Court May Refuse To Appoint Arbitral Tribunal If S.11(6) Petition Is Barred By Limitation Or Claim Is Ex-Facie Time Barred

Summary:

[1] In a recent ruling, a Bench of three (3) Hon’ble Judges of the Hon’ble Supreme Court held that the Limitation Act, 1963 is applicable to proceedings for appointment of arbitrator under Section 11(6) of the Arbitration and Conciliation Act, 1996 (“A&C Act“), and a Court may refuse to make a reference if the claims, on the date of commencement of arbitration proceedings, are ex-facie barred.

Facts:

The petitioner, a company based in Afghanistan is engaged in the business of providing training in computer education, information technology, English language, etc., whereas the respondent, is a company having its registered office in Mumbai, Maharashtra, India and is engaged in the business of providing training and education in information technology through its network in India and abroad.

On 21.03.2013, three separate franchise agreements were entered into between petitioner/franchisee and the respondent/franchisor. As per the terms of the said agreements, the petitioner, as the franchisee, was granted a non-exclusive license, by the respondent to establish and operate businesses. In 2018, disputes arose between the parties in relation to the renewal and payment of royalties for all three franchise agreements. On 23.04.2018, the petitioner informed the respondent of its decision to not renew two out of the three franchise agreements in light of the dispute regarding the payment for the course executed by the petitioner.

It was after about nine months, that the petitioner once again sent an email to the respondent on 29.12.2018, raising the issue of the non-payment of the dues. After a gap of around three years thereafter, the petitioner again took up the issue of non-payment of dues with the respondent, vide a legal notice dated 26.08.2021. Again, after about 10 months after the legal notice, the petitioner invoked a pre-institution mediation before the Main Mediation Centre, Bombay High Court on 05.07.2022 in accordance with Section 12A of the Commercial Courts Act, 2015, however the opposite party refusing to go into mediation, a non-starter report dated 24.08.2022 was issued.

After the failure of mediation as aforesaid, the petitioner resorted to a notice for invocation of arbitration to the respondent on 24.11.2022. The respondent replied to the aforesaid notice vide letter dated 05.04.2023 denying all the claims raised by the petitioner in the notice dated 24.11.2022. It further stated that notwithstanding the merits, the claims were barred by limitation.

Issue:

The following issues were framed for consideration of the three (3) Judge Bench:

1. 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?
2. Whether the court may refuse to make a reference under Section 11 of Act, 1996 where the claims are ex-facie and hopelessly time-barred?

Judgment:

At the outset, perusing Section 11(6), the Court noted that no time limit has been prescribed in the provision for filing an application for appointment of arbitrator. However, Section 43 stipulates that the Limitation Act would apply to arbitrations as it applies to proceedings in court. Next, it observed that none of the Articles in the Schedule to the Limitation Act provides a time period for filing an application under Section 11(6) of the A&C Act. As such, it would be covered by Article 137 of the Limitation Act – the residual provision.

Proceeding on this basis, the Court explored the question as to when the right to apply under Section 11(6) would accrue to a party. It was opined that the limitation period 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.”

It was added that it is the duty of 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.

Ultimately, the Court enunciated a two-prong test, to be applied while dealing with the issue of limitation in relation to a petition under Section 11(6), as follows:

• Whether the petition under Section 11(6) of the A&C Act is barred by limitation, and
• 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 the issues has an answer which goes against the party seeking referral of disputes to arbitration, a court may refuse to appoint arbitral tribunal, it said.

Applying the test to the facts of the present case, the Court noted that (i) the arbitration petition was filed within a period of 3 years from the date when the respondent failed to comply with the notice and (ii) the notice for invocation of arbitration was issued by the petitioner within a period of 3 years from the date of accrual of cause of action. In this view of the matter, the petition was allowed and a former Supreme Court judge (Justice S. K. Kaul), appointed to act as the sole arbitrator.

Analysis:

The Supreme Court’s verdict underscores the imperative for legislative intervention to prescribe a specific limitation period for Section 11(6) applications, aligning with the expeditious resolution of commercial disputes envisaged by the Arbitration and Conciliation Act, 1996. The decision not only provides clarity on the limitation period but also reaffirms the court’s commitment to facilitating efficient arbitration proceedings. This seminal ruling serves as a clarion call for stakeholders and policymakers to ensure a robust legal framework conducive to the swift and equitable resolution of commercial disputes through arbitration. Moving forward, it is incumbent upon Parliament to heed the court’s call for legislative amendments to address the lacuna in the law and uphold the principles of justice and expediency in arbitration proceedings.

[1] BEFORE THE HON’BLE SUPREME COURT

ARB. P. NO. 29 OF 2023

Judgment dated 1st March, 2024

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