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Going beyond the test of 'Cause Of Arbitration' for Limitation Period For a Section 11 (6) Application: SC Settles the Dust?

Updated: Jun 9

Nidhisha Garg*


Background


The question of limitation for an application under Section 11(6) of the Arbitration and Conciliation Act, 1996 ('Act') for appointment of an arbitrator has been the subject of much deliberation by the High Courts and the Supreme Court alike. The Act does not prescribe any time period for filing an application under Section 11. In view of this legislative vacuum, the Courts have time and again held that by virtue of Section 43 of the Act, Article 137 of the Schedule to the Limitation Act, 1963 shall govern the limitation for a Section 11 application.

In accordance with Article 137 of the Limitation Act, 1963 such an application under Section 11(6) of the Act must be filed within a period of 3 years from 'when the right to apply accrues'. However, the question of when this right to apply can be said to have conclusively accrued has notoriously been the subject of much controversy.


In this regard, the present article shall proceed to discuss the jurisprudence on how the courts have read the limitation period of three (3) years to commence from the expiry of 30 days from the service of notice under Section 21 of the Act. This shall be followed by a detailed analysis of the ratio of the Supreme Court in the recent judgment of Arif Azim Company Limited v. Aptech Limited,  including an analysis of whether the said judgment has disturbed the otherwise settled law on the point. Towards the conclusion, along with suggestions for the legislature to initiate steps for a pressing need for an amendment to the Act.

Section 11(5) of the Act provides that an application for appointment of an arbitrator may be made upon the expiry of 30 days from the receipt of a request made in this regard by one party. Further, Section 21 of the Act, provides that an arbitration proceeding shall be said to have commenced on the date of receipt of such request/notice by the other party.


In view of the above provisions, the Supreme Court in Bharat Sanchar Nigam Limited v. Nortel Networks India Private Limited ('BSNL case'), observed that limitation for filing an application under Section 11 would arise upon the failure to make the appointment of the arbitrator within a period of 30 days from issuance of the notice invoking arbitration.


The Supreme Court also sounded off with a word of caution that limitation for a Section 11 application must not be confused with the limitation applicable to the substantive claims made in the underlying commercial contract as the latter are governed by various provisions of the Limitation Act, 1963 and are necessarily distinct from limitation for filing an application for appointment of an arbitrator.


However, the Supreme Court has now, in a judgment delivered on March 1, 2024, in Arif Azim Company Limited v. Aptech Limited ('Arif Azim case') sought to modify the above settled position by resorting to the 'cause of arbitration' approach, under which the two otherwise distinct 'cause of action for the substantive claim' and 'cause of action for the Section 11 application' are inter-linked and harmoniously construed to arrive at a combined 'cause of arbitration'.


The Ratio in the Arif Azim Case


The Supreme Court in the Arif Azim case itself referred to the principle enunciated in the BSNL case that the question of a Section 11(6) application being time-barred, being a question of 'jurisdiction of the arbitral tribunal', falls within the purview of the referral court under Section 11(6) whereas the question of the substantive claim being barred by limitation can rightfully be adjudicated upon only by the arbitral tribunal as it pertains to 'admissibility' of the claim itself.

 

Despite the otherwise clear-cut distinction between limitation for a Section 11 application and that for the substantive claims, the Supreme Court in the BSNL case proceeded upon a conjoint construction of the two for the limited purpose of determining if the notice invoking arbitration had been issued within limitation. It observed that there must be a clear notice invoking arbitration setting out the claims which must be received by the other party within a period of 3 years from the rejection of a final claim, failing which, the time bar would prevail.


It may therefore be inferred that the determination whether a Section 11 application is time-barred entails a two-fold enquiry:


(i) Firstly, evaluating if the notice invoking arbitration was issued in a time-bound manner, i.e. within the applicable statutory limitation period from the date on which the cause of action for the substantive claims arose. For this purpose, the Court shall be guided by the compass of 'breaking point' as enunciated in the case of M/s. B and T AG v. Ministry of Defence, that is, the time at which any reasonable party would have abandoned efforts at arriving at a settlement and contemplated referral of the dispute to arbitration; and


(ii) Secondly, if the answer to the first question is 'yes', then evaluating if the Section 11 application has been filed within 3 years from the expiry of 30 days from the date on which the notice invoking arbitration was received by the respondent party.


It is therefore settled that dilution of the distinction between jurisdiction and admissibility is permissible for the limited purpose of evaluating whether the notice invoking arbitration was time-barred, which is further relevant for determining whether the Section 11 application is time-barred. This approach was in fact resorted to by the Supreme Court in the Arif Azim case to arrive at the conclusion that the Section 11 application therein was not time-barred.


