SUPREME COURT URGES PARLIAMENT FOR AMENDMENT OF THE LIMITATION ACT SPECIFYING A LIMITATION PERIOD FOR FILING APPLICATIONS FOR THE APPOINTMENT OF ARBITRATORS.

A three-Judge Bench of the Supreme Court comprising of Chief Justice Dr. Dhananjaya Y. Chandrachud and Justice J.B. Pardiwala and Manoj Mishra passed a Judgement dated 01-03-2024 in the matter of M/S Arif Azim Co. Ltd. vs M/S Aptech Ltd, Arbitration Petition No. 29 of 2023 and held that the period of three years as laid down under Article 137 of the Limitation Act, 1963 to be excessively long for applying for the appointment of an arbitrator under Section 11 of the Arbitration and Conciliation Act, 1996 (Act of 1996). Furthermore, the Court has recommended that the Parliament amend the Act of 1996 to include a specific time limit for Parties to request the Appointment of an Arbitrator.

FACTS:

i) That the Petition filed before the Apex Court by one, M/S Arif Azim Co. Ltd., (Appellant) against the M/S Aptech Ltd, (Respondent) was filed under Section 11(6) of the Arbitration and Conciliation Act, 1996, (Appointment of Arbitrators). The Petitioner is a Company based in Kabul, Afghanistan, engaged in providing computer education, English language, information technology, and other related training to students. The Petitioner requests the appointment of an arbitrator to resolve disputes or claims that have arisen from the AELA Franchise Agreement (Agreement) signed on 21.03.2013 between the Petitioner and the Respondent, an Indian company engaged in providing IT training.

ii) Further, this Agreement allowed the Petitioner to operate businesses under the trade names Aptech English Language Academy (AELA), Aptech Computer Education (ACE), and Aptech Hardware and Networking Academy (AHNA).

iii) The Agreement granted the Petitioner a non-exclusive license to establish and operate an English learning academy in Kabul, Afghanistan. It included provisions for payment of initial lump sum fees and recurring royalty fees based on gross collections. The Agreement also addressed renewal, termination, force majeure, arbitration, and governing laws.

iv) In 2016, the Indian Council for Cultural Relations (ICCR) accepted a proposal from the Respondent to execute a short-term English training course for Afghan students selected for Indian university degree courses. The Petitioner executed the course from February to April 2017 for 440 students, certified by the Embassy of India in Kabul.

v) Subsequently disputes arose regarding renewal and payment of royalties for all Franchise Agreements. In 2018, the Respondent issued a recovery Notice for non-payment of royalties. Email exchanges ensued regarding payments received from the ICCR for the executed course. The Petitioner claimed entitlement to 90% of the payments received by the Respondent.

vi) Discussions regarding payments halted in March 2018, when the Parties were renewing the Agreements. In April 2018, the Petitioner decided not to renew the AELA and ACE Agreements due to payment disputes but renewed the AHNA Agreement.

vii) The Petitioner raised the issue of non-payment for the ICCR project in December 2018 and sent a Legal Notice in August 2021 demanding payment with interest. Further, the Mediation was initiated in July 2022, but the Respondent refused to participate. The Petitioner invoked arbitration in November 2022, but the Respondent denied the claims citing limitation and the ongoing mediation process.

viii) After the Respondent failed to nominate an arbitrator, the Petitioner filed the present Petition on 19.04.2023, seeking a resolution of the disputes.

SUPREME COURT:

The Petitioner was aggrieved by the Reply received from the Respondent on 05.04.2023, which denied all the claims raised by the Petitioner in the Notice invoking Arbitration dated 24.11.2022. The Respondent further stated that even if the claims had merit, they were barred by the limitation period. The Petitioner therefore filed the present Petition.

OBSERVATIONS

FIRST ISSUE:

The issue before the Apex Court is whether the Limitation Act, 1963 applies to an application for the appointment of an arbitrator under Section 11(6) of the Arbitration and Conciliation Act, 1996, and if so, whether the present Petition seeking appointment of an arbitrator is barred by limitation.

The Court held that the Limitation Act, 1963 applies to arbitration proceedings under the Arbitration and Conciliation Act, of 1996. Further, the limitation period for filing an Application under Section 11(6) of the Arbitration and Conciliation Act, 1996 is three years from the date when the right to apply accrues.

Further, the Apex Court stated that the right to apply under Section 11(6) accrues only after a valid Notice invoking arbitration has been issued by one party to the other party, and there has been a failure or refusal on the other party’s part to make the appointment of an arbitrator within the specified period.

According to the Bench, the limitation period for filing the Section 11(6) application starts from the end of the specified period given to the other party to comply with the Notice. In the case provided, the Notice for invoking arbitration was issued on 24.11.2022, and the specified period for compliance ended on 28.12.2022. Therefore, the limitation period for filing the Application started on 28.12.2022.

