Court May Refuse To Appoint Arbitral Tribunal If S.11(6) Petition Is Barred By Limitation Or Claim Is Ex-Facie Time Barred : Supreme Court

In a recent ruling, the Supreme Court held that the Limitation Act, 1963 is applicable to proceedings for appointment of arbitrator under Section 11(6) of the Arbitration and Conciliation Act, 1996 ("A&C Act"), and a Court may refuse to make a reference if the claims, on the date of commencement of arbitration proceedings, are ex-facie barred.

"...there is no doubt as to the applicability of the Limitation Act, 1963 to arbitration proceedings in general and that of Article 137 of the Limitation Act, 1963 to a petition under Section 11(6) of the Act, 1996 in particular", said the Bench of CJI DY Chandrachud and Justices JB Pardiwala, Manoj Misra.

Factual Background

The petitioner is an Afghanistan-based company (doing business of providing training in computer education, information technology, English language, etc.) that entered 3 franchise agreements with the Mumbai-based respondent (rendering similar services). Under these agreements, the petitioner-franchisee was granted a non-exclusive license by the respondent-franchisor to establish and operate business under 3 trade names.

After signing of the above agreements, the respondent submitted a proposal to Indian Council for Cultural Relations for execution of a short-term course. The same was accepted. There was correspondence between the petitioner and the respondent, following which the petitioner executed the course at its centre in Kabul.

Eventually, disputes arose between the parties with respect to the royalty fee and renewal of the franchise agreements. In 2018, the respondent issued a recovery notice for non-payment of the royalty/renewal fee. Finally, the petitioner informed the respondent of its decision to not renew the franchise agreements.

Three years later, in 2021, the petitioner took up the issue of non-payment vide a legal notice. Thereafter, it invoked pre-institution mediation before the Bombay High Court, but when those proceedings failed, it sent notice for invocation of arbitration to the respondent in 2022. In its reply, the respondent denied all claims, besides stating that the same were barred by limitation.

After failure of the respondent to nominate an arbitrator as per mutually agreed upon procedure in response to notice for invocation of arbitration, the petitioner initiated the present proceedings before the Supreme Court in 2023.

Issues

The submissions of the parties led the Court to frame and decide two 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?

Court Observations

At the outset, perusing Section 11(6), the Court noted that no time limit has been prescribed in the provision for filing an application for appointment of arbitrator. However, Section 43 stipulates that the Limitation Act would apply to arbitrations as it applies to proceedings in court.

Next, it observed that none of the Articles in the Schedule to the Limitation Act provides a time period for filing an application under Section 11(6) of the A&C Act. As such, it would be covered by Article 137 of the Limitation Act - the residual provision.

Proceeding on this basis, the Court explored the question as to when the right to apply under Section 11(6) would accrue to a party. It was opined that the limitation period can only commence "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."

Bifurcating the issues that may be raised against an application under Section 11(6), the Court said that the issue of limitation is an "admissibility issue/objection", and not a "jurisdictional issue/objection". Jurisdictional issues were explained as pertaining to the power and authority of the arbitrators to hear and decide a case (such as, objections to the competence of arbitrators, existence/validity of arbitration agreement, absence of consent to submit disputes to arbitration, etc.). Per contra, admissibility issues were said to relate to the nature of the claim, including challenges to procedural requirements (such as, mandatory requirement for pre-reference mediation, claim being time-barred, etc.).

Although limitation was categorized as an admissibility issue, it was added that 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.

Ultimately, the Court enunciated a two-prong test, to be applied while dealing with the issue of limitation in relation to a petition under Section 11(6), 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, it said.

To quote the judgment authored by Justice Pardiwala :

"...while considering the issue of limitation in relation to a petition under Section 11(6) of the Act, 1996, the courts should satisfy themselves on two aspects by employing a two-pronged test – first, whether the petition under Section 11(6) of the Act, 1996 is barred by limitation; and secondly, 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 these issues are answered against the party seeking referral of disputes to arbitration, the court may refuse to appoint an arbitral tribunal."

Applying the test to the facts of the present case, the Court noted that (i) the present arbitration petition was filed within a period of 3 years from the date when the respondent failed to comply with the notice of invocation of arbitration issued by the petitioner (as such, it was not hit by limitation), and (ii) the notice for invocation of arbitration was issued by the petitioner within a period of 3 years from the date of accrual of cause of action (thus, the claims could not be said to be ex-facie dead or time-barred on the date of commencement of the arbitration proceedings).

In this view of the matter, the petition was allowed and former Supreme Court judge, Justice Sanjay Kishan Kaul, appointed to act as the sole arbitrator.

In closing, the Court observed that the applicability of Article 137 to applications under Section 11(6) of the A&C Act results from a legislative vacuum, as there is no statutory prescription regarding time limit. It urged the Parliament to consider bringing an amendment to the Act, so as to prescribe a specific period of limitation within which a party may move the Court for appointment of Arbitrator under Section 11.

"...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."

Case Title: M/s Arif Azim Co. Ltd. Versus M/s Aptech Ltd., ARBITRATION PETITION NO. 29 OF 2023

Citation : 2024 LiveLaw (SC) 180

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