Due-diligence and good faith are the utmost requirement for application of section 14 of the Limitation Act: Delhi High Court

IN THE HIGH COURT OF DELHI AT NEW DELHI O.M.P.188 2020 Judgment delivered on: 17.03.2021 INDIAN OIL CORPORATION LTD THE GREAT EASTERN SHIPPING CO. LTD. & ANR Advocates who appeared in this case For the Petitioner For the Respondents Mr Ramabhadran V. Senior Advocate with Mr Shashwat Goel Mr Amitava Majumdar Mr Arvind Kumar Gutpa Mr Rishabh Saxena Mr Prashant Bhardwaj and Mr Rishi Bhardwaj Advocates HON’BLE MR JUSTICE VIBHU BAKHRU VIBHU BAKHRU J Indian Oil Corporation Ltd.is a Public Sector Undertaking engaged in the business of import distribution and sale of petroleum and other ancillary products. It has filed the present petition under Section 34 of the Arbitration and Conciliation Act 1996 the ‘A&C Act’ impugning an Arbitral Award dated 16.04.2012made by an Arbitral Tribunal comprising of three members. The Arbitration was conducted O.M.P.188 2020 under the aegis of the Indian Council of Arbitrationto IOCL. IOCL claims that its claim was within the period of limitation as the period spent by it in pursuing its claim as a counter claim before another Arbitral Tribunal ought to have been excluded in terms of Section 14 of the Limitation Act Respondent No. 1 The Great Eastern Shipping Co. Ltd.disputes the aforesaid contention. According to GESCO IOCL had not acted with due diligence. IOCL had claimed an amount of ₹1 09 86 726 as a counter claim in the arbitral proceedings instituted by GESCO in respect of another contract. GESCO had contested the same on the ground that the Arbitral Tribunal constituted in that matter hereafter referred to as the ‘First Arbitral Tribunal’) did not have the jurisdiction to entertain IOCL’s counter claim. However despite GESCO pointing out the First Arbitral Tribunal jurisdiction to decide IOCL’s counter claim IOCL did not take the necessary steps for commencing arbitral proceedings or appointment of an Arbitrator to adjudicate its claim It continued to press its counter claim before the First Arbitral Tribunal which IOCL knew or ought to have known did not have the jurisdiction to decide O.M.P.188 2020 the same. Second it is submitted that even if it is ignored that the First Arbitral Tribunal did not have jurisdiction to entertain IOCL’s claim it could not have done so as the claim was barred by limitation as on the date when such counter claim was filed before the First Arbitral The controversy arising in this case is confined to examining whether the impugned award suffers from any patent illegality which warrants interference under Section 34(2A) of the A&C Act The parties had entered into a Contract of Affreightment dated 12.05.2006188 2020 of the Laycan or within three days of IOCL’s intimation of the Laycan’s whichever is later. It was also agreed that in case the ownerwould be recoverable from GESCO GESCO nominated its vessel M.T. Prem Prachi for loading crude oil from Rastanura on 11.04.2007 and the nomination of the said vessel was accepted by IOCL IOCL claims that it found that the vessel in questionwas progressively delayed and therefore was likely to miss the Laycan. IOCL by an email dated 03.04.2007 informed GESCO that vessel in question had not even berthed at Vizag and would miss her Laycan by a large margin IOCL claims that GESCO was required to immediately substitute the vesselfor the Laycan. But GESCO failed to do so. According to IOCL this constituted breach of the obligations under COA 2006. IOCL thus made arrangements for a substitute vessel for lifting crude oil from Ras Tanura on 11.04.2007. It claims that it put GESCO to notice that all additional cost including the lighterage cost at disport would be recovered from GESCO O.M.P.188 2020 IOCL claims that by a fax email dated 25.05.2007 it informed GESCO that it had resorted to in chartering of vesselfor lifting of the parcel from Rastanura. The cargo was lightered at Vizag and discharged at CPCL. IOCL claimed that the additional expenditure incurred by it amounted to ₹1 09 86 726 and called upon GESCO to remit the same immediately failing which it would be recovered from its bills. GESCO sent an email dated 07.07.2007 disputing IOCL’s 11. According to GESCO there was no default on its part and it was not obliged to substitute a vessel till it had