Supreme Court Prescribes three years limitation period for appointment of Arbitrator

Contributed by: Khaitan & Co




INTRODUCTION


The Supreme Court of India (“Supreme Court”) vide a judgment dated 10 March 2021 in the case of Bharat Sanchar Nigam Limited & Anr. v. M/s Nortel Networks India Private Limited held that the period of limitation for an application under Section 11 of the Arbitration and Conciliation Act, 1996 (“Act”) would be governed by Article 137 of the Limitation Act, 1963 (“Limitation Act”) from the date when there is a failure to appoint the arbitrator.


FACTUAL BACKGROUND


The Appellant invited tenders, which was applied for and granted to the Respondent for carrying out works related to GSM cellular mobile network in certain circles in Kerala, Karnataka, Tamil Nadu, and Andhra Pradesh . The Appellant withheld Rs. 100 crores on account of liquidated damages and other levies on completion of the project. The Respondent in order to reclaim the amount issued a letter dated 13 May 2014, to which the Appellant replied on 4 August 2014 denying the contentions of the Respondent.


Arbitration was invoked by the Respondent, after a period of about 5 and a half years, vide letter dated 29 April 2020. In its reply, the Appellant, turned down the request for appointment of an arbitral tribunal basing its reasoning on Section 43 of the Act. The Kerala High Court was approached by the Respondent under Section 11 of the Act for appointment of an arbitrator. The appointment was made by the High Court vide order dated 13 October 2020. The review was filed by the Appellant, was dismissed on 14 January 2021. Aggrieved thereof, the Appellant approached the Supreme Court.


ISSUE

The following issues were framed by the Supreme Court for consideration:

  1. the period of limitation for filing an application under Section 11 of the Act; and

  2. whether the Court may refuse to make the reference under Section 11 where the claims are ex facie time-barred?


ARGUMENTS BY THE APPELLANT

  • The Appellant contended that the Respondent had slept over its alleged rights for over 5 ½ years, before issuing the notice of arbitration on 29.04.2020. From 04.08.2014 till 29.04.2020, Respondent did not take any action. As a result, the arbitration notice became “legally stale”, “non-arbitrable” and “unenforceable”.

  • Even though limitation is a mixed question of fact and law, and is ordinarily to be decided by the arbitral tribunal, in cases where the invocation of the arbitration agreement is ex facie time barred, the Court must reject the request for appointment of an arbitrator. The limitation period for invoking arbitration, and seeking appointment of an arbitrator is at par with a civil action, and would be covered by Article 137 of the Schedule to the Limitation Act.

  • Section 11(6A) of the Act uses the phrase “examination of the existence of an arbitration agreement”, which would imply that the power conferred upon the Court is not a formal exercise, but requires a certain degree of examination before making the reference.


ARGUMENTS BY THE RESPONDENT

  • The Respondent submitted that the starting point of limitation for initiating a proceeding under Section 11 of the Act is the expiry of 30 days’ from the date of issuing notice of arbitration on 29.04.2020. The cause of action was, therefore, a continuing one.

  • The distinction between the limitation for filing an application under Section 11 of the Act, and with respect to the underlying claims does not survive post the 2015 Amendment, since the role of the Court is only limited to examine the existence of the arbitration agreement between the parties.

  • The Resondent submitted that Section 11 of the Act as amended by the 2015 Amendment provides for a limited scope of enquiry at the pre-reference stage which is restricted only to the “existence” of an arbitration agreement. Further, it is trite law that the objection with respect to the claims being allegedly time barred, could be decided by the arbitral tribunal.


JUDGMENT

  • The Court held that Section 11 of the Act does not prescribe any time period for filing an application under sub-section (6) for appointment of an arbitrator. Resultantly, one would have to take recourse to the Limitation Act as per Section 43 of the Act, which provides that the Limitation Act shall apply to arbitrations, as it applies to proceedings in Court.

  • As the Schedule to the Limitation Act does not prescribe a specific time period for filing of an application under Section 11 of the Act, it would be covered by the residual provision of Article 137, which provides a period of 3 years from the date when the right to apply accrues.

  • The Court held while exercising jurisdiction under Section 11, “the Court may exercise the prima facie test to screen and knockdown ex facie meritless, frivolous, and dishonest litigationThere is a distinction…. between jurisdictional and admissibility issues. ….The issue of limitation, in essence, goes to the maintainability or admissibility of the claim, which is to be decided by the arbitral tribunal.”

  • In very rare and exceptional cases, “where there is not even a vestige of doubt that the claim is ex facie time-barred, or that the dispute is non-arbitrable, that the Court may decline to make the reference.”


CONCLUSION


The Supreme Court vide its judgement has examined the legislative intent behind the Act as well as the judgements passed by the Supreme Court and High Courts on the issues. While holding that Article 137 of the Limitation Act would govern the period of limitation for an application under Section 11 of the Act, reference was made to judgements passed by the High Courts of Bombay and Delhi, which previously held that the period of limitation to file an application under Section 11 is 3 years from the date of refusal to appoint the arbitrator, or on expiry of 30 days, whichever is earlier. In light of the above, the Supreme Court set-aside the judgement of the High Court and dismissed the application under Section 11 of the Act.


Contributed by Khaitan & Co


The above article is authored by Ajay Bhargava (Partner), Trishala Trivedi (Principal Associate), and Shivank Diddi (Senior Associate).