Introduction
In order to foster quick resolution, efficiency and flexibility are the cornerstones of arbitration. The Arbitration and Conciliation Act, 1996 (“the Act”) [1], provides for strict limitations at most stages of the arbitral process. Naturally, Section 11 with its glaring lack of prescribed limitation at the stage of appointment appears conspicuous and almost at odds with the scheme of the Act.
The limitation period under Section 11 as interpreted by the courts gains importance as failure to adhere to the prescribed time frame can result in the rejection of a Section 11 application. This blog analyses the aspect of limitation while appointing an arbitrator under Section 11 of the Act. It delves into how the courts have interpreted limitation under Section 11 in the absence of a prescribed time limit therein and the concept of “breaking point” developed in this regard. It also highlights the need to amend Section 11, as expressed by the Hon’ble Supreme Court while addressing the practical issues of a potentially shorter limitation period, if ever so prescribed by the Parliament.
Section 11 framework
Section 11 of the Act [2] deals with the appointment of arbitrators in an arbitration proceeding. It provides possible courses of action that parties to a dispute can take to appoint arbitrators. Section 11 allows parties to choose arbitrators themselves by agreeing upon an appointment procedure. In case the parties are unable to agree upon the appointment of arbitrators, Section 11 empowers them through sub-sections (4), (5) and (6) to approach the Hon’ble Supreme Court or the Hon’ble High Court for such appointments.
Over the years, the provision has gone through several changes via the Arbitration & Conciliation (Amendment) Act, 2015 (“2015 Amendment”)[3], and the Arbitration & Conciliation (Amendment) Act, 2019 (“2019 Amendment”)[4]. The 2015 Amendment has added sub-section 6A to Section 11, which confines the examination by the court at this stage to the ‘existence’ of an arbitration agreement only. Further, the 2019 Amendment has taken the power of appointment of arbitrator from courts and conferred it upon arbitral institutions designated by the Supreme Court or the High Court. However, this amendment has not yet come into force.
Scheme of the Act: Various instances of timeliness in the Act
Pertinently, in light of the 2015 Amendment adding Section 29A to the Act[5], an award has to be made within a period of twelve months from the date of completion of pleadings and such period may be extended by a period of six months by the mutual consent of parties. For any subsequent extension, a party needs to make an application to the court. Section 29A(2)[6] entitles an arbitral tribunal to additional fees if it delivers the award within six months from the date of constitution.
Further, Section 23(4), added by the 2019 Amendment, stipulates a period of six months from the date the arbitral tribunal receives notice of appointment in writing, for filing the statement of claim and defence[7]. Section 34(3) of the Act mandates that an application for setting aside shall not be made after three months from the date of receiving the award[8].
All in all, it is apparent that the Act lays emphasis on making India an arbitration hub by implementing strict timelines for the various steps in an arbitral proceeding, as well as for rendering of the arbitral award.
Limitation for appointment of arbitrator under Section 11
At the outset, it is important to note that Section 11, even after 2015 and 2019 Amendments to the Act, does not prescribe any limitation period for filing of an application for appointment of arbitrator.
Filling this lacunae, the Hon’ble Supreme Court of India in Bharat Sanchar Nigam Ltd. & Anr. v. M/s Nortel Networks Pvt. Ltd. (“Nortel Networks”)[9] has held that the period of limitation for filing an application under Section 11 of the Act would be governed by Article 137 of the First schedule of the Limitation Act, 1963 (“Limitation Act”). Article 137 of the Limitation Act is a residual provision and provides for a limitation period for any application for which no period of limitation is provided in any of the Articles in the Schedule to the Limitation Act[10]. It provides for a period of limitation of three years from the date when the right to apply accrues. Therefore, the Supreme Court has held that the period of limitation for application for appointment of an arbitrator under Section 11 shall be three years from the date when the right to apply accrues.
The Court explained that the limitation for filing an application under Section 11 would arise upon failure to appoint an arbitrator within 30 days from the issuance of the notice invoking arbitration. In other words, an application under Section 11 can be filed only after a notice of arbitration as contemplated by Section 21 of the Act is made, and there is failure to make the appointment within 30 days.
The apex court has also observed that a three year limitation period for a Section 11 application is fairly long and thus, not in line with the timeliness nature of the Act. The Court observed:
“17. Given the vacuum in the law to provide a period of limitation under Section 11 of the Arbitration and Conciliation 1996, the Courts have taken recourse to the position that the limitation period would be governed by Article 137, which provides a period of 3 years from the date when the right to apply accrues. However, this is an unduly long period for filing an application u/S. 11, since it would defeat the very object of the Act, which provides for expeditious resolution of commercial disputes within a time bound period… In view of the legislative intent, the period of 3 years for filing an application under Section 11 would run contrary to the scheme of the Act. It would be necessary for Parliament to effect an amendment to Section 11, prescribing a specific period of limitation within which a party may move the court for making an application for appointment of the arbitration under Section 11 of the 1996 Act.” (emphasis supplied) [11]
Therefore, the Court has expressed the need for the Parliament to amend Section 11, and prescribe a specific limitation period for a Section 11 application in order to align it with the scheme of the Act.