missed the Laycan. GESCO claims that at the material time it believed that M.T. Prem Prachi would reach the port at the given time. It further claims that IOCL’s action was pre mature and it the said additional cost of ₹1 09 86 726 incurred by IOCL. IOCL and GESCO entered Affreightment on 03.01.2007whereby it agreed to provide two vessels M.T. United Gallant and M.T. Ocean Opal for lifting crude oil from various ports 13. Disputes arose between the parties in connection with COA 2007. The said disputes related to payment of demurrages in respect of the two vessels a) M.T. United Gallant which reported for loading at Basrah Oil Terminal on 24.02.2007 and completed the loading on 08.03.2007. It arrived at the discharge port on O.M.P.188 2020 Chennai on 21.03.2007 and completed the discharge on 24.03.2007 and b) M.T. Ocean Opal which reported for loading at Basrah Oil Terminal on 20.04.2007 and completed loading on 25.04.2007. This vessel arrived at the port of discharge on 10.05.2007 and completed the discharge on 13.05.2007 The parties after an exchange of correspondence agreed that USD 3 39 790.27 was payable as demurrages in respect of M.T. United Gallant and USD 1 28 234.16 was payable as demurrages in respect of M.T. Ocean Opal. However while making the final payment IOCL deducted an amount of ₹1 09 86 726 being its claim in respect of an alleged breach of obligations on the part of GESCO under COA 2006 15. By an email dated 21.08.2007 IOCL informed GESCO about remittance made in connection with COA 2007 indicating that it had deducted a sum of ₹1 09 86 726 from the amounts payable to GESCO. GESCO responded to the same by a communication dated 30.08.2007 disputing IOCL’s claim Thereafter by a notice dated 07.04.2010 GESCO invoked the Arbitration Clause under COA 2007 inter alia claiming that IOCL had wrongfully deducted the sum of ₹1 09 86 726 . 17. GESCO nominated its Arbitrator and IOCL also nominated its Arbitrator. Both the nominated Arbitrators nominated a third Arbitrator and the First Arbitral Tribunal was constituted O.M.P.188 2020 18. GESCO filed its Statement of Claim before the First Arbitral Tribunal in respect of its claim under COA 2007. IOCL filed its Statement of Defence and counter claim before the Arbitral Tribunal on 28.10.2010. IOCL’s counter claim related to the alleged breach of COA 2006 on the part of GESCO 19. GESCO filed its rejoinder to the Statement of Defence as well as response to the counter claims before the Arbitral Tribunal on 23.12.2010 inter alia pointing out that IOCL’s claim for damages in respect of non performance of vessel M.T. Prem Prachi was not a subject matter that fell within the scope of COA 2007. It pointed out that the First Arbitral Tribunal had been constituted in terms of Clause 29 of COA 2007 and in terms of the said Clause the jurisdiction of the First Arbitral Tribunal was confined to disputes arising under COA 2007 and did not extend to disputes relating to any other agreement The First Arbitral Tribunal noted that the Arbitration Clause Clause 29) was worded to cover “all disputes arising under this Charter Party”. The First Arbitral Tribunal was constituted under the said Clause of COA 2007 and thus its jurisdiction was confined to the dispute under COA 2007. Before the First Arbitral Tribunal it was conceded by IOCL that COA 2007 did not include any clause that entitled IOCL to withhold payments against claims relating to any other The First Arbitral Tribunal held that it had no jurisdiction to entertain IOCL’s claim for damages arising in connection with COA O.M.P.188 2020 2006. Accordingly on 28.03.2011 it rendered an arbitral award hereafter ‘the First Arbitral Award’) in favour of GESCO for a sum of ₹1 09 86 726 and directed that the same be paid within a period of thirty days. GESCO was also awarded interest at the rate of 9% per annum from the date on which the amount became due that 03.08.2007 till the date of payment realization. The First Arbitral Award has become final IOCL claims that it received the First Arbitral Award dated 23.03.2011 on 10.06.2011. Thereafter IOCL issued an Arbitration Notice on 16.08.2011 for referring the disputes under COA 2006 to The Arbitral Tribunal was constituted in terms of the Arbitration Clause under COA 2006. Before the Arbitral Tribunal IOCL contended that the period