The Supreme Court, however, did not stop there. Instead, it went beyond this permissible threshold and proceeded to enquire as to whether the claims being sought to be arbitrated by the petitioner therein, were ex-facie barred by limitation and whether appointment of arbitrator under Section 11(6) may be refused on this ground alone.


The Hon'ble Supreme Court deviated from the settled position of law by observing that although limitation is an admissibility issue, yet it is the duty of the 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.


The Supreme Court finally opined that a referral court under Section 11 (6) should dwell upon the limitation of both, the Section 11 application as also the substantive claims being sought to be arbitrated. It further went on to state that if either of the above questions is answered in the negative, the referral court should reject the application for appointment of an arbitrator.


Critical Analysis of the Arif Azim case


The Supreme Court in the Arif Azim case relied upon Vidya Drolia and Others v. Durga Trading Corporation ('Vidya Drolia case') wherein it was observed that limitation law being procedural and disputes, being factual, would be for the arbitrator to decide. The court at the referral stage can interfere only when it is manifest that the claims are ex facie time-barred and dead, or there is no subsisting dispute. All other cases should be referred to the arbitral tribunal.

 

Unfortunately, however, the full bench failed to consider its own observations in the seven judge constitution bench decision of In re: Interplay between arbitration agreements under the Arbitration and Conciliation Act, 1996 and the Indian Stamp Act ('N. N. Global case'). It has been observed therein that the legislature confined the scope of the referral courts under Section 11(6A) to only examining the existence of an arbitration agreement. The use of the term “examination” in itself connotes that the power is limited to a prima facie determination on the basis of Section 7, i.e. the requirement that the agreement be in writing. This interpretation also gives true effect to the doctrine of competence-competence by leaving the issue of substantive existence and validity of an arbitration agreement to be decided by arbitral tribunal under Section 16.


The Supreme Court also added that the ratio of Vidya Drolia case stood modified to this extent. In fact, the Supreme Court opined that the view taken in the Vidya Drolia case is erroneous inasmuch as it proceeded with the presumption that the omission of Section 11(6A) of the Act had already been notified, which is certainly not the case. The 2019 Amendment to the Act omitted Section 11(6A) from the Act, which provided that while considering an application for appointment of an arbitrator, a Court shall confine its examination to the “existence of an arbitration agreement.” The Supreme Court in the N. N. Global case clarified that pending the notification of this deletion, Section 11(6A) of the Act continues to remain in force. On this basis, it proceeded to opine that for a reference under Section 11(6), the referral court's examination must be extremely restricted to see that an arbitration agreement existed in writing.


In view of the above observations in the N. N. Global case, the ratio of the Vidya Drolia case has been partially over-ruled. Resultantly, the ratio of Uttarakhand Purv Sainik Kalyan Nigam Ltd v. Northern Coal Field Limited stands restored, wherein it was unequivocally laid down that the issue of limitation is a jurisdictional issue, which would be required to be decided by the arbitrator under Section 16, and not at the pre-reference stage under Section 11 of the Act.

Even the two-fold / eye of the needle test laid down in the NTPC case, entails an inquiry by the referral court only into the existence of an arbitration agreement and a prima facie enquiry of the arbitrability of the dispute. The question of whether the substantive claims are time-barred or not, is not for the referral court to inquire under a Section 11 application.


Conclusion and the way forward


What is relevant to note is that the three judges that constituted the full bench in the Arif Azim case also formed part of the seven-judge bench in the N. N. Global case. It is trite that the ratio of a seven-judge bench can only be modified by a subsequent bench of seven or more judges.


It therefore remains to be seen as to how the Courts shall proceed to apply the ratio of the Arif Azim case, so long as the ratio in the N. N. Global case holds the fort. More particularly, if the omission of Section 11 (6A) actually comes to be notified, the ratio of the Arif Azim case, to the extent it authorises referral courts to divulge into the question of the substantive claims being barred by limitation, shall need a relook. Further, post the omission of Section 11 (6A) from the Act, when the scope of scrutiny by a referral court would be rendered extremely restricted, the suggestion of the SC in the Arif Azim case, for the legislature to firstly introduce a specific period of limitation under Section 11 and secondly, to keep such prescribed period of limitation shorter than three (3) years would become more relevant now than ever.


 

*Nidhisha Garg is an Associate at Trilegal. The article has been written by the author in her personal capacity and does not represent the views of the firm with which she is associated.

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1 Comment


Digvijay Khatai
Digvijay Khatai
Jun 25

Hence, the incessant ambiguity around the issue of the interference of referral courts in deciding the arbitrability of disputes still prevails. An insightful article that clarifies the latest position of law on the issue in light of the Arif Azim Verdict.

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