INTRODUCTION
Superior courts in India have ratified the stringent deadlines for the various stages in arbitration proceedings, aiming to position India as an arbitration hub. However, it is crucial to establish safeguards to prevent delays in the adjudication process from discouraging the parties’ decision to engage in arbitration. The absence of a prescribed limitation period in certain key provisions of the Arbitration and Conciliation Act, 1996 (“A&C Act”), could be a contributing factor to some of these delays.
Section 11(6) of the A&C Act pertains to inter alia the appointment of an arbitrator in the event of the parties failing to make such an appointment. It outlines steps parties may take to appoint an arbitrator in a dispute but it does not provide any limitation period.
Section 11, a comprehensive clause largely addressing every scenario, has an apparent gap: It does not specify a time limit for filing of an application under Section 11(6).
IDENTIFYING THE REAL PROBLEM
The concept of limitation period is rooted in the maxim “Vigilantibus non dormientibus jura subveniunt” or “The law assists those who are vigilant and not those who sleep over their rights”. A defined limitation period not only guarantees certainty, finality, and confidence to the other party that the case will not be open to an endless period of liability, it also often only allows claims before the evidence deteriorates. While the law of limitation merely prohibits the remedy; , it does not act to extinguish the right itself.[1]
Section 11(6) presents a challenge that it does not specify a time limit for filing an application seeking appointment of an arbitrator/tribunal. Despite the provision evolving over the years, it still fails to specify a definite limitation period.
Because of this gap in Section 11(6), reliance is placed on Section 43 of the A&C Act, which incorporates the timelines stipulated under the Limitation Act, 1963 (“Limitation Act”), within the realm of the A&C Act. Since none of the Articles in the Schedule to the Limitation Act specifically provide a time period for filing an application under Section 11(6) of the A&C Act, it would naturally fall within the ambit of the residual provision under Article 137 of the Limitation Act. Hence, the interplay between the A&C Act and the Limitation Act comes to the forefront, with a need for clarification at the behest of the courts.
ERSTWHILE POSITION OF LAW
Indian courts have consistently[2] ruled that Article 137 of the First Schedule of the Limitation Act governs the limitation period for filing an application under Section 11 of the A&C Act. This Article sets a three-year time limit from the accrual of the right to apply, hence under Section 11, too, the time limit for application is three years from the accrual date of the right to apply.
In the same parlance, a three judge bench of the Hon’ble Supreme Court (“the Court”) vide their judgement in the matter of M/S Arif Azim Co Ltd v. M/S Aptech Ltd.[3] (“the Arif Azim”) concretely confirmed the application of Limitation Act for Section 11(6) applications. In the Arif Azim case, supra, the Hon’ble Court also laid down a two-prong test for dealing with the issue of limitation in relation to a petition under Section 11(6) and highlighted the need for legislative intervention in the said provision.
THE ARIF AZIM CASE
The Petitioner, based in Afghanistan, provided computer education, information technology, and English language training, and the Respondent, based in Mumbai, provided similar services. They entered into three franchise agreements. Disputes arose over agreement renewals and royalties. In 2018, the Petitioner first issued a recovery notice for unpaid costs and followed it up with another legal notice in 2021. In 2022, after a failed pre-institution mediation before the Bombay High Court, the Petitioner invoked arbitration, which the Respondent contested citing a limitation bar. Eventually, in 2023, the Petitioner filed an application before the Supreme Court to nominate an arbitrator according to the agreed-upon procedure in the agreement.
The Court adjudicated on the following issues:
“(i) Whether Limitation Act, 1963 is applicable to an application for the appointment of an arbitrator under Section 11(6) of the A&C Act? If yes, whether the present petition is barred by limitation?
(ii) Whether the court may refuse to make a reference under Section 11 of the A&C Act where the claims are ex-facie and hopelessly time-barred?”
Observations by the Court in the Arif Azim Case
The Court’s ruling clarifies that even though Section 11(6) of the A&C Act does not specify a time limit for filing applications, the Limitation Act under Section 43 of the A&C Act applies to arbitration proceedings. The Court established that Article 137 of the Limitation Act, with its provision of a three-year limitation period from the accrual of the right to apply, shall apply for all Section 11(6) applications.
This naturally raises the question of when precisely does the three-year limitation begins. The Court ascertained that it starts “once a valid notice invoking arbitration has been sent by the applicant to the other party, and there has been a failure or refusal on part of that other party in complying with the requirements mentioned in such notice.”
