INTRODUCTION

The hon'ble Supreme Court in its judgment titled Bharat Sanchar Nigam Limited Vs. Nortel Networks India Private Limited1 dated 10.03.2021 examined an appeal under Section 11 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as "Act") wherein the division bench comprising of Justice Indu Malhotra and Justice Ajay Rastogi deliberated upon two important issues, namely: (i) the period of limitation for filing an application under Section 11 of the Act; and (ii) whether the court may refuse to make the reference under Section 11 where the claims are exfacie time-barred.

BRIEF FACTS

Bharat Sanchar Nigam Limited (hereinafter referred to as "BSNL" or "Appellant") invited bids for execution of certain works related to mobile network in southern India. After the tender process, the Appellant awarded the works to M/s. Nortel Networks India Private Limited (hereinafter referred to as "Nortel" or "Respondent") under a purchase order. Thereafter, upon completion of the works under the purchase order, the Appellant deducted / withheld certain amounts towards liquidated damages and other levies. The Respondent raised a claim for refund of the said amounts in 2014, which was rejected by the Appellant vide its letter dated 04.08.2014.

After a period of over 5½ years, the Respondent vide its letter dated 29.04.2020 invoked the arbitration clause and requested for appointment of an independent arbitrator wherein it was contended that the dispute of withholding the aforesaid amounts would fall within the ambit of arbitrable disputes under the purchase order. The Appellant rejected the Respondent's request for appointment of an arbitrator saying that the request could not be entertained, since the limitation for invoking the arbitration notice had lapsed, and as per Section 43 of the 1996 Act, the notice invoking arbitration was time barred. The Respondent was constrained to file an application under Section 11 of the Act (Section 11 Application) before the hon'ble High Court of Kerala (High Court) for appointment of an arbitrator. The High Court vide its order dated 13.10.2020 referred the disputes to arbitration. Subsequently, the Appellant herein filed a review petition before the High Court, which was dismissed by the High Court vide its order dated 14.01.2021.

Thereafter, the Appellant filed the present civil appeal to challenge the orders dated 13.10.2020 and 14.01.2021 respectively. The hon'ble Supreme Court also appointed Mr. Arvind Datar, Senior Advocate as Amicus Curiae to assist the court on the legal issues, which are detailed herein below:

SUBMISSIONS ON BEHALF OF PARTIES

The Appellant contended that the Respondent had slept over its right for more than five years since the cause of action arose upon rejection of its claim on 04.08.2014. Therefore, the notice invoking arbitration had become stale, non-arbitrable and non-enforceable. It further contended that the High Court had wrongly proceeded on the premise of mere existence of a valid arbitration agreement between parties, without considering that such an agreement was inextricably connected with the existence of a live dispute. The limitation period for invoking arbitration was covered under Article 137 of the Schedule to the Limitation Act, 1963 (Limitation Act) and as such, in the present case, the invocation of arbitration was ex-facie time barred.

Per contra, it was the contention of the Respondent that in light of the amendment to Section 11 by the Arbitration and Conciliation (Amendment) Act, 2015 (2015 Amendment Act), Section 11 (6A) provided for a limited scope of inquiry at the pre-reference stage, which was restricted to only the 'existence' of an arbitration agreement. As such, the objections with respect to claims being time-barred could be decided by the arbitral tribunal. It was further contended that the starting point of limitation for initiating a Section 11 application was expiry of 30 days from the date of issuing notice of arbitration and therefore, the cause of action was a continuing one. Hence, the High Court had rightly held that the issue of limitation was to be decided by the arbitral tribunal.

ISSUES IN QUESTION

  1. What is the period of limitation for filing an application under Section 11 of the Act?
  2. Whether the court may refuse to make a reference under Section 11 of the Act where claims are exfacie time barred.

OBSERVATIONS AND CONCLUSIONS OF THE COURT

WHAT IS THE PERIOD OF LIMITATION FOR FILING AN APPLICATION UNDER SECTION 11 OF THE ACT?

The hon'ble court first delved into various provisions under the Act emphasizing upon arbitral proceedings being time-bound in nature such as Section 8, Section 9(2), Section 13, Section 16(2) and Section 34(3) of the Act; various other provisions enacted by the 2015 Amendment Act; and also, the Commercial Courts Act, 2015 enacted contemporaneously with the 2015 Amendment Act for speedy disposal of high value commercial disputes.

