Steel Authority Of India Ltd. v. J.C Budharaja, Government And Mining Contractor .

M.B Shah, J.— This appeal is filed against the judgment and order dated 11-9-1991 passed by the Patna High Court, Ranchi Bench in Miscellaneous Appeal No. 621 of 1990 under Section 39(1)(vi) of the Arbitration Act, 1940 (hereinafter referred to as “the Act”). The High Court dismissed the appeal filed by the appellant and confirmed the order dated 2-4-1990 passed by the Subordinate Judge, Ist Court, Chas in Arbitration Suit No. 28 of 1988 by which the award is made rule of the court with 8% per annum interest from the date of the decree.

2. It is undisputed that National Mineral Development Corporation, predecessor of Steel Authority of India Limited on 1-8-1977 executed a contract with the respondent for construction of tailing-cum-storage reservoir at Kundi for Megha Taburu Iron Ore Project. As per the terms of the contract, the work was to be completed within a period of two years. During this period, the Public Sector Iron and Steel Companies (Restructuring and Miscellaneous Provisions) Act, 1978 was passed and Steel Authority of India Limited became the employer in place of National Mineral Development Corporation. Further, the contractor, N.C Budharaja also died and was succeeded by the present respondent.

3. After two years of contract period, on 29-8-1979, the respondent raised the claim of about 18 lakhs as damages for delay in handing over work sites and allied reasons. On 20-12-1980, a supplementary agreement was executed between the appellant and the respondent for the same work at an increased rate. The relevant part of the said agreement is as under:

“The supplementary agreement made this twentieth day of December, 1980 between Steel Authority of India Limited having its registered office at Hindustan Times House, 18/20, Kasturba Gandhi Marg, New Delhi-110 001 and having one of its units at Bokaro Steel Plant at Bokaro Steel City (hereinafter referred to as the employer which expression shall include its successors and assigns) of the one part and M/s N.C Budharaja, Government and Mining Contractor, at Jharpada, PO Budheswari Colony, Bhubaneswar (hereinafter referred to as ‘the Contractor’) which expression shall include its successors and assigns of the other part.

Whereas the Contractor entered into an agreement dated 1-8-1977 with M/s National Mineral Development Corporation Limited in regard to the work of ‘Constructions of Tailing-cum-Storage Reservoir’ at Kundi relating to their Megha Taburu Iron Ore Project.

And whereas the said unit of National Mineral Development Corporation Limited after the coming into force of the Public Sector Iron and Steel Companies (Restructuring and Miscellaneous Provisions) Act, 1978 was transferred to Steel Authority of India Limited and declared as a captive unit for Bokaro Steel Plant of Steel Authority of India Limited.

And whereas pursuant to the provisions of Section 23 of the Restructuring Act aforesaid, the agreement entered into by and between M/s National Mineral Development Corporation Ltd. in respect of Megha Taburu unit of M/s National Mineral Development Authority Ltd. became fully enforceable and effective against or in favour of Steel Authority of India Limited.

And whereas the Contractor is yet to execute a considerable portion of the work more particularly described in the schedule to this agreement.

And whereas the Contractor has agreed to complete the said balance work as on 12-3-1980 the estimated quantity of which is set out in document specified at 2(d) on the terms and conditions hereinafter enumerated.”

Further clauses 3 and 4 of the said agreement read as under:

“3. In consideration of the payments to be made by the employer to the Contractor as hereinafter mentioned the Contractor hereby covenants with the employer to construct, complete and maintain the works in conformity with the provisions of contract in all respects.

4. The employer hereby covenants to pay to the Contractor in consideration of the construction completion and maintenance of the works the contract price at the time and in the manner prescribed by the contract.”

4. Despite the aforesaid fact that the supplementary agreement was executed for the same work at an increased rate, it is stated that the appellant wrote letter dated 3-9-1983 repudiating claim of Rs 18 lakhs on account of damages for any loss sustained by the Contractor as claimed by him by his letter dated 29-8-1979.