“Breaking point” vis-a-vis limitation of Section 11 application
“Breaking point” is a legal fiction inter alia used by courts to determine the period of limitation for a Section 11 application. In Geo Miller Geo Miller and Company Private Limited v. Chairman, Rajasthan Vidyut Utpadan Nigam Ltd.[12], the Hon’ble Supreme Court opined that a “breaking point” is the point at which any reasonable party would abandon efforts to arrive at a settlement and contemplate referral of the dispute for arbitration. This “breaking point” would then, in the Court’s opinion, be treated as the date on which cause of action arises, for the purpose of limitation.
Recently, in May 2023, the apex court again had the opportunity to apply the fiction of “breaking point” in the context of Section 11 in M/s. B and T AG v. Ministry of Defence (“B and T Ag”)[13]. In this case, the Supreme Court was deciding a petition under Section 11 of the Act filed by B and T AG, a Swiss defence supplier, seeking appointment of an arbitrator for adjudication of its disputes with the Ministry of Defence, Government of India under a 2012 contract for supply of sub-machine guns. B and T AG contended that time spent in pre-arbitration negotiations undertaken in good faith should be omitted for computing limitation for filing a Section 11 application. The Court held that the date on which the bank guarantee was encashed was the “breaking point” for initiation of the limitation period for the Section 11 application[14]. Further, the Court held that the fact that B&T AG kept negotiating with the Government of India in anticipation of some amicable settlement would not extend the period of limitation[15]. The Court dismissed the application filed under Section 11(6) of the Act for being beyond the limitation as it was filed after five years from the abovementioned “breaking point”. [16]
Practical concerns if a shorter limitation for Section 11 application is prescribed by the legislature
Recently, the Hon’ble Supreme Court in B & T AG again referred to its earlier judgment in Nortel Networks,which had emphasised on the need for an amendment to prescribe a limitation period under Section 11 of the Act. While this is a lacuna in the apex court’s opinion, such an amendment prescribing shorter limitation may pose certain risks and practical challenges.
Efficacy is an essential aspect of the arbitral process, but timelines prescribed in the Act ensure efficacy after the commencement of the arbitration process. Appointment of an arbitrator under Section 11 is a pre-arbitral process. It is a legitimate concern that by imposing a strict limitation on appointment, will the possibility of a settlement be impacted negatively? Due to shorter timelines, a party may necessarily have to invoke arbitration even if both parties are amenable to settlement, simply because of the risk of running beyond the limitation period.
Simply put, a party invoking arbitration will always operate under the pressure of conforming to the strict limitation period for filing a Section 11 application without effectively exploring the possibility of a mutual settlement with the other party. Would this not be akin to thrusting and coercing parties into an arbitral process even when parties may have a real chance of arriving at a settlement? In this vein, it is pertinent to note that the Act lays great emphasis on fostering mutual settlement between the parties, as is evident from Section 30 of the Act, which provides that settlement between parties may be encouraged by the arbitrator. Further, arbitration proceedings stand terminated if parties arrive at a settlement during the pendency of the arbitration and such settlement is given the same status as an arbitral award by virtue of Section 30(4) of the Act.
Concluding remarks
The Act places much emphasis on making the arbitral proceedings time-bound. The intention of the Parliament is vivid and apparent through 2015 and 2019 Amendments to the Act, which have added Sections 29A and 23(4) to the Act, respectively. The Hon’ble Supreme Court has also expressed that a three-year limitation period for filing a Section 11 application may not fit in the overall timely nature of the Act. It is also unclear whether Article 137 of the Limitation Act would apply with the same force upon coming into effect of the 2019 Amendment, which empowers arbitral institutions instead of courts to appoint the arbitral tribunal.
At the same time, the imposition of a shorter limitation period for appointment of an arbitrator under Section 11 of the Act may come with potential risks explored above, which may result in unnecessarily rushing parties towards arbitration even when there is scope of a settlement.
It remains to be seen whether the Parliament would act on the Hon’ble Supreme Court’s observation and stipulate a specific limitation for filing an application for appointment of an arbitrator under Section 11 of the Act, and if it chooses to do so, will it be able to address the practical concerns that may emanate from prescribing a fixed, shorter limitation period under Section 11.
For further information, please contact:
Gauhar Mirza, Partner, Cyril Amarchand Mangaldas
gauhar.mirza@cyrilshroff.com
[1] The Arbitration & Conciliation Act, 1996 (Act No. 26 of 1996).
[2] Section 11, Arbitration & Conciliation Act, 1996.
[3] The Arbitration & Conciliation (Amendment) Act, 2015 (Act No. 3 of 2016).
[4] The Arbitration & Conciliation (Amendment) Act, 2019 (Act No. 33 of 2019).
[5] Section 29A, Arbitration & Conciliation Act, 1996.
[6] Section 29A(2), Arbitration & Conciliation Act, 1996.
[7] Section 23(4), Arbitration & Conciliation Act, 1996.
[8] Section 34(3), Arbitration & Conciliation Act, 1996.
[9] (2021) 5 SCC 738
[10] Article 137, The Limitation Act, 1973.
[11] Supra note 9, paragraph 17.
[12] (2020) 14 SCC 643
[13] 2023 SCC OnLine SC 657
[14] Id. at para 59.
[15] Supra note 13, at paragraph 59.
[16] Supra note 13, at paragraph 66.