from 07.04.2010 that is on the date when GESCO commenced arbitration proceedings under COA 2007 till 10.06.2011 being the date on which IOCL received the First Arbitral Award ought to be excluded as the said period has been spent in bona fide and diligent pursuit of its claim before the First Arbitral Tribunal The Arbitral Tribunal rejected IOCL’s claim as barred by limitation. The Arbitral Tribunal noted that the Statement of Claims filed by IOCL did not contain any averment as to the time spent before a wrong forum. IOCL had also not made any plea seeking condonation of delay in its Statement of Claims. The Arbitral Tribunal also noted that IOCL had not furnished any explanation as to how it had proceeded O.M.P.188 2020 before a Tribunal constituted under COA 2007 for a claim relating to the vessel M.T. Prem Prachi arising out of COA 2006 25. Mr Ramabhadran learned Senior Counsel appearing for IOCL submitted that the impugned award is patently illegal as the Arbitral Tribunal had without any justification denied IOCL the benefit of Section 14 of the Limitation Act. He submitted that the case was squarely covered by the decision of the Supreme Court in M.P. Steel Corporation v. Commissioner of Central Excise:7 SCC 58. He referred to Paragraph no. 9 of the said decision and submitted that a mere averment that IOCL was pursuing a remedy before another Tribunal was sufficient to attract the provisions of Section 14 of the Limitation 26. Next he submitted that the Arbitral Tribunal had rejected IOCL’s claim as barred by limitation in view of the reasons as stated in Paragraph nos. 22 25 29 34 35 and 36 of the impugned award. He submitted that a plain reading of the said paragraphs would indicate that the Arbitral Tribunal was persuaded to hold that IOCL’s claim was barred by limitation for the reason that IOCL had made a mistake in proceeding before an incorrect forum and had not taken any corrective steps even after GESCO had pointed out the same in its submissions to the counter claims filed on 23.12.2010. He submitted that an error in approaching an incorrect forum is common in all cases where Section 14 of the Limitation Act is to be applied and therefore the same cannot O.M.P.188 2020 be a ground for excluding the period spent by IOCL pursuing its claims before the First Arbitral Tribunal. He contended that since the Arbitral Tribunal had not applied the correct legal principle the impugned award is patently illegal and was also liable to be set aside as being contrary to the fundamental policy of Indian Law as held in ONGC Ltd. v. Saw Pipes Ltd.:5 SCC 705 and Associate Builders v. Delhi Development Authority:3 SCC 49 27. Next he submitted that the Arbitral Tribunal had placed undue weightage on the fact that GESCO had filed a response to its counter claims on 23.12.2010 contesting IOCL’s counter claims on the ground of jurisdiction. He submitted that the same is not relevant and in terms of the decision of the Supreme Court in Associate Buildersthe impugned order was liable to be set aside as based on irrelevant 28. Mr Amitava Majumdar learned counsel appearing for GESCO countered the aforesaid submissions. He submitted that the cause of action in the present case had arisen on 30.08.2007 and IOCL had filed its counter claim before the First Arbitral Tribunal on 28.10.2010 which was beyond the period of three years from the date of cause of action He submitted that thus in any event IOCL’s claim was barred by limitation. He also referred to the decision of the Supreme Court in State of Goa v. Praveen Enterprises:12 SCC 581 and submitted that in case of a counter claim the period of limitation would stop running on the date when the counter claim is filed O.M.P.188 2020 Reasons and Conclusion 29. At the outset it is necessary to note that it is conceded that the First Arbitral Tribunal did not have any jurisdiction to entertain IOCL’s counter claim for damages under COA 2006. The First Arbitral Tribunal had pointedly asked IOCL’s counsel whether there was any provision in COA 2006 or COA 2007 which permitted interchange of the said contracts. This was in the context of ascertaining whether IOCL could claim any amount due under COA 2006 in connection with disputes under COA 2007. IOCL’s response was in the negative. This was noted by the First Arbitral Tribunal in the first