5. Thereafter, dispute arose in the year 1985 for the work with regard to the second agreement dated 20-12-1980 and the matter was referred to arbitration. In that reference, the respondent raised certain claims relating to the work done under the first agreement. On 2-12-1985, the appellant raised an objection that the claim could not be decided by the arbitrators as the same was pertaining to previous agreement. Thereafter the respondent gave notice dated 2-12-1985 to the appellant to appoint sole arbitrator as provided for under the first agreement. On 10-12-1985, the appellant appointed sole arbitrator “with reservation regarding the tenability, maintainability and validity of the reference as also on further grounds that the claim was barred by the period of limitation and that it pertained to excepted matters of general conditions of the contract”.

6. On 11-7-1986, the arbitrators gave an award pertaining to the dispute under the agreement dated 20-12-1980. Against the claim of Item 1 of Rs 17 lakhs and odd pertaining to the first agreement, the arbitrators awarded “Nil”; this award has been made the rule of the court by the High Court of Delhi.

7. Meanwhile, the appellant challenged the jurisdiction of the sole arbitrator by filing Miscellaneous Case No. 22 of 1987. Finally, the High Court dismissed the revision application on 22-8-1988. Thereafter on 18-11-1988, the sole arbitrator made an award granting damages to the tune of Rs 11,26,296 as principal sum (unliquidated damages) and a further sum of Rs 12,06,000 as interest on the above principal amount from 29-8-1979 till the date of the reference i.e 15-12-1985. The arbitrator also awarded future interest at the rate of 17 per cent from the date of the award to the date of payment or the date of decree, whichever is earlier. By order dated 2-4-1990, the learned Sub-Judge made the award the rule of the court with a modification for the payment of interest from the date of the decree at the rate of 8 per cent on the principal amount or unpaid part till the date of actual payment. The appeal filed before the High Court against the said judgment and decree was also dismissed. Hence this appeal.

8. At the time of hearing, the learned counsel for the appellant submitted that the award passed by the arbitrator is

(a) without jurisdiction,

(b) the claim made by the respondent was on the face of it barred by the period of limitation, and

(c) award of interest is wholly unjustified and illegal.

9. The learned counsel for the respondent supported the order passed by the High Court. He submitted that

(1) the award is non-speaking. Hence, the courts below rightly refused to interfere with it;

(2) the question whether claim made by the Contractor was within the period of limitation or not was required to be decided by the arbitrator; and

(3) there is no prohibition for awarding interest from the date of the claim till the date of reference and thereafter.

10. For deciding the controversy, it would be necessary to refer to the material part of the award dated 18-11-1988 which is as under:

“The claimant has put forth a claim amounting to Rs 18,10,014.48 plus interest on the same amount at 30% per annum from 29-8-1979 till date of payment.

The amount of interest at the above rate on the claim amount from 29-8-1979 till 18-11-1988, i.e date of ‘award’ worked out to Rs 33,39,351.00 (Rupees thirty-three lakhs thirty-nine thousand three hundred fifty-one only).

Thus the total amount of claims including interest up to the date of ‘award’ works out to Rs 51,49,365.48 (Rupees fifty-one lakhs forty-nine thousand three hundred sixty-five and paise forty-eight only).

On perusal of all documents filed by both parties and relied upon by the parties and keeping in view oral and written submissions and chain of arguments of both parties relating to factual and legal, I am convinced that the claimant sustained losses on account of the following reasons:

(a) The work site is located in the wildlife sanctuary of Saranda Reserve Forest. The Project authorities issued work order without completing the departmental formalities in obtaining permission of the Forest Department for executing the work inside wildlife sanctuary.

(b) The Project authorities could not obtain permission of Forest Department to take men and machinery to the work site as and when necessary for executing the work.

(c) The Project authorities could not obtain permission of Forest Department in time for making hutments at work site and could not hand over the site in time.

(d) The Project authority could not remove forest growths from the working area before issue of work order.

(e) The Project authorities could not obtain permission of Forest Department for transporting the required machinery and materials for blasting operation and executing drilling and blasting work inside the wildlife sanctuary till March 1979.

(f) Delay in payment of legitimate dues of the claimant for more than nine years.”