The Court examined whether a court is obligated to appoint an arbitrator when a petition under Section 11(6) falls within the limitation period. To address this, the Court invoked the Hohfeld’s analysis of jural relations and emphasised that the “right to apply” correlates to a court’s “duty to appoint”. The Court highlighted that a court may reject premature or non-compliant applications, but it is duty-bound to appoint an arbitrator and refer the dispute to an arbitral tribunal if the petitioner’s application meets procedural requirements and withstands limited judicial scrutiny.
The Court then examined if a court has the power to refuse to refer a case to an arbitral tribunal when limitation bars an application filed under Section 11(6). It categorised the objections to limitation-related applications under Section 11(6) into two types: (i) “jurisdictional issue/objection” and (ii) “admissibility issue/objection”. The Court concluded that while limitation falls under admissibility issues, “it is the duty of courts to prima facie examine and reject non-arbitrable or dead claims, so as to protect the other party from being drawn into a time-consuming and costly arbitration process”. Hence, the Court held that a court may refuse to refer the dispute to the arbitral tribunal if the claims were ex facie barred the day the arbitration proceeding starts.
The Court finally laid down a two-prong test, to be applied while dealing with the issue of limitation concerning petitions under Section 11(6) is as follows:
“(i) whether the petition under Section 11(6) of the A&C Act 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.
If either of the issues has an answer which goes against the party seeking referral of disputes to arbitration, a court may refuse to appoint arbitral tribunal.”
Eventually, in light of these observations, the Court allowed the application by the petitioners.
NEED FOR LEGISLATIVE INTERVENTION
In the concluding paragraphs of the Arif Azim case, the Court highlighted the absence of a statutory prescription on a time limit was a legislative vacuum that prompted the applicability of Article 137 of the Limitation Act to applications under Section 11(6) of the A&C Act. The Court recommended that the Parliament consider amending the A&C Act to incorporate a limitation period within Section 11. It observed:
“..the period of three years is an unduly long period for filing an application under Section 11 of the Act, 1996 and goes against the very spirit of the Act, 1996 which provides for expeditious resolution of commercial disputes within a time-bound manner. Various amendments to the Act, 1996 have been made over the years so as to ensure that arbitration proceedings are conducted and concluded expeditiously. We are of the considered opinion that the Parliament should consider bringing an amendment to the Act, 1996 prescribing a specific period of limitation within which a party may move the court for making an application for appointment of arbitrators under Section 11 of the Act, 1996.”
Besides the Arif Azim case, the Court in many recent judgments emphasised the need for an amendment to specify a limitation period under Section 11 of the A&C Act.[4] However, it is important to be cautious, considering an amendment seeking a shorter timeline could be riddled with complexities, risks, and practical challenges. One may also argue, that an amendment which reduces the time period might compromise the effectiveness of the adversarial system, potentially rushing parties into arbitration without fully exploring avenues to negotiate or settle.
The Arif Azim case not only helped clarify the interplay between the A&C Act and the Limitation Act, but it raised the issue of whether legislative action is necessary to set a limitation period for Section 11(6) applications. Considering this is a pre-arbitration application, the question arises about the most effective time limit that ought to be set for filing the Section 11(6) petition. The goal of setting an arbitration-process deadline is to ensure completion in a time-bound and efficient manner.
Would it be prudent, though, to impose and expedite the limitation period for the appointment of an arbitrator to shorter than three years? It is important to strike a delicate balance between the need to speed up the arbitration process and to avoid the risk of rushing an arbitration, which could lead to an unfavourable outcome for the parties.
For further information, please contact:
Juvraj Singh, Partner, Cyril Amarchand Mangaldas
juvraj.singh@cyrilshroff.com
[1] M/S Arif Azim Co Ltd v. M/S Aptech Ltd [2024 SCC OnLine SC 215].
[2] State of Orissa v. Damodar Das [(1996) 2 SCC 216], Grasim Industries Ltd. v. State of Kerala [(2018) 14 SCC 265], Geo Miller and Company Private Limited v. Chairman, Rajasthan Vidyut Utpadan Nigam Limited [(2020) 14 SCC 643], Secunderabad Cantonment Board v. B. Ramachandraiah & Sons [(2021) 5 SCC 705], and Bharat Sanchar Nigam Ltd. & Anr. v. M/s Nortel Networks Pvt. Ltd. [(2021) 5 SCC 738].
[3] 2024 SCC OnLine SC 215.
[4] M/s B and T AG v. Ministry of Defence [2023 SCC OnLine SC 657] and Bharat Sanchar Nigam Limited & Another v. Nortel Networks India Private Limited [(2021) 5 SCC 738]
