Introduction
In a notable step aimed at expediting arbitration proceedings, a three-judge bench of the Hon'ble Supreme Court of India ("Hon'ble Supreme Court") in M/s Arif Azim Co. Ltd. v. M/s Aptech Ltd [1] commented that the Parliament should consider amending the Arbitration & Conciliation Act, 1996 ("Act") to prescribe a specific period of limitation for applications seeking the appointment of arbitrators under Section 11(6) of the Act. The Hon'ble Supreme Court examined the interplay between Article 137 under the Limitation Act, 1963, and applications for the appointment of arbitrators under Section 11(6) of the Act observing that three years is an unduly long period for filing an application under Section 11(6) of the Act which goes against the spirit of the Act enabling expeditious resolution of commercial disputes in a time-bound manner.
Background
The Petitioner entered into three separate Franchise Agreements ("Agreements") with the Respondent on 21.03.2013 for the operation of training centres in Kabul, Afghanistan. Pursuant to the signing of these Agreements, the Indian Council for Cultural Relations, New Delhi ("ICCR") invited proposals in 2016 for the execution of training courses in English for students from Afghanistan pursuing degree courses at Indian Universities during the academic year 2017-18. The Respondent's proposal was accepted by ICCR vide a Sanction Order dated 10.10.2016 ("Sanction Order"). After securing the Sanction Order, the Respondent informed and appointed the Petitioner to implement the training course as per the Sanction Order. Accordingly, the Petitioner implemented the training course in Kabul from February to April 2017. Thereafter, disputes arose between the Petitioner and the Respondent concerning non-payment of royalties, leading to several email exchanges on outstanding payments, franchise renewal, and disagreements over royalty percentages. After aabout 3 years, the Petitioner issued a legal notice dated 26.08.2021 calling upon the Respondent to make the outstanding payments, failing which, appropriate proceedings will be initiated. This was followed by the initiation of pre-institution mediation before the Bombay High Court. Subsequently, due to failure of mediation, the Petitioner invoked arbitration on 24.11.2022. Following the Respondent's failure to nominate an arbitrator, the Petitioner filed a Petition under Section 11(6) of the Act on 19.04.2023 before the Hon'ble Supreme Court as this case qualified as an international commercial arbitration.
Analysing the Judgment of the Hon’ble Supreme Court
The following issues were framed by the Hon’ble Supreme Court:
- Whether the Limitation Act, 1963 is applicable to an application for appointment of arbitrator under Section 11(6) of the Arbitration and Conciliation Act, 1996? If yes, whether the present petition is barred by limitation?
- Whether the court may refuse to make a reference under Section 11 of the Arbitration and Conciliation Act, 1996 where the claims are ex-facie and hopelessly time-barred?
While determining the first issue, the Hon'ble Supreme Court noted that as per Section 43 of the Act, the provisions of the Limitation Act are applicable to arbitration proceedings. Since none of the Articles in Schedule to the Limitation Act, 1963 provide a specific period for filing an application under Section 11(6) of the Act, it will be covered by Article 137 of the Limitation Act, 1963, which is a residual provision. The Hon’ble Supreme Court clarified that the limitation period for filing an application seeking appointment of an arbitrator commences only after the applicant sends a valid arbitration notice and the other party fails or refuses to comply with the procedure agreed upon between the parties. It is settled law that the limitation period for making an application seeking the appointment of an arbitrator must not be confused with the limitation period for raising the substantive claims which are sought to be referred to an arbitral tribunal.
While answering the second issue, the Hon’ble Supreme Court applied the settled legal position that mere failure to pay may not give rise to a cause of action. It is only once the applicant asserts its claim and the respondent either denies such claim that the cause of action will arise after such denial. It was further observed that although limitation is an admissibility issue, 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.
After analysing the legal position, the Hon’ble Supreme Court held that the courts should satisfy themselves on two aspects by employing a two-pronged test- (i) whether the petition under Section 11(6) of the 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 these issues are answered against the party seeking referral of disputes to arbitration, the Court may refuse to appoint an arbitral tribunal.
Since the notice invoking arbitration was received by the Respondent within three years from the date on which the cause of action for the claim arose, the Hon’ble Supreme Court held that claims sought to be raised by the Petitioner were not ex-facie dead or time-barred on the date of commencement of arbitration proceedings.
While concluding, the Hon'ble Supreme Court reiterated that the three-year period permitted for filing an application under Section 11(6) of the Act is excessively prolonged and contradicts the fundamental ethos of the Act, which aims for the swift resolution of commercial disputes within specified timeframes. Several amendments to the 1996 Act have been introduced over the years to guarantee prompt and efficient conduct and conclusion of arbitration proceedings and therefore, the apex court commented that a legislative amendment should be carried out to prescribe a shorter timeframe for an application to appoint an arbitrator.
Conclusion:
The Judgment is based on the maxim “the law assists those who are vigilant and not those who sleep over their rights”. A specified limitation period serves the purpose of bringing certainty to legal proceedings, assuring the opposing party that it won't face an indefinite period of potential liability.
[1] 2024 SCC Online SC 215