11. After recording the aforesaid reasons, the arbitrator held that in consideration of the documents, submissions and arguments of both the parties, the Contractor was entitled to be paid by Steel Authority of India Limited a sum of Rs 11,26,296 as principal amount and a sum of Rs 12,06,000 as interest from 29-8-1979 till 15-8-1985, in all Rs 23,32,296. The arbitrator also awarded future interest at the rate of 17% on the principal sum of Rs 11,26,296 from the date of award till the date of payment or the date of decree, whichever is earlier.

12. Learned counsel for the appellant submitted that the award is a speaking one and the arbitrator has awarded the damages for the reasons that the Department failed to obtain various permissions from the Forest Department. The reasons which are specifically mentioned in the award for granting damages clearly reveal that the arbitrator has passed a speaking award. He pointed out the terms of the contract and submitted that it is apparent that the arbitrator has awarded the amount for the items for which there is prohibition in the contract and thereby he has travelled beyond his jurisdiction. For this purpose, learned counsel for the appellant referred to conditions which are referred to by the learned Single Judge and the trial court. They are as under:

“25. No claim if work is abandoned or postponed.—The successful tenderer shall have no claim whatsoever against the Corporation if the work or any part thereof covered by these tender documents if postponed to any later date or abandoned in the overall interest of the Corporation or for any other reason. The Corporation's decision in the matter shall be final and binding on the contractor.

32. Site for execution of works.—Site for execution of work will be available as soon as the work is awarded. In case it is not possible for the Corporation to make the entire site available on the award of work the Contractor will have to arrange his working programme accordingly. No claim whatsoever for not giving the entire site on award of work and for giving the site gradually will be tenable.

39. Force majeure.—No failure or omission to carry out the provisions of the contract shall give rise to any claim by the Corporation and the Contractor, one against the other, if such failure or omission arises from an act of God, which shall include natural calamities such as fire, flood, earthquake, hurricane or any pestilence, or from civil strike, compliance with any statute or regulation of Government, lockouts and strikes, or from any political or other reasons beyond the control or either the Corporation or the Contractor, including war whether declared or not, civil war or state of insurrection.

5. (iv) General conditions of contract (time for completion of work covered by the contract).—Failure or delay by the Corporation to hand over to the Contractor possession of the lands necessary for the execution of the work, or to give the necessary drawings, instructions or any other delay by the Corporation which due to any other cause whatsoever shall in no way affect or vitiate the contract or alter the character thereof or entitle the Contractor to damage or compensation therefor provided that the Corporation may extend the time for completion of the work by such period as it may consider necessary and proper.”

13. Before the learned Sub-Judge and the High Court, it was submitted that in view of the aforesaid conditions which are laid down in the contract which prohibited award of damages or compensation, it was not open to the arbitrator to award damages for the alleged losses sustained on account of not obtaining or delay in obtaining various permissions required to be taken under the law or rules from the Forest Department.

Re: Lack of jurisdiction of the arbitrator

14. From the award quoted above, it is apparent that damages are granted by the arbitrator for delay in obtaining permission from the Forest Department:

(a) for executing the work inside the wildlife sanctuary;

(b) to take man and machinery to the work site in the forest;

(c) for making hutments at the work site and failure to hand over site in time;

(d) failure to remove forest growths from working area before issue of work order; and

(e) for transporting the required machinery and materials for blasting operation and executing the drilling and blasting work inside the wildlife sanctuary till March 1979.

15. Clause 32 of the agreement specifically stipulates that no claim whatsoever for not giving the entire site on award of work and for giving the site gradually will be tenable and the Contractor is required to arrange his working programme accordingly. Clause 39 further stipulates that no failure or omission to carry out the provisions of the contract shall give rise to any claim by the Corporation and the Contractor, one against the other, if such failure or omission arises from compliance with any statute or regulation of the Government or other reasons beyond the control of either the Corporation or the Contractor. Obtaining permission from the Forest Department to carry out the work in the wildlife sanctuary depends on statutory regulations. Clause (vi) of the general conditions of the contract also provides that failure or delay by the Corporation to hand over to the Contractor possession of the lands necessary for the execution of the work or any other delay by the Corporation due to any other cause whatsoever would not entitle the Contractor to damage or compensation thereof; in such cases, the only duty of the Corporation was to extend the time for completion of the work by such period as it may think necessary and proper. These conditions specifically prohibit granting claim for damages for the breaches mentioned therein. It was not open to the arbitrator to ignore the said conditions which are binding on the contracting parties. By ignoring the same, he has acted beyond the jurisdiction conferred upon him. It is settled law that the arbitrator derives the authority from the contract and if he acts in manifest disregard of the contract, the award given by him would be an arbitrary one. This deliberate departure from the contract amounts not only to manifest disregard of the authority or misconduct on his part, but it may tantamount to mala fide action. In the present case, it is apparent that awarding of damages of Rs 11 lakhs and more for the alleged lapses or delay in handing over the work site is, on the face of it, against the terms of the contract.