Arbitral Award as “Respondents Counsel was specifically asked by the Tribunal whether there is any clause provision in the two COAs which permits inter change between the two contracts and the answer was ‘NO’.” Even before this Court Mr Rambhadran did not suggest that the First Arbitral Tribunal had the jurisdiction to entertain IOCL’s subject It is also admitted that IOCL had not issued any notice invoking Arbitration in respect of its subject claim claim of damages for alleged breach of COA 2006 on the part of GESCO prior to its filing the counter claim before the First Appellate Tribunal. Concededly the cause of action in the case had arisen on 30.08.2007 when GESCO disputed IOCL’s adjustment of ₹1 09 86 726 from the amounts payable under COA 2007. IOCL filed its counter claim before the First Arbitral Tribunal on 28.10.2010 which was beyond the period of three O.M.P.188 2020 years from the date on which the cause of action had arisen. The Arbitral Tribunal had noted this in Paragraph no. 24 of the impugned award In State of Goa v. Praveen Enterprisesthe Supreme Court had authoritatively held as under the counterclaim. As “20. As far as counterclaims are concerned there is no room for ambiguity in regard to the relevant date for determining the limitation. Section 3(2)(b) of the Limitation Act 1963 provides that in regard to a counterclaim in suits the date on which the counterclaim is made in court shall be deemed to be the Limitation Act 1963 is made applicable to arbitrations in the case of a counterclaim by a respondent in an arbitral proceeding the date on which the counterclaim is made before the arbitrator will be the date of “institution” insofar as counterclaim is concerned therefore no need to provide a date of There is “commencement” as in the case of claims of a claimant Section 21 of the Act is therefore not relevant for counterclaims. There is however one exception. Where the respondent against whom a claim is made had also made a claim against the claimant and sought arbitration by serving a notice to the claimant but subsequently raises that claim as a counterclaim in the arbitration proceedings initiated by the claimant instead of filing a separate application under Section 11 of the Act the limitation for such counterclaim should be computed as on the date of service of notice of such claim on the claimant and not on the date of filing of It is not disputed that applying the aforesaid principle IOCL’s claim for damages under COA 2006 was time barred as on the date when it filed its counter claims before the First Arbitral Tribunal. In this O.M.P.188 2020 view the question whether the benefit of Section 14 of the Limitation Act ought to be extended to IOCL in respect of its claim is not relevant 34. Mr Ramabhadran did not dispute the above. He however submitted that since the decision in the case of State of Goa v. Praveen Enterpriseswas rendered after the impugned award was delivered the same may not be applicable. The said contention is unmerited. The Supreme Court had merely explained the law in State of Goa v. Praveen Enterprisesthe said decision cannot be construed as a change in law to be applied prospectively The fact that IOCL’s counter claim before the First Arbitral Tribunal was filed beyond the period of three years from the date of cause of action is noted in Paragraph no. 24 of the impugned award However this is not stated to be one of the reasons as mentioned in Paragraph no. 37 of the impugned award. The said paragraph only mentions the reasons as stated in paragraphs nos. 22 25 29 34 35 and 36 of the impugned Award 36. However paragraph no. 22 of the impugned award cannot be read in isolation. It merely records that the period of three years would expire on 29.08.2010. Paragraph no. 23 mentions the invocation of Arbitration under COA2007 and the fact that IOCL had filed its counter claim on 28.10.2010. The following paragraphexpressly records that by that time IOCL “had exceeded the limitation period even before the wrong forum the limitation period have not expired on O.M.P.188 2020 This Court finds no infirmity with the aforesaid view and the present petition is thus unmerited In view of the above it is not necessary to examine the other contentions advanced on behalf of IOCL. However for the sake of completeness this Court considers it