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

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. & 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&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&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.

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 Excise (supra). However, the question essentially is whether the said principles would apply in the facts of the present case. This question had been adjudicated by the Arbitral Tribunal. And, this Court cannot supplant its view in place of that of the Arbitral Tribunal. The contention that the impugned award is patently illegal on the face of the record or it violates the fundamental policy of Indian Law, is wholly unmerited. The reliance placed by Mr Ramabhadran on the decision of the Supreme Court in Associate Builders v. Delhi Development Authority (supra) is misplaced. On the Contrary, in that 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 judicial review. This Court, thus, finds no ground to interfere with the impugned award. The petition is, accordingly, dismissed.

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