16. Further, the Arbitration Act does not give any power to the arbitrator to act arbitrarily or capriciously. His existence depends upon the agreement and his function is to act within the limits of the said agreement. In Continental Construction Co. Ltd. v. State of M.P. (1988) 3 SCC 82 this Court considered the clauses of the contract which stipulated that the contractor had to complete the work in spite of rise in the prices of materials and also rise in labour charges at the rates stipulated in the contract. Despite this, the arbitrator partly allowed the contractor's claim. That was set aside by the Court and the appeal filed against that was dismissed by this Court by holding that it was not open to the contractor to claim extra costs towards rise in prices of material and labour and that the arbitrator misconducted himself in not deciding the specific objection regarding the legality of the extra claim. In that case, the Court referred to the various decisions and succinctly observed:

“If no specific question of law is referred, the decision of the arbitrator on that question is not final however much it may be within his jurisdiction and indeed essential for him to decide the question incidentally. The arbitrator is not a conciliator and cannot ignore the law or misapply it in order to do what he thinks is just and reasonable. The arbitrator is a tribunal selected by the parties to decide their disputes according to law and so is bound to follow and apply the law, and if he does not he can be set right by the court provided his error appears on the face of the award.”

17. It is to be reiterated that to find out whether the arbitrator has travelled beyond his jurisdiction and acted beyond the terms of the agreement between the parties, the agreement is required to be looked into. It is true that interpretation of a particular condition in the agreement would be within the jurisdiction of the arbitrator. However, in cases where there is no question of interpretation of any term of the contract, but of solely reading the same as it is and still the arbitrator ignores it and awards the amount despite the prohibition in the agreement, the award would be arbitrary, capricious and without jurisdiction. Whether the arbitrator has acted beyond the terms of the contract or has travelled beyond his jurisdiction would depend upon facts, which however would be jurisdictional facts, and are required to be gone into by the court. The arbitrator may have jurisdiction to entertain claim and yet he may not have jurisdiction to pass award for particular items in view of the prohibition contained in the contract and, in such cases, it would be a jurisdictional error. For this limited purpose reference to the terms of the contract is a must. Dealing with a similar question this Court in New India Civil Erectors (P) Ltd. v. Oil and Natural Gas Corpn. (1997) 11 SCC 75 held thus:

“It is axiomatic that the arbitrator being a creature of the agreement, must operate within the four corners of the agreement and cannot travel beyond it. More particularly, he cannot award any amount which is ruled out or prohibited by the terms of the agreement. In this case, the agreement between the parties clearly says that in measuring the built-up area, the balcony areas should be excluded. The arbitrators could not have acted contrary to the said stipulation and awarded any amount to the appellant on that account.”

18. However, the learned counsel for the respondent submitted that the award being a non-speaking one, the learned Sub-Judge and the High Court have rightly refused to go behind the award or interfere with it. In our view, this submission is without any substance. It is apparent that the arbitrator has awarded Rs 11,26,296 for the losses sustained for the reasons stated therein which we have incorporated in the previous paragraph. These reasons only pertained to non-obtaining or delay in obtaining permission from the Forest Department as the work site was located in the wildlife sanctuary of Saranda Reserve Forest. The arbitrator in his award in terms mentioned “I am convinced that the claimant sustained losses on account of following reasons” and thereafter reasons are recorded. Therefore, it cannot be said that the award is a non-speaking one.