apposite to do so The Arbitral Tribunal had noted that IOCL was made aware that it was pursuing its claim before the wrong forumby GESCO in its rejoinder to the counter claim filed on 23.12.2010IOCL ought to have been aware that it was pursuing its claims before a wrong forum and should have immediately sought condonation of delay and invoked the arbitration under COA 2006 The Tribunal held that IOCL had rendered no explanation as to how it had proceeded before the Arbitral Tribunal constituted under COA 2007. It IOCL was a Public Sector Undertaking and had the requisite expertise for “chartering of ships accounting and for legal framework”. Thus it could not be expected that the legal lapse went unnoticed even after GESCO had objected to withholding of the amount from the payments made under COA 2007 on 30.08.2007. The contention that the aforesaid considerations are is unmerited. A plain reading of the impugned award O.M.P.188 2020 indicates that the Arbitral Tribunal was of the view that IOCL had not acted with due diligence. Indisputably this is one of the aspects to be considered for determining whether provisions of Section 14 of the Limitation Act are applicable The contention that the decision of the Supreme Court in M.P Steel Corporation v. Commissioner of Central Exciseis an authority for the proposition that a mere averment that a party was pursuing its remedy before another forum is sufficient provisions of Section 14 of the Limitation Act is unmerited. It is relevant to note that in the said case the Supreme Court had also quoted paragraph no. 21 of its earlier decision in Consolidated Engg Enterprises v. Principal Secretary Irrigation Dept.:7 SCC 169 The said paragraph is set out below “21. “Section 14 of the Limitation Act deals with exclusion of time of proceeding bona fide in a court without jurisdiction. On analysis of the said section it becomes evident that the following conditions must be satisfied before Section 14 can be pressed into service 1) Both the prior and subsequent proceedings are civil proceedings prosecuted by the same party 2) The prior proceeding had been prosecuted with due diligence and in good faith 3) The failure of the prior proceeding was due to defect of jurisdiction or other cause of like nature 4) The earlier proceeding and the latter proceeding must relate to the same matter in issue and 5) Both the proceedings are in a court.” O.M.P.188 2020 is seen from the above that the question whether requirement that a party had prosecuted the proceedings with due diligence and in good faith is a necessary condition for application of Section 14 of the Limitation Act. In the present case it is apparent that the Arbitral Tribunal doubted that this condition was met as is evident from the its observations that it was not expected that the lapse on the part of IOCL would have gone unnoticed. The fact that GESCO had the First Arbitral Tribunal would not have the jurisdiction to entertain the counter claims cannot be stated to be irrelevant. The Arbitral Tribunal had noted the same in the context of ascertaining whether IOCL had pursued its counter claim before the First Arbitral Tribunal in good faith There is no dispute that provisions of Section 14 would be applicable in respect of claims filed before an Arbitral Tribunal. There is also no cavil as to the principles enunciated by the Supreme Court in M.P. Steel Corporation v. Commissioner of Central Exciseis misplaced. On the Contrary in that O.M.P.188 2020 decision the Supreme Court has authoritatively held that the arbitrator is the final adjudicatory authority for determining questions of fact and the said findings even though may be erroneous are not amenable to This Court thus finds no ground to interfere with the impugned award. The petition is accordingly dismissed MARCH 17 2021 VIBHU BAKHRU J O.M.P.188 2020 Page 1

