Proceedings For Cheque Dishonour U/s. 138 NI Act Do Not Constitute Continuing Cause Of Action To Initiate Arbitration: Supreme Court

The Supreme Court recently observed that initiation of proceedings under the Negotiable Instruments Act, 1881 for cheque dishonour does not constitute continuing cause of action for initiating arbitration under the Arbitration and Conciliation Act, 1996 (A&C Act).A bench of Chief Justice of India DY Chandrachud, Justice JB Pardiwala, and Justice Manoj Misra dismissed an arbitration petition seeking the appointment of an arbitrator eleven years after cheques were dishonoured, on the ground that the claims were barred by limitation.“The initiation of arbitration and criminal proceedings under Section 138 of the Negotiable Instruments Act 1881 are separate and independent proceedings that arise from two separate causes of action. Therefore, the institution of the proceedings under Section 138 does not imply a 'continuing cause of action' for the purpose of initiating arbitration, as erroneously contended by the petitioner”, the court held.Elfit Arabia, an entity incorporated in the United Arab Emirates, was approached by the respondents to finance a telecommunication project undertaken by Telesuprecon Nigeria Limited (TNL). A Memorandum of Understanding (MoU) was executed on June 1, 2004, with TNL represented by a director of Concept Hotel BARONS Limited, the first respondent. Pursuant to the terms of the MoU, the petitioners claim to have disbursed funds on various occasions. A supplementary MoU was executed on August 2, 2006, outlining the terms of repayment and settlement of the petitioners' dues, including a lien on the respondents' property and issuance of cheques as financial support.On May 7, 2011, fifteen cheques amounting to Rs. 7.30 crores provided by the respondents were allegedly dishonoured. On June 2, 2011, the petitioners issued a legal notice to the respondents to implement the MoU and make the necessary payment.Eleven years later, on July 4, 2022, the petitioners invoked arbitration as per clause 19 of the MoU. The respondents did not reply to the notice. A fresh notice was issued on October 27, 2022, again calling for arbitration, which went unanswered. Subsequently, the present petition was filed before the Supreme Court under Section 11(6) of the A&C Act.The respondents argued that the petitioner's claims were barred by limitation and should be dismissed by the Court.Petitioner contended that during the intervening period it initiated proceedings under Section 138 of the NI Act against the respondents. The Magistrate acquitted the respondents on July 23, 2018. An appeal against this order is currently pending before the Bombay High Court.The Supreme Court noted that while the determination of whether a claim is barred by limitation typically falls within the arbitral tribunal's domain, the Court may intervene to reject clearly non-arbitrable or dead claims. The Court emphasized the need to prevent parties from being compelled into arbitration for claims that are demonstrably time-barred.Referring to the principles established in Vidya Drolia v. Durga Trading Corporation, the Court highlighted that it may interfere at the referral stage if the claim is ex-facie time-barred.The Supreme Court found that the notices invoking arbitration in July 2022 and October 2022 were issued eleven years after the cause of action arose in 2011, exceeding the three-year limitation period as per Article 55 of the Schedule under Limitation Act, 1963. The initiation of arbitration proceedings was hopelessly barred by limitation, the court said.Additionally, the Court noted that proceedings under Section 138 of the Negotiable Instruments Act 1881, which were separately initiated, do not constitute a continuing cause of action for initiating arbitration. Therefore, the petitioners' argument that these proceedings implied a continuing cause of action was rejected.Thus, the Supreme Court dismissed the arbitration petition, stating that referring the dispute to arbitration would compel the parties to arbitrate a "deadwood" claim that is clearly time-barred.AppearancesFor petitioner - Senior Advocate Dr. Vineet Kothari, Advocate Mehul Kothari, Advocate Lzafeer Ahmad BF - AOR, Advocate Vinay Kothari, Advocate Shubham ArunFor respondents - Senior Advocate Gaurav Aggarwal, Advocate Chritarth Palli - AOR, Advocate Harsheen M Palli, Advocate Nina Nariman, Advocate Avishkar Singhvi, Advocate B. Shravanth Shanker - AOR, Advocate Anil G Lalla, Advocate Prerna Robin, Advocate B Yeshwanth Raj, Advocate Naved Ahmed, Advocate Vivek Kumar SinghCase no. – Arbitration Petition (Civil) No. 15 of 2023Case Title – Elfit Arabia & Anr v. Concept Hotel BARONS Limited & OrsCitaiton : 2024 LiveLaw (SC) 494Click Here To Read/Download Judgment

Proceedings For Cheque Dishonour U/s. 138 NI Act Do Not Constitute Continuing Cause Of Action To Initiate Arbitration: Supreme Court

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Proceedings For Cheque Dishonour U/s. 138 NI Act Do Not Constitute Continuing Cause Of Action To Initiate Arbitration: Supreme Court

Amisha Shrivastava

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