19. Further even if such reasons are not recorded, the claim itself for such prohibited items was not entertainable by the arbitrator. In the agreement between the parties, there is a specific bar to raising of such claims. Hence the decision of the arbitrator is without jurisdiction. This aspect is also dealt with by this Court in H.P SEB v. R.J Shah and Co. (1999) 4 SCC 214 In para 26, the Court held as under:

“26. In order to determine whether the arbitrator has acted in excess of jurisdiction what has to be seen is whether the claimant could raise a particular dispute or claim before an arbitrator. If the answer is in the affirmative then it is clear that the arbitrator would have the jurisdiction to deal with such a claim. On the other hand if the arbitration clause or a specific term in the contract or the law does not permit or give the arbitrator the power to decide or to adjudicate on a dispute raised by the claimant or there is a specific bar to the raising of a particular dispute or claim then any decision given by the arbitrator in respect thereof would clearly be in excess of jurisdiction.”

20. The Court further held that in order to find out whether the arbitrator has acted in excess of the jurisdiction, the court may have to look into some documents including the contract as well as the reference of the dispute made to the arbitrator limited for the purpose of seeing whether the arbitrator has the jurisdiction to decide the claim made in the arbitration proceedings.

21. Further dealing with a similar condition in the contract, such as no claim for price escalation other than those provided therein shall be entertained and “the Contractor will not be entitled for any extra rate due to change in selection of quarries”, this Court in Associated Engg. Co. v. Govt. of A.P (1991) 4 SCC 93 observed that four claims mentioned therein were not payable under the contract; in fact, it prohibited such payment and for this purpose. The Court held “this conclusion is reached not by construction of the contract but by merely looking at the contract”. The Court further observed that the arbitrator could not act arbitrarily, irrationally, capriciously or independently of the contract; his sole function is to arbitrate in terms of the contract. The Court further held thus:

“25. An arbitrator who acts in manifest disregard of the contract acts without jurisdiction. His authority is derived from the contract and is governed by the Arbitration Act which embodies principles derived from a specialised branch of the law of agency (see Mustill and Boyd's Commercial Arbitration, 2nd Edn., p. 641). He commits misconduct if by his award he decides matters excluded by the agreement (see Halsbury's Laws of England, Vol. II, 4th Edn., para 622). A deliberate departure from contract amounts to not only manifest disregard of his authority or a misconduct on his part, but it may tantamount to a mala fide action. A conscious disregard of the law or the provisions of the contract from which he has derived his authority vitiates the award.”

22. In view of the aforesaid settled law, the award passed by the arbitrator is against the conditions agreed by the contracting parties and is in conscious disregard of the stipulations of the contract from which the arbitrator derives his authority. His appointment as a sole arbitrator itself was a conditional one and he was informed that the same was “with reservation regarding the tenability, maintainability and validity of the reference as also on further grounds that the claim was barred by the period of limitation and that it pertained to excepted matters of general conditions of the contract”. Despite this he has ignored the stipulations and conditions between parties. Hence, the said award is, on the face of it, illegal.

Re: Limitation

23. Our next question is of limitation. The period of limitation is required to be considered on the basis of the arbitration clause between the parties which is as under:

“All disputes or differences whatsoever which shall at any time arise between the parties hereto touching or concerning the works or the execution meaning operation or effect thereof or to the rights or liabilities of parties or arising out of or in relation thereto, whether during or after completion of the contract, or whether before or after determination, foreclosure or breach of the contract (other than those in respect of which the decision of any person is by the contract expressed to be final and binding) shall after written notice by either party to the contract to the other of them and to the MD/Chairman of the Corporation (who will be the appointing authority) be referred for adjudication to be sole arbitrator to be appointed as hereafter provided.

The appointing authority will send within thirty days of the receipt of notice a panel of three names of persons not directly connected with the work of the Contractor who will select any one of the persons named to be appointed as a sole arbitrator within thirty days of receipt of the names. If the Contractor fails to select the name from the panel and communicate within 30 days, the appointing authority shall appoint one out of the panel as sole arbitrator.

