Introduction:
In the realm of dispute resolution, arbitration offers a streamlined alternative to court litigation and has emerged as a preferred mode of resolving commercial disputes globally as well as in India. In India, the Arbitration and Conciliation Act, 1996 (“Arbitration Act”), regulates the laws in relation to arbitration proceedings.
Through the passage of time, there have been ongoing debates about the application of the Limitation Act, 1963 (“Limitation Act”) to arbitration proceedings, specifically in relation to the time limit for filing an application for appointment of arbitrator(s) under Section 11 of the Arbitration Act.
Section 11 of the Arbitration Act, empowers the courts to appoint arbitrator(s) when parties fail to do so internally. The exercise of these powers are subject to certain time limitations, as is stipulated under Article 137 of the First Schedule of the Limitation Act. Understanding this limitation period and the mechanism for deriving such time limitation is crucial for parties seeking recourse under Section 11 and for maintaining the effectiveness of arbitration proceedings thereafter.
Recently, the Supreme Court of India in the case of M/s Arif Azim Co. Ltd. Vs. M/s Aptech Ltd., 2024 INSC 155, made significant observations regarding the applicability of the Limitations Act to the appointment of arbitrator(s) and also laid down the mechanism for deriving the same. This article provides a brief analysis of the aforesaid judgment and the jurisprudence on the application of the Limitation Act over the appointment of arbitrator(s).
Facts of the Case:
The petitioner filed an application for the appointment of arbitrator(s) to settle disputes arising from a franchisee agreement dated March 21, 2013 entered between the petitioner and the respondent (“Agreement”). The dispute between the parties, arose in relation to the renewal and payment of royalties under the Agreement, wherein the respondent vide email dated March 20, 2018, issued a recovery notice for non-payment of royalty/renewal fees to the Petitioner.
Thereafter, there were a series of emails exchanges between the parties, leading to the petitioner raising a formal dispute in relation to the amount of the royalty fee to be paid to the respondent under the Agreement, via its email dated: March 28, 2018. From the email exchanges placed on record, the discussions regarding the non-payment of the royalty/renewal amounts came to a halt between the parties on March 28, 2018. Initially, the petitioner undertook and commenced mediation under Section 12A of the Commercial Courts Act, 2015, before the Bombay High Court Mediation Centre. However, when mediation failed between the parties, the petitioner invoked arbitration through its notice dated November 29, 2022. The respondent refuted all claims made in the notice, including the invocation of arbitration, since it was asserted that such invocation and appointment of arbitrator(s), is barred by the timelines stipulated under the Limitation Act. The petition was filed before the Supreme Court of India after the respondent’s failure to mutually appoint arbitrator(s) as per the agreed upon procedure laid out under the Agreement.
Issues:
- Whether the Limitation Act is applicable to an application for the appointment of arbitrator(s) under section 11(6) of the Arbitration Act? If yes, whether the said petition is barred by limitation?
- Whether the court may refuse to make a reference under Section 11 of the Arbitration Act where the claims are ex-facie and hopelessly time-barred.
Rule:
Section 11 of the Arbitration Act provides for the appointment of arbitrator(s) and no time limit has been prescribed for the filing an application under Section 11(6) of the Arbitration Act. Further, Section 43 of the Arbitration Act provides that the Limitation Act would apply to the process of appointment of arbitrator(s), same as it applies to the proceedings in the court. The period of limitation for filing an application under Section 11 would be governed by Article 137 of the First Schedule of the Limitation Act, 1963, which stipulates 3 (three) year time period for the purposes of filing the same.
Analysis:
- The Supreme Court of India opined that the limitation period for making an application under section 11(6) of the Arbitration Act is three years from the date when the right to apply accrues. The said period commences only after a valid notice invoking arbitration has been issued by one of the parties to the other party and there has been either a failure or refusal on the part of the other party to make an appointment as per the appointment procedure agreed upon. Therefore, in the present case, the notice issued on November 24, 2022, was received by the respondent on November 29, 2022, and a one-month period was granted to the respondent to respond and comply with the said appointment procedure, which concluded on December 28, 2022. The Supreme Court of India opined that beginning from the date of such inconclusion in appointment of the arbitrator(s), the countdown for the limitation period to file the current petition commenced. Thus since, the present petition was filed on April 19, 2023, within three years of the limitation period taking into account the extensions granted in light of the Covid-19 pandemic, the petition was not time-barred under Section 11(6) of the Arbitration Act.
