Limitation under Section 11 of Arbitration Act: A legislative vacuum

In the recent case of Arif Azim Co Ltd v. Aptech Ltd, a three-judge Bench of the Supreme Court decided that the limitation period for filing an application under Section 11 of the Arbitration and Conciliation Act, 1996 for appointment of arbitrator is three years from the date of notice of invocation of arbitration under Section 21 of the Act.

The Court held that the notice invoking arbitration shall be issued within three years from the date of accrual of the cause of action.

This article outlines the interpretation of Section 11(6) and Section 43 of the Arbitration Act along with Section 137 of the Limitation Act, 1963 by the Court in a quest to find out the scope of applicability of limitation at the stage of referral. While interpreting the aforesaid provisions of law, the Court has also stressed upon the legal vacuum in Section 11 running contrary to the scheme of the Arbitration Act, which needs to be cured by way of an amendment.

Applicability of Limitation Act to 11(6) of Arbitration Act

"Vigilantibus non dormientibus jura subveniunt" is a maxim which means that the law assists those who are vigilant and not those who sleep over their rights. The law of limitation plays a vital role in exempting the opposite party from an indefinite period of liability and ensuring that the suffering parties can claim relief before deterioration of evidence.

Section 11(6) of the Arbitration Act does not provide any time limit for filing an application for appointment of an arbitrator. However, Section 43 of the Arbitration Act clearly states that the Limitation Act would apply to arbitration, as it applies to proceedings in court. Section 43(2) of the Arbitration Act states that for the purpose of that Section and the Limitation Act, an arbitration shall be deemed to have commenced on the date of the invocation notice under Section 21. Section 11(6) of the Arbitration Act would fall under Section 137 of the Limitation Act, and accordingly, an application under Section 11(6) would not be hit by limitation if it is filed within three years from the date of invocation of arbitration.

In Geo Miller and Co Private Limited v. Chairman, Rajasthan Vidyut Utpadan Nigam Limited, it was held that the limitation period for reference of a dispute to arbitration or for seeking appointment of an arbitrator before a court is three years from the date on which the cause of action or the claim which is sought to be arbitrated first arises. However, the Supreme Court has now taken a completely different stand in light of Section 137 of the Limitation Act, while relying on the case of Bharat Sanchar Nigam Limited and Anr v. Nortel Networks India Private Limited.

The Court has now held that the limitation period for filing an application under Section 11(6) is three years from when the right to apply accrues. The right to apply accrues only when a valid Section 21 notice is issued by one of the parties and failure or refusal on part of the other party to make an appointment as per the procedure agreed upon between the parties. The Court has clarified that the limitation period for making an application seeking appointment of arbitrator must not be conflated or confused with the limitation period for raising the substantive claims which are sought to be referred to an arbitral tribunal. It has clearly held that whether the claims are barred by limitation or not has to be decided by the arbitrator.

Further, the Court also relied on Hohfeld’s Analysis of Jural Relations to elucidate that when the High Court or Supreme Court is conferred with the right to appoint an arbitrator, then the applicant is duty-bound to first comply with the requirement of invoking arbitration by issuing notice to the other side under Section 21. Thus, the limitation period for filing a petition under Section 11(6) of the Arbitration Act 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.

Can a court refuse to make a reference under Section 11 of the Arbitration Act where the claims are time-barred?

By placing reliance on the case of Bharat Sanchar Nigam Limited and Anr. v. Nortel Networks India Private Limited, the Court held that the issue of limitation is an admissibility issue and not an issue on jurisdiction of the tribunal. However, it held that even though this issue is an admissibility issue, the court has a duty of prima facie examination of the issue of limitation for rejection of dead claims and to save the parties from indulging in time-consuming and costly arbitration. The Court relied on Vidya Drolia and Ors v. Durga Trading Corporation in which it was decided that at the stage of referral, the court can interfere only when “it is manifest that the claims are ex facie time-barred and dead, or there is no subsisting dispute.”

The Court also relied on the case of NTPC Ltd v. SPML Infra Ltd, which elucidated the “eye of the needle” test for defining the scope of Section 11(6) of the Arbitration Act. It was held in that case that firstly, the court could only delve into the existence and validity of an arbitration agreement which also necessitates that inquiry into the parties to the agreement and the applicant’s privity to the said contract. Secondly, the court can also go into issue of non-arbitrability of the dispute at the stage of reference. However, it was made clear that the referral court can only reject the application if the issues are manifestly non-arbitrable.

Thus, by virtue of its latest decision in Arif Azim, the Court has added a new limb for consideration under Section 11(6) for rejection of manifest and prima facie time-barred claims. The Court has also shed light on when a cause of action arises. It has reaffirmed the well-settled position of law that mere failure to pay could not have given rise to a cause of action. It is only when one party has asserted its claim and the other party has either denied such claim or failed to reply to it, that the cause of action will arise. The Court reaffirmed the following principles in M/s B and T AG v. Ministry of Defence in relation to accrual of cause of action:

a. Right to receive the payment ordinarily begins upon completion of the work.

b. A dispute arises only when there is a claim by one side and its denial/repudiation by the other.

c. The accrual of cause of action cannot be indefinitely postponed by repeatedly writing letters or sending reminders.

Therefore, when a party invokes arbitration under Section 21 of the Arbitration Act within a period of three years from when cause of action had arisen, such claims will not be hit by limitation.

Fixing the loophole

The Court in Arif Azim carved out a two-fold test to determine the issue of limitation for adjudication of an application under Section 11(6) of the Arbitration Act. Firstly, the court has to determine whether the Section 11(6) application has been filed within three years from the date of invocation of arbitration under Section 21 of Arbitration Act. Secondly, it has to see whether the claims are prima facie or manifestly time-barred by virtue of non-invocation of arbitration under Section 21 within three years from the date of the cause of action.

However, the Court has made it crystal clear that the applicability of Section 137 to applications under Section 11(6) of the Arbitration Act is a result of a legislative vacuum, as there is no statutory time limit for filing an application for appointment of arbitrators. The Court has reiterated that the period of three years is an ‘unduly long period’ for allowing the filing of an application for appointment of an arbitrator and it goes against the spirit of the Arbitration Act in terms of expeditious resolution of disputes within a strict timeline.

Therefore, it is the need of hour to cure such legal loophole under Section 11(6) of the Arbitration Act by way of an amendment for prescribing a time limit for filing of the application under Section 11(6). This time limit should not exceed three to six months from the expiry of thirty days from date of notice invoking arbitration, considering the framework of the arbitration timeline in India.

Megha Shaw is an Advocate practicing in the Calcutta High Court.