If the appointing authority fails to send to the Contractor the panel of three names, as aforesaid, within the period specified, the Contractor shall send to the appointing authority a panel of three names of persons who shall all be unconnected with the organisation by which the work is executed. The appointing authority shall on receipt of the names as aforesaid select any one of the persons named and appoint him as the sole arbitrator. If the appointing authority fails to select the person and appoint him as the sole arbitrator within 30 days of receipt of the panel and inform the Contractor accordingly, the Contractor shall be entitled to invoke the provisions of the Indian Arbitration Act, 1940 and any statutory modification thereof.”

24. In view of the aforesaid arbitration clause, even though the claim made by the Contractor was time-barred, the dispute was required to be referred to the arbitrator. However, the reference was subject to the contention that it was barred by the period of limitation. In that context, the learned counsel for the appellant submitted that it is settled law that application under Section 20 or notice for appointment of arbitrator is to be filed within three years from the date when “cause of action” arises as provided in Article 137 of the Limitation Act, 1963. The application filed by the Contractor in December 1985 was, on the face of it, time-barred because the cause of action to recover the amount arose, according to the Contractor, in August 1979 when he demanded the alleged damages for loss suffered by him because of the delay in handing over the work sites. He further submitted that, in the present case, in year 1980 for the same work, the Contractor had executed a supplementary agreement for the completion of the work within the stipulated time and at a higher rate. This would also show that the Contractor waived his alleged right of asking for appointment of an arbitrator as provided in the arbitration clause. He referred to the arbitration clause and pointed out that within 30 days of the receipt of the notice, an arbitrator is required to be appointed by the Managing Director. If an arbitrator is not appointed then the Contractor has the option to send a panel of three names from which an arbitrator is required to be appointed. He contended that after the supplementary agreement, there was no question of adjudicating the so-called demand made by the Contractor in the year 1979. In any case, he submitted that the Contractor ought to have approached the Court under Section 20 or ought to have demanded arbitration within three years from the date of the notice demanding the amount for loss suffered by him. As against this, learned counsel for the respondent submitted that the cause of action to refer the matter to the arbitrator arose only in 1983 when the respondent denied the Contractor's claim.

25. For deciding this controversy, we would first refer to the decision of this Court in the State of Orissa v. Damodar Das (1996) 2 SCC 216 wherein this Court held that Section 3 of the Limitation Act, 1963 enjoins the court to consider the question of limitation whether it is pleaded or not. The Court in para 5 held as under:

“5. Russell on Arbitration by Anthony Walton (19th Edn.) at pp. 4-5 states that the period of limitation for commencing an arbitration runs from the date on which the ‘cause of arbitration’ accrued, that is to say, from the date when the claimant first acquired either a right of action or a right to require that an arbitration take place upon the dispute concerned. The period of limitation for the commencement of an arbitration runs from the date on which, had there been no arbitration clause, the cause of action would have accrued:

‘Just as in the case of actions the claim is not to be brought after the expiration of a specified number of years from the date on which the cause of action accrued, so in the case of arbitrations, the claim is not to be put forward after the expiration of the specified number of years from the date when the claim accrued.’

Even if the arbitration clause contains a provision that no cause of action shall accrue in respect of any matter agreed to be referred to until an award is made, time still runs from the normal date when the cause of action would have accrued if there had been no arbitration clause.”

(emphasis supplied)

26. The Court also referred to the earlier decision in Panchu Gopal Bose v. Board of Trustees for Port of Calcutta (1993) 4 SCC 338 where the Court observed as under:

“The period of limitation for commencing an arbitration runs from the date on which the cause of arbitration accrued, that is to say, from the date when the claimant first acquired either a right of action or a right to require that an arbitration takes place upon the dispute concerned.

Therefore, the period of limitation for the commencement of an arbitration runs from the date on which had there been no arbitration clause, the cause of action would have accrued. Just as in the case of actions the claim is not to be brought after the expiration of a specified number of years from the date on which the cause of action accrued, so in the case of arbitrations, the claim is not to be put forward after the expiration of the specified number of years from the date when the claim accrued.”

