, even if an amicable resolution is in sight.
Earlier judgments with respect to limitation applicable to arbitral claims have compared the traditional concept of “cause of action” applicable to suits to “cause for arbitration” and decided the question of limitation of arbitral claims which were preceded by settlement discussions on the basis of whether the “cause of action” in the facts of that case could be said to have arisen before the settlement discussion broke between the parties. In the case of arbitral claims involving specific performance and damages for breach of contract, the Courts have often expressed helplessness in extending period of limitation on the basis that the starting point of the “cause of action” had arisen prior to three years from the date of reference, even if the claim was referred to arbitration soon after the settlement discussions broke.
In the Geo Miller Case, the Supreme Court has, for the first time, held that time spent in settlement discussions and good faith negotiations may be excluded for the purpose of computing the limitation period for reference of dispute to arbitration.
In the Geo Miller Case, the Supreme Court has held that:
“Having perused through the relevant precedents, we agree that on a certain set of facts and circumstances, the period during which the parties were bona fide negotiating towards an amicable settlement may be excluded for the purpose of computing the period of limitation for reference to arbitration under the 1996 Act. However, in such cases the entire negotiation history between the parties must be specifically pleaded and placed on the 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 referral of the dispute for arbitration. This ‘breaking point’ would then be treated as the date on which the cause of action arises, for the purpose of limitation. The threshold for determining when such a point arises will be lower in the case of commercial disputes, where the party’s primary interest is in securing the payment due to them, than in family disputes where it may be said that the parties have a greater stake in settling the dispute amicably, and therefore delaying formal adjudication of the claim.” [Para 29]
Moreover, in a commercial dispute, while mere failure to pay may not give rise to a cause of action, once the applicant has asserted their claim and the respondent fails to respond to such claim, 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. It does not lie to the applicant to plead that it waited for an unreasonably long period of time to refer the dispute to arbitration merely on account of the respondent’s reminders to the respondent in the meanwhile.” [Para 30]
The ratio laid down by the above judgment clarifies that in cases where, upon accrual of the liability to pay, the claimant has not asserted its claim and the parties engage in good-faith negotiations, the period of limitation will stand excluded/suspended till the said negotiation reaches a “breaking point” i.e. the point at which a reasonable party would have abandoned efforts at arriving at a settlement and contemplated referral of the dispute for arbitration. The above principle will apply regardless of whether such pre-arbitral negotiations are envisaged under the arbitration clause or not. Whilst the judgment suggests that the suspension/exclusion of the limitation period would apply only in cases where the claimant has not asserted its claim, going forward, courts can be expected to read down this finding or introduce further intricacies in order to avoid a situation where a claimant who has asserted his claim would be discouraged from engaging in serious and meaningful good faith negotiations for the fear of the limitation period running out.
Further, and significantly, the judgment postulates that for the purpose of sustaining a claim for exclusion/suspension of limitation period on account of good faith negotiations between the parties, the claimant will have to specifically plead and place strong evidence on record, establishing the entire negotiation history between the parties to show that there was a serious effort to reach an amicable settlement prior to the stage when reference to arbitration became inevitable. The underlying principle being that a claimant cannot wait for an unreasonably long period of time to refer the dispute to arbitration merely on account of the respondent’s failure or inaction to settle its claim. The judgment also does not tamper with the settled position of the law that the applicant cannot postpone the accrual of cause of arbitration by writing representations and/or sending reminders to the respondent.
Interestingly, the judgment distinguishes the thresholds for determining the ‘breaking point’ in the case of commercial disputes vis-à-vis family disputes and goes on to hold that the threshold is lower in case of commercial disputes when compared to family disputes. The judgment proceeds on the basis that the claimants in case of commercial disputes, where the primary interest is in securing the payment due to them, would abandon efforts to reach settlement and thereby contemplate arbitration much earlier than in the case of family disputes, where the parties have a greater stake in settling the dispute amicably than going forward with formal adjudication of the claim.
The decision in the Geo Miller Case introduces a welcome change and will give parties, lawyers and arbitrators greater discretion and much required wriggle room to give more time to good faith negotiations, mediation and amicable settlement instead of being forced to precipitate matters and invoke arbitration, which due to the Court interface, often invites public attention.
This article was authored by Indranil Deshmukh, Partner in the Dispute Resolution Practice Area, Vineet Unnikrishnan, Principal Associate in the Dispute Resolution Team, and Vineet Bhansali, Associate in the Dispute Resolution Team at Cyril Amarchand Mangaldas, and was originally published on the Cyril Amarchand Mangaldas blog.
The views expressed here are those of the authors and do not necessarily represent the views of BloombergQuint or its editorial team.