It further observed that since the Act does not specify any time-period for filing an application under Section 11 of the Act, recourse had to be taken to the Limitation Act as prescribed under Section 43 of the Act which states that the Limitation Act shall apply to arbitrations, as it applies to proceedings in court. Further, since none of the Articles in the Schedule to the Limitation Act provides for a time-period for filing an application under Section 11, it would be covered by the residual provision of Article 137 of the Limitation Act, which makes it clear that the limitation for filing an application under Section 11 would arise upon failure to make the appointment of arbitrator within 30 days from issuance of notice of arbitration.

The court clarified that the period of limitation for filing a petition seeking appointment of arbitrator could not be confused with the period of limitation applicable to substantive claims made in the underlying commercial contract. The court further referred to various judgments such as Leaf Biotech Vs. Municipal Corporation Nashik2, Deepdarshan Builders Pvt. Ltd. Vs. Saroj3, Prasar Bharti Vs. Maa Communication4, Golden Chariot Vs. Mukesh Panika5 and Geo Miller & Co. Pvt. Ltd. Vs. Chairman, Rajasthan Vidyut Utpadan Nigam Ltd.6 on the applicability of Article 137 of the Limitation Act to applications made under Section 11 of the Act and observed that the reasoning in all the aforesaid judgments was that since an application under Section 11 was to be filed in a court of law, and since no specific Article of the Limitation Act applied, the residual Article 137 would become applicable, meaning thereby that the period of limitation to file an application under Section 11 was 3 years from the date of refusal to appoint the arbitrator, or on expiry of 30 days, whichever was earlier. The court observed the same to be unduly long period for filing an application under section 11, and that it was running contrary to the scheme of the Act which aimed at expeditious disposal. It suggested the Parliament to consider amending Section 11 of the Act to provide a period of limitation for filing an application under the said section which would be in consonance with the object of the Act.

In light of the specific provisions and the judgments of various courts on this issue, the hon'ble bench held that since the Respondent issued the notice of arbitration on 29.04.2020, which was rejected by the Appellant on 09.06.2020, and since the Section 11 Application was filed before the High Court on 24.07.2020, it was filed within the limitation period of 3 years as prescribed under Article 137 of the Limitation Act.

WHETHER THE COURT MAY REFUSE TO MAKE A REFERENCE UNDER SECTION 11 OF THE ACT WHERE CLAIMS ARE EX-FACIE TIME BARRED.

Firstly, the court delved into the legislative history of the enactment of Section 11 and observed that prior to the 2015 Amendment Act, by virtue of its decision in SBP & Co. Vs. Patel Engineering Ltd.7 and National Insurance Co. Ltd Vs. Boghara Polyfab Pvt. Ltd.,8 the court/ appointing authority exercised enlarged scope of power for appointing an arbitrator, and deciding various issues at a pre-reference stage. The courts at that point of time could go beyond the question of mere existence of the arbitration agreement.

Subsequently, the 2015 Amendment Act was enacted to insert Section 11(6A), the effect of which was that if the existence of the arbitration agreement was not in dispute, all other issues would be left for the arbitral tribunal to decide. This was in reinforcement of the doctrine of kompetenz-kompetenz, which empowers the tribunal to rule on its own jurisdiction, including any objections with respect to the validity of the arbitration agreement; and thereby minimizing judicial intervention at the pre-reference stage. Consequently, the scope of examination at the Section 11 stage got strictly confined to the existence of an arbitration agreement.

The hon'ble court while adjudicating upon the second issue also examined various judgments whereby Subsection (6A) came up for consideration such as Duro Felguera SA Vs. Gangavaram Port Ltd9, wherein the Supreme Court had held that from a reading of Section 11(6-A), the intention of the legislature was crystal clear i.e., the court should and need only look into one aspect—the existence of an arbitration agreement. It was further held in this case that the scope of the power under Section 11(6) of the 1996 Act was considerably wide in view of the decisions in SBP and Co.10 and Boghara Polyfab11 and this position continued till the amendment was brought about in 2015. However, after the amendment all that the courts needed to see was whether an arbitration agreement existed—nothing more, nothing less.

The court also examined the judgements of Mayavati Trading Company Private Ltd. Vs. Pradyut Dev Burman12and Uttarakhand Purv Sainik Kalyan Nigam Vs. Northern Coal Field Limited13and duly considered the subsequent amendment proposed in Section 11 of the Act by way of the Arbitration and Conciliation (Amendment) Act, 2019, consequently due to which Section 11(6A) would be omitted once the Amendment is notified.