(emphasis supplied)

27. Applying the aforesaid ratio in the present case, the right to refer the dispute to the arbitrator arose in 1979 when the Contractor gave a notice demanding the amount and there was no response from the appellant and the amount was not paid. The cause of action for recovery of the said amount arose from the date of the notice. The Contractor cannot wait indefinitely and is required to take action within the period of limitation. In the present case, there was a supplementary agreement between the parties. The supplementary agreement nowhere provides that the so-called right of the Contractor to recover damages was in any manner saved. On the contrary, it specifically mentions that the Contractor was yet to execute a considerable portion of the work more particularly described in the schedule to the agreement. And that the Contractor has agreed to complete the said balance work on the terms and conditions enumerated in the agreement. Now, in this set of circumstances, the Contractor cannot wait and approach the authority or the court for referring the dispute to the arbitrator beyond the period of limitation. Section 37 of the Arbitration Act specifically provides that provisions of the Indian Limitation Act shall apply to the arbitrations as they apply to proceedings in the court.

28. Learned counsel for the respondent relied upon the decision of this Court in Major (Retd.) Inder Singh Rekhi v. Delhi Development Authority (1988) 2 SCC 338 for contending that cause of action for referring the claim arises only when the appellant disputed the right of the respondent to recover the damages claimed by him. In the said case, the Court has observed that on completion of the work, the right to get payment would clearly arise, but wherein the final bills have not been prepared and when the assertion of the claim was made on 28-2-1983 and there was non-payment, the cause of action arose from that date. In that case, application under Section 20 was filed in January 1986. The Court also observed that:

“It is also true that the party cannot postpone the accrual of cause of action by writing reminders or sending reminders but where the bill had not been finally prepared, the claim made by a claimant is the accrual of the cause of action. A dispute arises where there is a claim and a denial and repudiation of the claim. The existence of dispute is essential for appointment of an arbitrator under Section 8 or a reference under Section 20 of the Act. See Law of Arbitration by R.S Bachawat, 1st Edn., p. 354. There should be dispute and there can only be a dispute when a claim is asserted by one party and denied by the other on whatever grounds. Mere failure or inaction to pay does not lead to the inference of the existence of dispute. Dispute entails a positive element and assertion of denying, not merely inaction to accede to a claim or a request. Whether in a particular case a dispute has arisen or not has to be found out from the facts and circumstances of the case.”

(emphasis supplied)

29. In the present case, as stated above, on 29-8-1979, the Contractor wrote a letter making certain claims. Thereafter, the supplementary agreement was executed on 20-12-1980. In that agreement it is nowhere stated that the Contractor's alleged right of getting damages or losses suffered by him was kept alive. On the contrary, he has agreed to complete the work within the time stipulated in the second agreement by charging some higher rate. The Contractor has not sought any reference within three years from the date when the cause of action arose, i.e, from 29-8-1979. Only in 1985 when the dispute arose with regard to the second agreement, the respondent gave notice on 2-12-1985 to appoint a sole arbitrator. The sole arbitrator was appointed with a specific reservation regarding the tenability, maintainability and validity of reference as also on the ground that the claim was barred by the period of limitation and it pertained to excepted matters in terms of the general conditions of the contract. From these facts, it is apparent that the claim before the arbitrator in November-December 1985 was apparently barred by the period of limitation. Letter dated 3-9-1983 written by the appellant repudiating the respondent's claim on account of damages or losses sustained by him would not give a fresh cause of action. On that date the cause of action for recovering the said amount was barred by the period of three years prescribed under Article 137 of the Limitation Act, 1963. Under Section 3 of the Limitation Act, it was the duty of the arbitrator to reject the claim as it was on the face of it, barred by the period of limitation.

30. In the present case, in view of the aforesaid findings, it is not necessary to discuss the contention with regard to the award of interest prior to the coming into force of the Interest Act, 1978 or that no interest could be awarded on the unliquidated damages. It is also not necessary to discuss whether the arbitration agreement provided in the first agreement executed in 1977 would survive after execution of the second agreement in December 1980.

31. In the result, the appeal is allowed with costs. The impugned order passed by the Patna High Court, Ranchi Bench in Miscellaneous Appeal No. 621 of 1990 and the order dated 2-4-1990 passed by the Subordinate Judge, Ist Court, Chas in Arbitration Suit No. 28 of 1988 are quashed and set aside.