Since the Application was filed on 19.04.2023, which is within three years from the start of the limitation period, the Court concluded that the Petition under Section 11(6) of the Arbitration and Conciliation Act, 1996 is not barred by limitation.

SECOND ISSUE:

The second issue before the Apex Court is whether the Court may refuse to make a reference under Section 11 of the Arbitration and Conciliation Act, 1996, when the claims sought to be arbitrated are ex-facie and hopelessly time-barred.

Further, to address this issue, the Court distinguished between different categories of objections that may be raised against an application for the appointment of an arbitrator under Section 11(6) of the Act:

1) Jurisdictional issues/objections: These pertain to the power and authority of the arbitrators to hear and decide a case. Examples include objections to the competence of arbitrators, existence/validity of the arbitration agreement, and absence of consent of the Parties to submit disputes to arbitration.

2) Admissibility issues/objections: These relate to the nature of the claim and include challenges to procedural requirements, such as claims or parts thereof being barred by limitation.

3) Assertion of Claim and Denial/Repudiation: The Court emphasized that a dispute arises when one party asserts a claim, and the other party either denies or repudiates it. Mere failure to pay does not necessarily constitute a cause of action unless there is a clear assertion of claim followed by denial or non-response by the other party.

4) Breaking Point for Commencement of Cause of Action: The Court highlighted the importance of identifying the “breaking point” at which any reasonable party would have abandoned settlement efforts and contemplated referral of the dispute to arbitration. This breaking point marks the commencement of the cause of action.

5) Impact of Covid-19 Pandemic on Limitation Period: The Court acknowledged the unprecedented circumstances arising from the Covid-19 Pandemic, which halted everyday life and commercial activity globally. In response, the Court issued orders to exclude the period from 15.03.2020, to 28.02.2022, for the computation of limitation in judicial or quasi-judicial proceedings.

6) Calculation of Balance Limitation Period: The Court clarified that the balance limitation period remaining on 15.03.2020, would become available from 01.03.2022. This balance period was calculated by determining the number of days between March 15, 2020, and the date when the limitation period would have ended under ordinary circumstances.

The Court addressed the issue of when arbitration is deemed to have commenced and made the following observations:

(1) Commencement of Arbitral Proceedings: According to Section 21 of the Arbitration and Conciliation Act, 1996, arbitral proceedings in relation to a dispute commence when a request for arbitration is received by the Respondent unless otherwise agreed by the Parties.

(2) Significance of Commencement for Limitation: The commencement of arbitration proceedings is significant for the applicability of the Indian Limitation Act, as stated in Section 43(1) of the Arbitration and Conciliation Act, 1996.

(3) Deemed Commencement: Arbitration is deemed to have commenced when one party serves a Notice requesting the appointment of an arbitrator to the other party, as per Section 21 of the Act.

(4) Service of Notice: The service of Notice invoking arbitration, setting out the particular dispute, must be received by the other party within a period of three years from the rejection of a final bill, failing which the time bar would prevail.

In the present case, the Notice invoking arbitration was received by the Respondent within the three-year period from the date on which the cause of action for the claim had arisen. Therefore, the claims sought to be raised by the Petitioner are not considered time-barred or dead claims at the commencement of arbitration.

The Court proposed a two-pronged test for considering limitation issues in Section 11(6) Petitions under the Arbitration and Conciliation Act, 1996. Firstly, the Court should determine if the Petition itself is barred by limitation, and secondly, whether the claims sought to be arbitrated are dead claims barred by limitation at the commencement of arbitration proceedings.

CONCLUSION:

Based on the above-mentioned facts, 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 fees and other modalities concerning the arbitrator would be fixed in consultation with the Parties. Additionally, all other rights and contentions were kept open for the Parties to raise before the arbitrator.

Furthermore, the Court expressed its concern regarding the absence of a specific time limit for filing Applications under Section 11 of the Arbitration and Conciliation Act, 1996. It recommended that Parliament should consider amending the Act to prescribe a specific period of limitation for such Applications, aligning with the Act’s objective of expeditiously resolving commercial disputes. The Petition was disposed of accordingly.

 

Sakshi Raghuvanshi

Legal Associate

The Indian Lawyer

 

Editor’s Comments:

Due to the Pandemic, the limitation for filing original matters lapsed during the Pandemic Period. The Supreme Court of India however came to the rescue of several litigants by suspending/excluding the period from 15.03.2020 to 28.02.2022, for the computation of limitation in judicial or quasi-judicial proceedings. This has helped many a litigant whose limitation expired during the Pandemic Period. In the present case also, the Applicants were rescued by this exclusion period of 715 days thereby allowing them to file the Section 11 (6) applications.

 

Sushila Ram Varma

Chief Consultant

The Indian Lawyer