The court observed that limitation was a mixed question of law and fact, however, there was a distinction between jurisdictional and admissibility issues. It observed at Paragraph 30 that "30. ... An issue of 'jurisdiction' pertains to the power and authority of the arbitrators to hear and decide a case. Jurisdictional issues include objections to the competence of the arbitrator or tribunal to hear a dispute, such as lack of consent, or a dispute falling outside the scope of the arbitration agreement. Issues with respect to the existence, scope and validity of the arbitration agreement are invariably regarded as jurisdictional issues since these issues pertain to the jurisdiction of the tribunal". It was further observed that an admissibility issue was not a challenge to the jurisdiction of the arbitrator to decide the claim. The court noted at Paragraph 32 that: "32. The issue of limitation, in essence, goes to the maintainability or admissibility of the claim, which is to be decided by the arbitral tribunal. For instance, a challenge that a claim is time-barred, or prohibited until some precondition is fulfilled, is a challenge to the admissibility of that claim, and not a challenge to the jurisdiction of the arbitrator to decide the claim itself."

The court also referred to judgment passed by the Singapore Court of Appeals in Swisbourgh Diamond Mines Vs. Kingdom of Lesotho14 and BBA & Ors. Vs. BAZ & Anr.15 to highlight the "tribunal versus claim" test and observed that the said test helped to ascertain whether the objection was directed towards the tribunal, jurisdictional, or the claim, admissibility. Applying this test, a distinction could be made between issues of jurisdiction and admissibility. The hon'ble Supreme Court also relied upon the three-judge bench in Vidya Drolia Vs. Durga Trading Corporation,16 on the scope of power under Sections 8 and 11, where it was held that "the court must undertake a primary first review to weed out 'manifestly ex facie non-existent and invalid arbitration agreements, or non-arbitrable disputes". It was further held that only when the court was certain that no valid arbitration agreement existed, or that the subject matter was not arbitrable, that reference might be refused.

Based on the aforementioned judgments and settled legal principles, the court concluded that it was only in very limited category of cases that there existed no doubt as to whether the claim was ex-facie time-barred, or that the dispute was non-arbitrable, for the court to decline to make reference. However, if there was even the slightest doubt, the rule was to refer the disputes to arbitration, otherwise it could encroach upon what was essentially a matter to be determined by the tribunal.

Therefore, in the light of aforesaid reasoning, and after due consideration of various statutes and settled judicial precedents, the hon'ble Supreme Court held that the Respondent's claims were ex facie time-barred as the Respondent did not take any action whatsoever after the rejection of its claim by the Appellant on 04.08.2014. It had raised the notice of arbitration only on 29.04.2020 i.e., over 5 years after the Respondent's claims were rejected. Thus, the dispute between parties could not be referred to arbitration. Resultantly, it allowed the civil appeals in question and set aside the impugned orders dated 13.10.2020 and 14.01.2021 passed by the hon'ble High Court.

CONCLUSION AND ANALYSIS

The Supreme Court by way of this judgment has held that (a) limitation period for filing an application under Section 11 of the Act would be three years from the date when there is failure to appoint the arbitrator; and (b) a court may refuse to make the reference to arbitration where claims are ex facie time barred. The ruling of the Supreme Court in the present judgment is a welcome step for the much-needed clarity over the jurisprudence of Section 11, specifically in light of the various judgments and the amendments introduced to the provision per se. The court has made it clear that interference at the stage of Section 11 is warranted only in exceptional circumstances. However, in light of the wordings of the Vidya Drolia judgment17 wherein the court had equated examination under section 11 of the Act to review under Section 8 of the Act, there is still the need for a well-defined and summary clarification from a larger bench.

Further, the hon'ble court has rightly pointed out that the limitation of three years for filing an application under Section 11 of the Act, as prescribed under Article 137 of the Limitation Act is a fairly long duration, which is not in consonance with the objectives of the Act. It is quite often seen that the refractory parties tend to take undue advantage of this extended period of limitation and therefore, an amendment to shorten this period of limitation for filing an application under Section 11 of the Act would be extremely beneficial in the regime of Indian arbitration.

Footnotes

1. Civil Appeal Nos. 833-844 of 2021 arising out of SLP (C) No. 1531-32/2021

2. 2010 (6) MhLJ 316

3. (2019) 1 AIR Bom. R 249, SLP (C) No. 305/2019 against this decision was dismissed on 16.02.2019

4. 2010 (115) DRJ 438 (DB)

5. 2018 SCC Online Del 10050, SLP (C) No. 40627/2018 against this decision was dismissed on 31.01.2019

6. (2020) 14 SCC 643

7. (2005) 8 SCC 618

8. (2009) 1 SCC 267

9. (2017) 9 SCC 729

10. Supra., Note 7.

11. Supra., Note 8.

12. (2017) 9 SCC 729

13. (2020) 2 SCC 455

14. (2019) 1 SLR 263

15. (2020) SGCA 53

16. (2021) 2 SCC 1

17. Supra., Note 16.

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