- Two-pronged Test: The Supreme Court of India laid down two aspects by employing a two-pronged test i.e., (i) whether the petition under section 11(6) is barred by limitation, and (ii) whether the claims sought to be arbitrated are ex-facie dead claims and are thus barred by limitation on the date of commencement of arbitration proceedings. Therefore, in the present case, it was found that the petitioner’s right crystallized on March 28, 2018, and after considering COVID-19 related extensions, the petitioner’s notice fell within the permissible time frame under the Limitation Act. Thus, the Supreme Court of India appointed a sole arbitrator, rejecting arguments of time limitations and non-arbitrability, and upheld the petitioner’s request for arbitration. 2.
- The Cause of Action: The date of arising of the cause of action becomes important for the purpose of determining the limitation period to file an application for the appointment of arbitrator(s). Therefore, whether specific facts constitute a cause of action, must be determined by considering the circumstances of each case and focusing on the substance rather than the mere form of the action. If a breach of a right occurs at a particular point in time, the entire cause of action is deemed to have arisen at that moment. In such instances, a party cannot delay filing an application to settle the dispute regarding their infringed right beyond the timeframe provided by the Limitation Act. Allowing the right to be extinguished by the passage of time and then waiting for another cause of action to arise before filing an application under Section 11 of the Arbitration Act would effectively be seeking to revive a right that had long been extinguished under the provisions of the Limitation Act. Such an application would be futile and legally untenable, as the right in question would be considered dead for all intents and purposes. Any such proceedings would be subject to dismissal on the grounds of limitation under Article 137 of the First Schedule of the Limitation Act. 3.
Conclusion:
The issue of limitation for appointment of arbitrator(s) has been the subject of several judgments in India. The Supreme Court of India, in the case of Government of India v. Vedanta Ltd. & Ors.[1], held that the period of limitation for filing an application under Section 11 would be governed by Article 137 of the First Schedule of the Limitation Act, which prescribes a three-year period. The Supreme Court of India noted that the period of limitation would begin from the date when there is a failure to appoint arbitrator(s).
However, the Supreme Court of India also observed that the period of three years is an unduly long period for filing an application under Section 11 and goes against the very spirit of the Arbitration Act. The Supreme Court of India recommended that the Parliament should consider bringing an amendment to the Arbitration Act prescribing a specific period of limitation within which a party may move the court for making an application for appointment of arbitrator(s) under Section 11.
In another significant decision in the case of, BSNL v. Nortel Networks India Pvt. Ltd.[2], the Supreme Court of India held that the limitation period for filing an application under Section 11 would be governed by the agreement between the parties. If the agreement is silent on this aspect, then the general law of limitation i.e., Article 137 of the First Schedule of the Limitation Act shall apply. While adjudicating on the subject matter the Supreme Court of India emphasized the importance of party autonomy in arbitration proceedings and held that the parties are free to agree on a limitation period.
Implications and the Way Forward:
The aforementioned judgments have highlighted the need for a specific period of limitation for filing an application under Section 11 of the Arbitration Act. The current period of three years is seen as a hindrance to the expeditious resolution of commercial disputes.
The proposed amendment to the Arbitration Act should strike a balance between providing sufficient time for parties to initiate arbitration proceedings and ensuring the swift resolution of disputes. A shorter limitation period would encourage parties to act promptly and contribute to the efficiency of the arbitration process.
However, any amendment should also take into account the realities of commercial transactions and disputes. A very short limitation period may not be practical and could potentially lead to a surge in premature and unnecessary arbitration proceedings. Therefore, a nuanced approach is required while determining the appropriate limitation period.
[1] Civil Appeal No. 3185 of 2020
[2] Civil Appeal Nos. 834-844 of 2021
