Background
Construction contracts are central to arbitration disputes due to their complexity and involvement of multiple stakeholders. These contracts cover diverse construction and engineering works, often leading to disagreement over performance obligations, price escalation, variation in quantities, force majeure claims, delays in completion of the projects and Termination of the contract.
Arbitration serves as a preferred method for resolving these disputes outside courts since it ensures expertise in construction matters and flexibility in managing complex multi-party issues. Parties have the advantage of presenting extensive documentation and expert testimony to support their claims, ensuring a fair and efficient resolution while maintaining business relationships that are crucial in the construction industry.
Some issues that commonly arise in such arbitrations deal with claims being barred by contractual limitation periods and disputes arising with respect to the Running Account Bills and the Final Bill. In this regard, the present article discusses how the courts have dealt with the contractual limitation periods regarding reference of such disputes to arbitration, followed by a detailed analysis of when a cause of action can be deemed to have accrued in these disputes.
Shorter limitation periods under the Indian Contract Act
Construction contracts typically provide for reference of disputes to a competent authority under the contract before such claims can be adjudicated in an arbitration. If the competent authority fails to resolve the issues raised or the parties are not satisfied with the decision, they may then refer the disputes to arbitration. The time periods for reference of the disputes to the competent authority under the contract as well as for reference to arbitration thereafter are usually restricted.
Under Article 113 of the Limitation Act (“Limitation Act”), the disputes arising between the parties may be referred to arbitration in three years. However, since the time period given under certain construction contracts is less than the statutory time period, this leads to a situation where the arbitral tribunal must initially decide as to whether the claims raised in the arbitration are contractually barred since the reference to the competent authority or to arbitration thereafter has not been made within the time period specified in the contract.
Section 28 of the Indian Contract Act, 1872 (“Contract Act”) states that agreements restricting parties from enforcing their rights, or agreements extinguishing the rights of parties after a certain time period are not valid. Hence, a prohibition to initiate arbitration proceedings without a reference having been made to the competent authority in a limited period of time essentially falls foul of Section 28 of the Contract Act. Even the extinguishment of the right to refer a dispute to arbitration if the same is not done by adhering to a certain timeline runs contrary to Section 28.
Prior to the 1997 amendment to Section 28 of the Contract Act, the Courts had made a distinction between agreements which curtailed the time for enforcement of a right and agreements which provided for the forfeiture or waiver of the right itself if no action was commenced within the period stipulated by the agreement. In National Insurance Co. Ltd v. Sujir Ganesh Nayak & Co. & Anr., the Supreme Court held that the latter would not fall within the mischief of Section 28 of the Contract Act as extinction of the right to initiate any action, unless exercised within a specified time frame would be permissible and could be done. The parties to an agreement were hence permitted to insert their own periods of prescription.
However, the 1997 amendment changed the position of law. In Pandit Construction Company v. Delhi Development Authority & Anr., the Delhi High Court noted that an agreement which in effect seeks to curtail the period of limitation and prescribes a shorter period than that prescribed by law would be void for offending Section 28 of the Contract Act since such an agreement would restrict a party from enforcing its right after the period prescribed under the agreement expired even though the period prescribed by law for the enforcement of its right had yet not expired [¶19].
Thereafter , in NHAI v. Bhageeratha Engineering Ltd., the Delhi High Court noted that post the 1997 amendment to Section 28 of the Contract Act, both the curtailment of the period of limitation and the extinction of the right would be void. In other words, the Court clarified that after the amendment to Section 28, the distinction between curtailing of the period of limitation and extinction of the right itself after the specified period in the agreement no longer existed [¶5].
Recently, in Municipal Corporation of Delhi v. Natraj Construction Company, the Delhi High Court again reiterated that in light of the provisions of Section 28, parties to an arbitration agreement cannot be permitted to rely on the relevant clauses of the agreement in order to restrict the period of limitation for invoking arbitration to a period lesser that the statutory period of 3 years [¶11].
Hence, while parties are free to fix limitation periods for issuing notice to the opposite party or reference of disputes to a competent authority under the contract before initiating arbitration, the said periods must not provide for a time frame less than the time period prescribed under the Limitation Act.
