2013 (4) TMI 387 - HC - Companies Law

Arbitration and Conciliation - the petitioner and the respondent entered into a contract agreement dated 5th January, 2004 for the widening/ four laning and strengthening of the existing 2 lane carriageway of NH-47, including the bridges from Vytilla to Aroor Junction, totaling a distance of 348.382 kms to 358.750 kms of Nh-47 in the state of Kerala - The project could not be completed timely and both the parties claimed that there are breach of obligations on either side - Whether the respondents/petitioner herein are entitled to seek settlement of disputes under clause 24.2 before this Arbitral Tribunal in so far as the recommendations of DRB in respect of such disputes have become final and binding under clause 24.1 of the contract data? - Whether the counter claim by the respondent/ petitioner herein raised for the first time before the tribunal is barred in view of the clause 24.1 of the contract data? - whether the appeal under Section 37 (2) of the Act is maintainable in the case of present nature? Held that - A perusal of the amended Section 28 of the Contract Act, 1957 would show that both kinds of agreements i.e. agreements which restrict the period of limitation within which claims could be referred, as also agreements which extinguish the right of a party to prefer a claim or discharges any party from any liability under a contract on expiry of a specified period, are void to that extent. Before the amendment of Section 28 in 1997, the agreements reducing the period of limitation were distinguished from those which did not limit the time within which a party might enforce his rights, but which provided for a release or forfeiture of rights, if no suit was brought within the period stipulated in the agreement and the latter class of agreements, being outside the scope of the section, were held to be binding between the parties. Thus, in National Insurance Co. Ltd. v. Sujir Ganesh Nayak & Co. (1997 (3) TMI 568 - SUPREME COURT), the Supreme Court drew a clear distinction between an agreement which curtails the period of limitation and an agreement which provides for forfeiture or waiver of the right itself, if no action is commenced within the period stipulated by the agreement. The first was held to be void as offending Section 28 but, the later was held not falling within the mischief of Section 28. Thus, it was held that curtailment of the period of limitation was not permissible in view of Section 28 but extinction of the right itself, unless exercised within the specified time, was permissible and can be enforced. After the 1997 amendment to Section 28 of the Indian Contract Act, 1872, not only the curtailment of the period of limitation is void, but also the extinction of right, if sought to be brought by the agreement within a specific period, which period is less than the period of limitation prescribed for the suit under the Contract in question, is also rendered void. In other words, after the amendment to Section 28 of the Indian Contract Act, 1872 by Act 1 of 1997, the distinction between curtailing of the period of limitation and extinction of the right itself, after the specified period, no longer exists. Therefore, no merit in the submission of Mr. Sethi learned Senior counsel appearing on behalf of the respondents that there lies a difference in the curtailment of the period of limitation and the extinction of the right itself. The judgment relied by the Mr. Sethi in the case of H.P. State Forest Company (2008 (12) TMI 664 - SUPREME COURT) was rendered in the context of the Section 28 of the Contract Act as it stood prior to the amendment. The effect of legislative amendment was never considered in the said judgment. It is, therefore, clear that the main object of the 1952 Act was only to strike out the unnecessary Acts and excise dead matter from the statute book in order to lighten the burden of ever increasing spate of legislation and to remove confusion from the public mind. The object of the Repealing and Amending Act of 1952 was only to expurgate the Amending Act of 1949, along with similar Acts, which had served its purpose. Clause 24.1 of the Act so far as it puts the restriction on the party either by extinction of right to arbitrate or for its enforcement of the right to arbitrate unless the notice is given within 14 days of the receipt of the recommendations of DRB lies in the teeth of Section 28 of the Contract Act (as amended in the year 1997) and thus the same has to be read down and the effect of such restriction is in consequential. The resultant effect of the aforementioned discussion is that as a matter of law, the restriction prescribed under clause 24.1 of the Contract putting fetters upon the party to arbitrate their claim is inconsequential. Accordingly, the impugned order deciding preliminary issue cannot sustain and the same is set aside. Appeal is allowed. Learned Arbitral Tribunal is requested to entertain the claims of the petitioner and decide the same on merits in accordance with law.

Summary

Issues Involved:
1. Maintainability of the appeal under Section 37(2) of the Arbitration and Conciliation Act, 1996.
2. Validity of the time limit prescribed in clause 24.1 of the contract for challenging the DRB recommendations.
3. Jurisdiction of the Arbitral Tribunal to entertain the claims of the petitioner.

Detailed Analysis:

1. Maintainability of the Appeal under Section 37(2) of the Arbitration and Conciliation Act, 1996:

The court first addressed whether the appeal under Section 37(2) of the Act is maintainable. The respondent argued that the appeal was not maintainable as the Arbitral Tribunal's order did not pertain to jurisdiction under Section 16 of the Act. The court examined the provisions of Sections 16 and 37 of the Act and concluded that the plea that the Arbitral Tribunal "does not have jurisdiction" includes objections regarding the arbitrability of the dispute. The court found that the objection raised by the respondent, claiming that the petitioner was barred from raising disputes before the tribunal due to the finality of the DRB recommendations, was indeed a jurisdictional objection. Consequently, the court held that the appeal was maintainable under Section 37(2)(a) of the Act.

2. Validity of the Time Limit Prescribed in Clause 24.1 of the Contract:

The petitioner argued that the time limit prescribed in clause 24.1 of the contract, which required a notice to arbitrate within 14 days of receiving the DRB recommendations, was unreasonably harsh and against public policy. The court referred to previous judgments, including Hindustan Construction Corporation vs. Delhi Development Authority and National Highways Authority of India vs. Backbone Projects Limited, which held that such clauses are directory and not mandatory. The court noted that Section 28 of the Contract Act, 1872, as amended in 1997, voids agreements that either limit the time within which rights may be enforced or extinguish the rights if not exercised within a specified period. The court concluded that clause 24.1 was void to the extent that it restricted the right to arbitrate and should be read down.

3. Jurisdiction of the Arbitral Tribunal to Entertain the Claims of the Petitioner:

The court examined whether the Arbitral Tribunal had jurisdiction to entertain the claims of the petitioner. The Arbitral Tribunal had ruled that the recommendations of the DRB had attained finality and, therefore, the petitioner was not entitled to challenge them before the tribunal. The court found that this ruling effectively took away the jurisdiction of the tribunal to adjudicate the disputes, as it was based on the invalid clause 24.1. The court held that the Arbitral Tribunal should have entertained the claims of the petitioner and decided them on merits.

Conclusion:

The court allowed the appeal, set aside the impugned order of the Arbitral Tribunal, and directed the tribunal to entertain the claims of the petitioner and decide them on merits in accordance with the law. The court emphasized that procedural laws should facilitate justice rather than obstruct it, and the restrictive clause in the contract was against public policy and the provisions of the Contract Act.