Interplay between Limitation Period & Section 11 of Arbitration Act: Appointment of Arbitrator
Introduction
The expeditious settlement of disputes is one of the main objectives of the Alternate Dispute Resolution. Arbitration is one such method that involves the intervention of a neutral third party rather than the court. The Arbitration and Reconciliation Act, 1996 governs arbitration matters, and the Limitation Act, 1963 applies to arbitration law, like other laws. Section 11 of the Act provides the method for appointing an arbitrator to initiate arbitration proceedings, which has been subject to different court interpretations in recent years. In the recent case of M/s B and T AG v Ministry of Defence, where the question of Section 11 is governed by Article 137 of the Limitation Act, 1963 was discussed and held that the appointment of an arbitrator is subject to the Limitation Act. The cause of action to appoint an arbitrator starts from the breaking point. Further observed that subsequent negotiations between the parties occurring after the cause of action has arisen would not have any impact on the limitation period. This article aims to explore the connection between the limitation period and the cause of action based on different legal provisions and judgments.
Factual Matrix
The present dispute arose when the Defence Ministry initiated a tender for the purchase of Sub Machine Guns. M/s B and T AG (Company) was selected as the successful bidder, and a contract was formalized. However, there are allegations that the company failed to fulfil its contractual obligation by causing a delay in supplying the goods to the Ministry.
In response to the alleged violation, the Ministry instructed the bank to invoke the Bank Guarantee provided by the company to recover the Liquidated Damages imposed on the company. Subsequently, the Ministry deducted the specified amount from Bank Guarantee and transferred the same to its account in 2016. Despite negotiations between the parties until 2019, they were unable to reach a settlement. Consequently, in 2023, a petition was filed under Section 11(6) of Arbitration Act to seek Arbitrator’s appointment to resolve the disputes arising from the contract.
The Ministry challenged the petition as being time-barred. It was argued that the cause of action to appoint an arbitrator started when the amount was deducted. Hence, the limitation period of three years ended way back in 2019. On the other hand, the company claimed that since negotiations went on till 2019, the cause of action was postponed.
Verdict
The court examined the question of applicability of Section 11 of Arbitration Act for appointing an Arbitrator in the light of the limitation act. Since no fixed period under section 11(6) is prescribed by Arbitration Act, the court concluded that the three-year limitation period, provided in the Article 137 of Limitation Act, 1963, would apply to arbitral proceedings. The three-year time limit would begin when the cause of action arises and would commence from the ‘Breaking Point’ when any reasonable party would abandon efforts to settle amicably. The court further observed that negotiations between the parties do not automatically postpone the “cause of action” for the purpose of limitation. Thus, the three-year time limit cannot be invalidated by ongoing negotiations. Consequently, the court dismissed the arbitration petition, as it was deemed to be hopelessly time-barred.
Impact of Limitation Period and Breaking Point
Section 11 of the Act provides for the appointment of arbitrators, and plain reading of clause (6) of the section indicates that no time limit has been prescribed for filing an application. However, as per Section 43, “the limitation act of 1963 would apply to arbitrations as it applies to the proceedings in the court”. As already decided in Consolidated Engineering Enterprises v. Principal Secretary, Irrigation Department and Others, the Limitation Act, 1963 applies to arbitrations and all related proceedings. Since none of the articles in Schedule to the Limitation Act provide a time period for applying Section 11, it would fall under the residual provision under Article 137. Hence, the three-year limitation period would apply to appointing arbitrators. The said period would commence when the right to apply first arises.
The existence of a dispute is essential for appointing arbitrators under section 8, and a dispute can arise only when a claim asserted by one party is denied by the other on any grounds that lead to the arousal of a cause of action. The cause of action to appoint arbitrators arises from the ‘Breaking Point’ when a reasonable party would no longer pursue amicable settlement efforts and instead opt to refer the dispute to arbitration. At this stage, the parties realize that further attempts at amicable resolution are futile. Determining the breaking point is very imperative for calculating the limitation period for bringing action. Even if the parties are uncertain about when the cause of action arose, and there is a delay in sending a notice, they may forfeit their claim. In certain circumstances, the court may exclude the negotiation period for the purpose of computing the limitation period. The breaking point is a question of facts and must be ascertained on a case-to-case basis. The court, through careful examination, must ascertain when the breaking point occurred. The threshold for determining the breaking point is generally lower in commercial disputes and higher in family disputes.
The limitation period for issuing a notice of arbitration would not be extended solely by exchanging letters or engaging in settlement discussions where a final claim is rejected through deductions. The time spent on negotiations is not exempted by the Limitation Act. There must be a clear notice invoking arbitration received by the other party within three years from the cause of action. Failure to provide such notice within the prescribed time frame would result in the time bar. This proposition found its support in BSNL and Anr v. Nortel Networks India Private Limited and Secunderabad Cantonment Board v. B. Ramachandraiah and Sons as well. In general, arbitral tribunals are considered the first authority to decide on the non-arbitrability of dispute. However, as an exception, the referral court may reject the claim of arbitration price facie. They should not delve into the details. The limited scrutiny, through the eye of the needle, is crucial and compelling to fulfil the referral court’s duty of safeguarding parties from being compelled to arbitrate when the subject matter is clearly non-arbitrable. This scrutiny ensures that parties are not forced into arbitration when the dispute is evidently outside the scope of arbitration.
Conclusion
it is crucial to introduce a prescribed time under Section 11 for the appointment of an arbitrator in order to expedite the arbitration process for resolving disputes. The Supreme Court, through its ruling in the aforementioned case, observed that the limitation period of three years commences from the occurrence of a breach by either party. The subsequent negotiations following the breach do not impact the limitation period. However, a three-year limitation period for bringing an action is excessively long. It goes against the purpose of the legislation, which aims to facilitate the swift resolution of disputes within a specified time span. Therefore, it is imperative to amend the act to incorporate a specific limitation period to ensure timely dispute resolution.
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