In a recent case of M/S Arif Azim Co. Ltd. vs M/S Aptech Ltd, Arbitration Petition No. 29 of 2023, the Supreme Court held that the Limitation Act, 1963, applies to proceedings for appointing an arbitrator under Section 11(6) of the Arbitration and Conciliation Act, 1996 (“A&C Act”). This ruling signifies that if claims exceed the time limit when arbitration begins, the court can refuse to proceed with the reference. The three-judge bench, comprising Dr. DY. Chandrachud, CJI, J.B. Pardiwala, and Manoj Misra, JJ., addressed the limitation issue. Justice J.B. Pardiwala authors the judgment.
Facing a dispute in a contract dated March 21, 2013, the petitioner sought arbitrator appointment. The court prevented a time-barring issue by recognizing that the petition arrived within three years of the respondent’s non-compliance with the arbitration notice. Furthermore, the timely issuance of the notice (within three years of the cause of action) ensured the claims’ validity at the outset of the arbitration.
Factual Background:
The petitioner, an Afghanistan-based company offering computer education and language training, signed three franchise deals with Mumbai-based respondent providing similar services. Disputes arose over royalty fees and renewals. In 2018, the respondent issued a recovery notice for unpaid fees, prompting the petitioner to decide against renewal. Three years later, in 2021, the petitioner sent a legal notice regarding non-payment. Mediation attempts failed, leading to arbitration invocation in 2022. The respondent claimed time-barred claims. After failed arbitration nominations, the petitioner approached the Supreme Court in 2023 for resolution.
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:
On the first issue, the Court ruled that the Limitation Act, 1963, applies to arbitration proceedings governed by the Arbitration and Conciliation Act, 1996. It established that the timeframe for filing an Application under Section 11(6) of the Arbitration and Conciliation Act, 1996 is three years from when the right to apply arises.
Furthermore, the Supreme Court clarified that the right to apply under Section 11(6) arises only after one party issues a valid Notice invoking arbitration to the other party, and there is a subsequent failure or refusal by the other party to appoint an arbitrator within the specified period.
According to the Court, the limitation period for filing the Section 11(6) application begins at the end of the specified period given for the other party to comply with the Notice. The arbitration process began on November 24, 2022, when the petitioner issued a notice to the respondent. The respondent had until December 28, 2022, to comply with the notice. Consequently, the limitation period for filing the Application commenced on 28.12.2022.
To avoid a time-bar issue, the petitioner strategically filed their application on April 19, 2023, well within the three-year limitation window. The court acknowledged this timely filing and ruled that the petition under Section 11(6) of the Arbitration and Conciliation Act, 1996 was not barred by limitations.
Further, to address the second issue, the Court delineated various objections that may arise against an arbitrator’s appointment under Section 11(6) of the Act. These objections fall into distinct categories:
Firstly, jurisdictional issues encompass concerns regarding the arbitrators’ authority, such as challenges to their competence, the validity of the arbitration agreement, or the absence of party consent.
Secondly, admissibility issues revolve around the nature of the claim, including procedural challenges like claims being time-barred by limitation.
Additionally, the Court emphasized the significance of the assertion of a claim and its denial or repudiation by the opposing party in triggering a dispute. It highlighted the crucial moment, termed as the “breaking point,” when parties abandon settlement efforts and contemplate arbitration.
Furthermore, the Court addressed the impact of the Covid-19 pandemic on limitation periods, recognizing the unprecedented disruptions it caused. It ordered the exclusion of the period from 15.03.2020 to 28.02.2022 from limitation calculations.
Finally, the Court clarified the calculation of the remaining limitation period, stating that the balance period on 15.03.2020 would be available from 01.03.2022 onward.
The Respondent received the arbitration notice within three years of the claim’s cause of action arising. Filing the petition within three years of the cause of action preserves the validity of the Petitioner’s claims at the outset of arbitration.
Moreover, the Court proposed a two-pronged approach to evaluate limitation issues in Section 11(6) Petitions under the Arbitration and Conciliation Act, 1996. Firstly, the Court must determine if the Petition itself is time-barred, and secondly, whether the claims to be arbitrated are dead claims barred by limitation at the commencement of arbitration proceedings.
Judgement cited:
The Court referred to SBP & Co. v. Patel Engg. Ltd., (2005) 8 SCC 618, wherein it was held that the issue of limitation being one of threshold importance, it must be decided at the pre-reference stage, so that the other party is not dragged through a long-drawn arbitration, which would be expensive and time consuming and Geo Miller & Co. (P) Ltd. v. Rajasthan Vidyut Utpadan Nigam Ltd., (2020) 14 SCC 643 , wherein it was held that the period of limitation for the commencement of an arbitration runs from the date on which, had there been no arbitration clause, the cause of action would have accrued.
Conclusion:
The Apex Court allowed the Petition and appointed Shri Justice Sanjay Kishan Kaul, Former Judge of the Supreme Court of India, as the sole arbitrator. The parties will consult together to determine the arbitrator’s fees and other arrangements. Additionally, both parties retain the right to raise any other rights or arguments before the arbitrator.
Furthermore, 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, to prescribe a specific period of limitation within which a party may move the Court for appointment of an Arbitrator under Section 11 A&C Act.
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