Offshore Infrastructures vs Bharat Petroleum - Arbitration Clause Case Explained

❓ QUESTION

If your contract contains an arbitration clause that names a specific person as arbitrator, but changes in law make that person ineligible, does your right to arbitration disappear? Also, how strictly do courts enforce time limits for initiating arbitration?

✅ ANSWER

No, your right to arbitration does not disappear. The Supreme Court has clarified that while the specific appointment mechanism may become invalid due to legal changes, the core agreement to arbitrate remains alive and enforceable.
Regarding time limits, courts strictly enforce the three-year limitation period for initiating arbitration, which typically starts when the final payment becomes due. However, legitimate exceptions like the COVID-19 limitation extension are recognized to ensure justice isn't denied due to extraordinary circumstances.

🧩 UNDERSTANDING THE LEGAL PRINCIPLES

⚖️ What the Supreme Court Has Clarified

1️⃣ An Arbitration Agreement Survives Even When the Appointment Mechanism Fails

The Court made a crucial distinction between the "core" agreement to arbitrate and the "procedure" for appointing an arbitrator.

The Legal Principle: When a contract specifies that disputes will be resolved through arbitration, this represents the fundamental intention of the parties. The method of appointing the arbitrator is secondary to this core agreement.
In This Case: The contract named the Managing Director of the opposite party as the arbitrator. After legal reforms in 2015, this became invalid because such a person cannot be neutral. The other party argued this made the entire arbitration clause void.
The Court's View: This argument was rejected. The Court emphasized that statutory changes aimed at ensuring arbitrator neutrality should not be used to destroy the entire arbitration mechanism. If the specified appointment procedure fails, the court can and will appoint a neutral arbitrator to honor the parties' original intention to resolve disputes through arbitration.

2️⃣ The Three-Year Time Limit for Initiating Arbitration is Strict but Not Inflexible

The Court reinforced that limitation laws serve an important purpose but must be applied with common sense.

The Law (Limitation Act, Article 137): You have three years to apply for appointment of an arbitrator. This period usually begins when the final bill becomes payable or when a "No Claim Certificate" is issued.
In This Case: The final bill was raised on March 20, 2018, and the limitation period would normally have expired on April 21, 2021. The application was filed on March 15, 2022 — apparently beyond the three-year limit.
The COVID-19 Exception: The Supreme Court recognized its own orders during the pandemic, which excluded the period from March 15, 2020, to February 28, 2022, from all limitation calculations. When this period was excluded, the application was well within time.

3️⃣ Mere Correspondence Does Not Extend the Limitation Period

The Court clarified a common misconception about how limitation works in commercial disputes.

The Principle: Once a cause of action arises (when payment becomes due), the clock starts ticking. Writing letters or sending reminders to the other party does not pause or restart this clock.
The Court's View: Parties cannot indefinitely extend the limitation period by engaging in prolonged correspondence. If the other party does not respond to your claims, this silence itself constitutes a "dispute," and you must initiate arbitration within the three-year period.

🧭 YOUR ACTION PLAN: NAVIGATING ARBITRATION AND LIMITATION

📝 If You Want to Initiate Arbitration (The Claimant)

✅ Step 1: Act Promptly When Dispute Arises

Identify the Trigger Point: Determine when your cause of action accrued. This is typically when a final bill becomes due, when payment is refused, or when a "No Claim Certificate" is issued under protest.
Don't Rely on Continuous Correspondence: While polite reminders are acceptable, understand that each day you wait reduces your legal options. The three-year period is strict.

✅ Step 2: Follow the Proper Sequence

Issue a Formal Arbitration Notice: Before approaching the court, send a clear written notice to the other party invoking the arbitration clause and proposing names of potential arbitrators.
Wait for Response/Refusal: Only if the other party fails to respond or refuses to appoint an arbitrator should you approach the court under Section 11(6) of the Arbitration Act.
File Within Limitation: Calculate your limitation period carefully, considering any applicable exceptions like the COVID-19 exclusion.

✅ Step 3: Don't Worry About "Invalid" Appointment Clauses

If the Named Arbitrator is Ineligible: Many old contracts name someone associated with a party as arbitrator. Don't let this discourage you. The law now allows courts to appoint neutral arbitrators in such situations.
Focus on the Core Agreement: Your right to arbitrate exists independently of the specific appointment mechanism mentioned in the contract.

📝 If Arbitration is Initiated Against You (The Respondent)

✅ Step 1: Check Limitation Defenses Carefully

Verify the Dates: Scrutinize when the cause of action arose and when the arbitration application was filed. The three-year limit is a complete defense if properly applied.
Consider Exceptions: Be aware that extraordinary circumstances like the COVID-19 period may extend limitation, so consult a lawyer before relying solely on limitation.

✅ Step 2: Don't Rely on Technical Defects in Arbitration Clause

Avoid Frivolous Objections: Arguments that the entire arbitration agreement is void because the appointment mechanism is invalid are likely to fail. Courts will preserve the arbitration agreement.
Focus on Substantive Defenses: Instead, concentrate on the actual merits of the claim — whether the money is actually due, whether there were delays in performance, or if the claims are exaggerated.

⚖️ KEY LEGAL PROVISIONS EXPLAINED

📜 Arbitration and Conciliation Act, 1996

Section 11(6): Empowers the court to appoint an arbitrator when the parties cannot agree on an appointment or when the procedure agreed upon in the contract fails.
Section 12(5): Makes certain persons (like employees or managers of one party) ineligible to act as arbitrators, regardless of what the contract says. This ensures neutrality.

📜 Limitation Act, 1963

Article 137: Provides a three-year limitation period for "any other application" for which no period is specified. This covers applications for appointment of arbitrators.
Section 19: Deals with how part-payments can extend the limitation period in certain circumstances.

💡 CORE TAKEAWAY FROM THE SUPREME COURT

"Technicalities should not trump justice, and access to arbitration should not be denied due to statutory changes aimed at improving the process."

This judgment strikes a careful balance between respecting contractual terms and ensuring access to justice. It tells businesses that while they must be diligent about time limits, they need not worry about their arbitration rights disappearing due to legal reforms. The Court has sent a clear message that arbitration remains a viable dispute resolution mechanism even when specific contractual provisions become outdated. For the common citizen, this means that your substantive rights are protected even when procedural mechanisms need updating.

Offshore Infrastructures vs Bharat Petroleum - Arbitration Clause Case