A Contractual Right to Set-Off Remains Enforceable Notwithstanding the Expiry of Limitation for the Underlying Debt

The parties entered into a Tripartite Agreement on 01.08.2012 for the supply of coal to Damodar Valley Corporation (DVC).

Under Clause 5.2, all charges pertaining to the Railways, including surcharges and overloading charges, were to be on the account of Respondent No. 1.

In 2014, East Coast Railways (ECR) raised a demand of Rs. 4,78,17,458/- against the Appellant for delayed freight payments and surcharges.

Consequently, the Appellant withheld Rs. 1,64,38,456/- (Railway Surcharge) and Rs. 56,93,579/- (overloaded wagon charges) from the Respondents’ dues.

The Arbitral Tribunal (AT) allowed the Respondents’ claims for these amounts, holding that the ECR’s claim was time-barred since it hadn't been pursued for five years.

The Single Bench (SB) of the High Court upheld the award under Section 34, suggesting the Appellant could instead invoke indemnity bonds if future deductions occurred.

1. Whether the Arbitral Tribunal was justified in refusing to set off payments claimed by ECR from the Appellant on account of charges contractually payable by Respondent No. 1.

2. Whether the bar of limitation on a third party’s (ECR) claim extinguishes the Appellant's contractual right to effect a set-off against the Respondents.

The Court applied Section 37 and Section 28(3) of the Arbitration and Conciliation Act, 1996, highlighting that an Arbitral Tribunal must decide disputes in accordance with the terms of the contract.

It relied on Associate Builders v. DDA to establish that an award sufferring from "patent illegality" due to contravention of contractual terms warrants interference.

The Court applied the principle that the law of limitation bars the remedy but does not extinguish the underlying substantive right, unless expressly provided by statute.

The Court found that Clause 5.2 of the Tripartite Agreement was "ex-facie unambiguous" in imposing the liability for Railway charges exclusively on Respondent No. 1.

The AT and SB committed a patent illegality by ignoring this express allocation of risk.

The Court reasoned that since the demand from ECR had been crystallized and declined for withdrawal in 2014, the liability was enforceable against the Appellant, justifying the withholding of dues.

The Court rejected the SB’s interpretation regarding indemnity bonds, noting the contract did not require the Appellant to pay and then seek reimbursement later.

The Court held that even if ECR’s remedy to sue the Appellant was time-barred, the Appellant's contractual right to adjust/set-off those dues against the Respondent remained intact under the Agreement.

The Appellant was entitled to set off the Railway surcharges and detention charges against the Respondents' dues.

If Respondents eventually obtain a legal declaration exempting them from the ECR liability, they would be at liberty to seek recovery of the concerned amounts from the Appellant in accordance with the law.