Summary: Due-diligence though seems to be an easier task, but it is the most crucial and detailed work which is involved in any transactional or legal aspect. It deals with specification and minute information to reduce information asymmetry and confusion. A due-diligence can build a transaction, and at the same time, it can destroy one. A minute wrong in the detailing can curtail an agreement. Thus good faith and due-diligence are complementary and supplementary to each other, which cannot be separated from any situation. In the case of Indian Oil Corporation Ltd. V.The Great Eastern Shipping Co. Ltd. &amp; Anr [O.M.P. (COMM) 188/2020], the facts of the case initiate when Indian Oil Corporation Ltd. (hereafter referred to as “IOCL”), a public sector undertaking engaged in the manufacture, distribution, and selling of petroleum and other ancillary goods. It has filed this petition under Section 34 of the Arbitration and Conciliation Act, 1996 (hereafter the “A&amp;C Act”), challenging an Arbitral Award dated April 16, 2012 (hereafter “the impugned award”) given by a three-member Arbitral Tribunal. The Arbitration was held under the auspices of the Indian Council of Arbitration (Respondent No. 2) and in compliance with the Indian Council of Arbitration’s Maritime Arbitration Rules. The Arbitral Tribunal had dismissed IOCL’s claim as barred by restriction in the disputed award. The impugned award is clearly unconstitutional, according to IOCL, because the Arbitral Tribunal could not have refused IOCL the privilege of Section 14 of the Limitation Act, 1963 (hereafter the “Limitation Act”). According to IOCL, its argument was beyond the statute of limitations since the time it spent defending its claim as a counterclaim before another Arbitral Tribunal should have been removed under Section 14 of the Limitation Act. The Great Eastern Shipping Co. Ltd. (hereafter ‘GESCO’) is the first respondent and denies the above contention. IOCL had not behaved with due diligence, according to GESCO. In the arbitral proceedings launched by GESCO in relation to another deal, IOCL filed a counterclaim for Rs.1,09,86,726/-. GESCO had challenged the decision, claiming that the Arbitral Tribunal convened in that case (hereafter referred to as the “First Arbitral Tribunal”) lacked authority to hear IOCL’s counterclaim. Despite GESCO’s statement that the First Arbitral Tribunal lacks authority to decide IOCL’s counterclaim, IOCL refused to take the necessary steps to begin arbitral proceedings or appoint an arbitrator to hear its case. It continued to pursue its counterclaim before the First Arbitral Tribunal, despite the fact that IOCL knew or should have known that the tribunal lacked jurisdiction to hear the case. Second, even though it is assumed that the First Arbitral Tribunal lacked jurisdiction to hear IOCL’s lawsuit, it could not have done so because the claim was excluded by restriction at the time the counterclaim was filed with the First Arbitral Tribunal. The dispute in this case is limited to determining if the contested award contains any patent infringement that warrants interference under Section 34(2A) of the A&amp;C Act. The court, in this case, had held that “The Tribunal held that IOCL had rendered no explanation as to how it had proceeded before the Arbitral Tribunal constituted under COA-2007. It further reasoned that IOCL was a Public Sector Undertaking and had the requisite expertise for “chartering of ships, accounting and for legal framework”. Thus, it could not be expected that the legal lapse went unnoticed even after GESCO had objected to withholding of the amount from the payments made under COA-2007, on 30.08.2007. The contention that the aforesaid considerations are irrelevant, is unmerited. A plain reading of the impugned award indicates that the Arbitral Tribunal was of the view that IOCL had not acted with due diligence. Indisputably, this is one of the aspects to be considered for determining whether provisions of Section 14 of the Limitation Act are applicable.” “It is seen from the above that the question whether the requirement that a party had prosecuted the proceedings with due diligence and in good faith, is a necessary condition for application of Section 14 of the Limitation Act. In the present case, it is apparent that the Arbitral Tribunal doubted that this condition was met as is evident from the its observations that it was not expected that the lapse on the part of IOCL would have gone unnoticed. The fact that GESCO had pointed out that the First Arbitral Tribunal would not have the jurisdiction to entertain the counter claims cannot be stated to be irrelevant. The Arbitral Tribunal had noted the same in the context of ascertaining whether IOCL had pursued its counter claim before the First Arbitral Tribunal in good faith.”