Final Bills and the Period of Limitation
A Running Account Bill also referred to as the “RA Bill” refers to a bill for which the payment has to be made to the contractor on a running account. There are considered as interim bill payments. In these, payment for the work done is made at specific intervals of time. These are also subject to deductions, withholding and recoveries done as per the contract. Once the entire project is completed, a Final Bill is prepared to settle any outstanding payments. The RA Bills are adjusted and reconciled against the Final Bill, which includes the total work done, materials supplied, and any other adjustments.
Unlike the Final Bill, which is issued upon the completion of the entire project, RA Bills are submitted throughout the duration of the project to ensure the contractor receives payments for the ongoing work. RA Bills are a crucial part of the project’s cash flow management and are often linked to specific milestones or stages of construction.
An issue that comes up quite often relates to whether the contractor is required to raise a particular claim after the RA Bill for the relevant period is rejected by the employer, or whether a cause of action which arises after the rejection of the RA Bill or non-payment of certain dues under the relevant RA Bill continues to subsist till the payments are made under the Final Bill related to a project.
As mentioned above, under Article 113 of the Limitation Act, the limitation period for the reference of a dispute to arbitration is three years. Further, Article 113 provides that the period of limitation starts to run from when the ‘right to sue accrues’. It is settled law that the ‘right to sue accrues’ only when the cause of action arises, that is, the right to prosecute to obtain relief by legal means.
It is also important to note that the expression used in Article 113 is ‘when the right to sue accrues’, which is markedly distinct from the expression used elsewhere in the Limitation Act such as Article 58 (‘when the right to sue first accrues’), Article 59 (‘when the facts entitling the plaintiff to have the instrument or decree cancelled or set aside or contract rescinded first become known to him’) and Article 104 (‘when the plaintiff is first refused the enjoyment of the right’).
In Union of India and Ors. v. West Coast Paper Mills Limited and Anr., the Supreme Court held that the distinction between Article 58 and Article 113 of the Limitation Act is apparent, in as much as the right to sue may accrue to a suitor in a given case at different points of time. Hence, in terms of Article 58, the period of limitation would be reckoned from the date on which the cause of action arose first. However, in terms of Article 113, the period of limitation would be computed depending on the last date when the cause of action arose.
In view of the above, it is pertinent to note that if the Contract provides for intermediate payments to be made to the contractor, non-payment of a RA Bill gives rise to a cause of action to the contractor to recover the same in appropriate proceedings as per the mechanism specified in the contract. However, such a provision for making intermediate payments to the contractor does not prevent re-opening of such payments at the time of the adjustment of the Final Bill.
In many cases, the employer makes adjustments under the Final Bill in order to account for the discrepancies that may have arisen during the payment of the RA Bills. This gives rise to the conclusion that even if a claim / dispute has not been raised at the time of the rejection of the relevant RA Bill, the same may be raised after the rejection of the Final Bill or after the payments due are not made under the said bill.
The intention behind a Final Bill being considered as a cause of action having arisen may be traced to the requirements of public policy. It is to avoid a situation where for each dispute or difference which may arise at different stages of the contract, the parties are forced to immediately invoke arbitration as it may hamper the execution of the project.
Conclusion
It is no longer res integra that contractual time periods proscribing a party from filing a claim are contrary to Section 28 of the Contract Act and hence unenforceable. This is because such agreements absolutely restrict parties from enforcing their rights after the expiration of the stipulated period, even though the same may be within the period of limitation under the Limitation Act. This inability to restrict the period of limitation is one of the exceptions to the otherwise well settled principle of arbitration being driven by party autonomy, wherein parties by mutual consent may decide the entire course of their dispute settlement mechanism.
Similarly, it is settled law that the claims raised in an arbitration cannot be denied on the basis that the reference to arbitration has not been made within three years from the date of payment under the RA Bill for the relevant period. If one or more of the RA Bills submitted by the contractor have not been paid over time, nevertheless, the contractor is entitled to recover the same as a part of the Final Bill. Failure to pay the Final Bill constitutes a new cause of action and the starting point of limitation for payment arises from the date of default in payment of or rejection of the Final Bill.
Author(s)
Khushbu Turki
Advocate at Delhi High Court