Has ‘Limitation’ Become Limitless? Rethinking the Boundaries for Initiating Arbitration Proceedings

Introduction

In the recent ruling in M/s Arif Azim Co. Ltd. Vs. M/s Aptech Ltd., Arbitration Petition No. 29 of 2023, the Hon’ble Supreme Court undertook an exhaustive exercise of tracing the law and identifying the existing legislative vacuum regarding the limitation for both the initiation of arbitration proceedings and the filing of an application for the appointment of an arbitrator. A precise reading of the Order highlights the point where the Arbitration and Conciliation Act, 1996 (the Act) is failing. The objective of this article is to briefly encapsulate the evolution of limitation within arbitration proceedings and explain the vacuum identified by the Court.

Context of Identification of the ‘Cause of Action’

In arbitration, identifying the ’cause of action’ is crucial. The ’cause of action’ typically arises when a dispute occurs, often marked by one party’s failure to fulfill its obligations, and the right to sue accrues when a reasonable party would abandon settlement efforts and seek arbitration. The Supreme Court has clarified that this “breaking point” signifies when the claimant should reasonably consider initiating arbitration, as discussed in B and TAG v. Ministry of Defence 2023 SCC Online SC 657.

The cause of action is thus identified from the moment when a claimant’s request is refused or ignored by the other party. This refusal can be explicit or implicit through silence. For instance, in Genten Infra Projects Private Limited v. Balagoni Balraj Goud (MANU/TL/0529/2023), the court held that the limitation period begins when the right to sue accrues, which occurs when one party’s claim is refused by the other. This view was reaffirmed in S.L.P. (C). No. 14292 of 2023.

The Court also highlighted the principle that a dispute arises when a party fails to fulfill its obligations, but the right to sue or apply is deferred until a reasonable party abandons bona fide negotiations. This principle was discussed in Vidya Drolia v. Durga Trading Corporation 2021 (2) SCC 1, emphasizing that the “breaking point” marks the start of the limitation period.

Time and Limitation to Issue the Notice of Arbitration

The Act does not prescribe a specific limitation period for issuing an arbitration notice. Consequently, the Supreme Court has applied the general law of the Limitation Act, specifically Article 137. This provision allows for the issuance of an arbitration notice within three years from when the right to sue accrues. This principle was affirmed in multiple cases, such as Secunderabad Cantonment Board v. B. Ramachandraiah & Sons, where the court noted that the limitation for filing an application under Section 11 of the Act starts from the date of the respondent’s refusal.

In Terra Infra Development Limited v. NCC Limited (MANU/TL/1125/2022), the court held that the respondent’s silence to the applicant’s claim amounts to refusal or denial. This view was further affirmed by the Supreme Court in S.L.P. (C). No. 13650 of 2022.

Commencement of Arbitration Proceedings Under Section 21

According to Section 21 of the Arbitration Act, arbitration proceedings are deemed to commence on the date the arbitration notice seeking the appointment of an arbitrator is issued. This commencement date is vital as it marks the starting point for various procedural timelines. The Supreme Court has emphasized this principle in several rulings, including Terra Infra Development Limited v. NCC Limited.

It is a trite law that the arbitral process is initiated when a notice is issued. It is equally settled that in case of multiple notices, limitation would begin to run from the date of the first refusal to appoint an arbitrator

Filing the Arbitration Application Post-Issuance of Notice

Once the arbitration notice is issued, there is a mandatory 30-day waiting period as per Section 11(4) of the Act, during which the respondent can agree to the appointment of an arbitrator. After this period, the party has another three years to file an application for the appointment of an arbitrator under Section 11(6). The Supreme Court, in Secundrabad Cantonment Board v. B. Ramachandraiah & Sons 2021 (5) SCC 705, clarified that the limitation period for filing such an application begins 30 days after the initial request to appoint an arbitrator and is not reset by subsequent rejections or communications.

The Supreme Court also addressed situations where the respondent’s repeated refusals or communications could potentially reset the limitation period. It clarified that the limitation period is fixed based on the first refusal or denial, ensuring that subsequent communications do not extend the limitation period unnecessarily.

Legislative Vacuum and the Need for Amendment

The absence of a specific limitation period in the Act for issuing an arbitration notice results in an effective limitation period of nearly six years. This includes the three-year period for issuing an arbitration notice and an additional three years for filing an application for the appointment of an arbitrator post-notice issuance. The Supreme Court highlighted this extended period as a significant legislative gap, necessitating an amendment to streamline and expedite the arbitration process.

Here’s a step-by-step breakdown of how this effectively creates a six-year window:

• Three-Year Period for Issuing Arbitration Notice: According to the general law of limitation (Article 137 of the Limitation Act, 1963), a party has three years from the date when the right to sue accrues to issue an arbitration notice.
• Commencement of Arbitration Proceedings: Under Section 21 of the Arbitration Act, arbitration proceedings are deemed to commence on the date the arbitration notice is issued.
• Three-Year Period for Filing Application for Arbitrator Appointment: After issuing the arbitration notice, the party has another three years to file an application for the appointment of an arbitrator. This is in line with the general limitation period for filing applications under Article 137 of the Limitation Act.
• 30-Day Waiting Period: There is also a mandatory 30-day waiting period as per Section 11(4) of the Arbitration Act, during which the respondent has an opportunity to agree to the appointment of an arbitrator before the applicant can move the court.

Example Scenario:

• Right to Sue Accrues: January 1, 2020
• Deadline for Issuing Arbitration Notice: December 31, 2022 (3 years from the accrual of the right to sue)
• Issuance of Arbitration Notice: December 31, 2022
• Deadline for Filing Application for Arbitrator Appointment: December 30, 2025 (3 years from the date of the arbitration notice)

From the initial accrual of the right to sue (January 1, 2020) to the final deadline for filing an application for the appointment of an arbitrator (December 30, 2025), the total period amounts to nearly six years. This extended period underscores the need for legislative clarification to streamline and expedite the arbitration process.

Judicial Observations and Scrutiny

The Supreme Court has undertaken a rigorous review to ensure that arbitration claims are not frivolous or time-barred. In Bharat Sanchar Nigam Ltd. v. Nortel Networks India Pvt. Ltd. (2021 (5) SCC 738, relying on Vidya Drolia v. Durga Trading Corporation, the Court emphasized the need for a preliminary review at the referral stage to dismiss clearly time-barred, invalid, or non-arbitrable claims. This practice aims to eliminate meritless claims early in the process, promoting judicial efficiency.

Final Note

In conclusion, the Supreme Court’s exhaustive exercise has highlighted a critical legislative vacuum in the Arbitration and Conciliation Act, 1996. The absence of specific limitation periods for issuing arbitration notices and filing applications for the appointment of arbitrators creates an extended, inefficient process. There is an urgent need for legislative amendments to prescribe clear limitation periods, thereby enhancing the efficiency and predictability of arbitration proceedings in India.