Supreme Court clarifies the limitation period for appointment of arbitrators under Section 11 of the Arbitration Act: Arif Azim Co. Ltd. vs. Aptech Ltd. (2024)

Date of the Judgment: 1st March 2024

Citation: 2024 INSC 155

Judges: Dr. Dhananjaya Y. Chandrachud, CJI, J.B. Pardiwala, J., Manoj Misra, J.

When does the clock start ticking for filing an application for the appointment of an arbitrator? The Supreme Court of India recently addressed this crucial question in a case involving a dispute between an Afghan company and an Indian company regarding a franchise agreement. The court clarified the applicability of the Limitation Act, 1963, to arbitration proceedings and set the ground rules for when a court can refuse to refer a dispute to arbitration if the claims are time-barred. This judgment clarifies the scope and application of Section 11 of the Arbitration and Conciliation Act, 1996. The judgment was authored by Justice J.B. Pardiwala, with a bench comprising Chief Justice Dr. Dhananjaya Y. Chandrachud and Justice Manoj Misra.

Case Background

M/s Arif Azim Co. Ltd., an Afghan company, entered into three franchise agreements with M/s Aptech Limited, an Indian company, on March 21, 2013. These agreements allowed the Afghan company to operate training centers under the names “Aptech English Language Academy” (AELA), “Aptech Computer Education” (ACE), and “Aptech Hardware and Networking Academy” (AHNA). The dispute in this case specifically concerns the AELA agreement. The Afghan company was to provide training, and the Indian company was to provide the content and programs. A dispute arose regarding payments for a course conducted by the Afghan company for Afghan students selected for Indian universities, under a scheme by the Indian Council for Cultural Relations (ICCR). The Afghan company claimed it was entitled to 90% of the payments received by the Indian company from the ICCR.

Timeline

Course of Proceedings

After disputes arose regarding the payments, M/s Arif Azim Co. Ltd. sent a legal notice to M/s Aptech Limited on August 26, 2021, demanding payment. Subsequently, on July 5, 2022, the Afghan company initiated pre-institution mediation at the Bombay High Court, including the ICCR as a party. This mediation failed on August 24, 2022. Following the failure of mediation, the Afghan company invoked arbitration on November 24, 2022. M/s Aptech Limited denied the claims and argued that they were barred by limitation. Consequently, the Afghan company filed a petition before the Supreme Court on April 19, 2023, seeking the appointment of an arbitrator under Section 11(6) of the Arbitration and Conciliation Act, 1996.

Legal Framework

The Supreme Court considered the following legal provisions:

• Section 11(6) of the Arbitration and Conciliation Act, 1996: This section deals with the procedure for appointing an arbitrator when parties fail to agree on the appointment. The court is empowered to take necessary measures for the constitution of an arbitral tribunal.
• Section 43 of the Arbitration and Conciliation Act, 1996: This section states that the Limitation Act, 1963, applies to arbitrations as it applies to court proceedings.
  
  “43. Limitations.—(1) The Limitation Act, 1963 (36 of 1963), shall apply to arbitrations as it applies to proceedings in court.”
• Article 137 of the Limitation Act, 1963: This is a residual provision that applies to applications for which no specific limitation period is provided. It prescribes a limitation period of three years from the date when the right to apply accrues.
  

  Description of Application	Period of Limitation	Time from which period begins to run
  Any other application for which no period of limitation is provided elsewhere in this Division	Three years	When the right to apply accrues.

• Section 21 of the Arbitration and Conciliation Act, 1996: This section specifies that arbitration proceedings commence on the date a request for arbitration is received by the respondent.
  
  “21. Commencement of arbitral proceedings.—Unless otherwise agreed by the parties, the arbitral proceedings in respect of a particular dispute commence on the date on which a request for that dispute to be referred to arbitration is received by the respondent.”

Arguments

Submissions on behalf of the Petitioner (M/s Arif Azim Co. Ltd.):

• The petitioner argued that the Supreme Court has jurisdiction to appoint an arbitrator under Section 11(6) of the Arbitration and Conciliation Act, 1996, as this case involves an international commercial arbitration.
• The petitioner contended that it was entitled to 90% of the payments received by the respondent from the ICCR, as per the AELA franchise agreement.
• The petitioner submitted that the cause of action first arose on October 3, 2017, when the respondent withheld information about receiving Rs 73,53,000 from the ICCR, and further on March 28, 2018, when the respondent stated they had received only 61.5% of the claimed amount.
• The petitioner argued that the respondent’s failure to disclose the amount received from the ICCR resulted in a continuing cause of action, as the petitioner couldn’t quantify the total amount due.
• The petitioner claimed that a force majeure situation occurred due to the Taliban’s return to Afghanistan in August 2021, which disrupted communication channels.
• The petitioner also sought the benefit of the extension of limitation period provided by the Supreme Court due to the COVID-19 pandemic.
• The petitioner stated that it had initiated pre-reference mediation as per the arbitration clause in the AELA agreement.

Submissions on behalf of the Respondent (M/s Aptech Limited):

• The respondent argued that the dispute was not arbitrable, as the claims related to the ICCR sanction letter, which was not part of the AELA franchise agreement.
• The respondent stated that it was entitled to receive royalty from the petitioner, and there was no arrangement for a 90% payment to the petitioner.
• The respondent contended that the claims were time-barred under Article 137 of the Limitation Act, 1963, as the dispute arose on November 1, 2017.
• The respondent argued that the force majeure plea was not valid, as email communication was still available.
• The respondent submitted that the pre-litigation mediation was under Section 12A of the Commercial Courts Act, 2015, and the petitioner could not invoke arbitration after submitting to the jurisdiction of the Commercial Courts Act, 2015.
• The respondent raised an objection regarding the validity of the notice for invocation of arbitration, stating it was not in compliance with the arbitration clause.

The arguments can be summarized in the following table:

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for consideration:

1. Whether the Limitation Act, 1963, is applicable to an application for the appointment of an 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 the Arbitration and Conciliation Act, 1996, where the claims are ex-facie and hopelessly time-barred?

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Judgment

The Supreme Court held that the petition filed by M/s Arif Azim Co. Ltd. was not barred by limitation, and the claims were not ex-facie time-barred at the commencement of arbitration. The Court appointed Shri Justice Sanjay Kishan Kaul, Former Judge of the Supreme Court of India, as the sole arbitrator.

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

The Court relied on various authorities to reach its decision. The court used SBP & Co. v. Patel Engineering Ltd. and Another, (2005) 8 SCC 618* to emphasize the importance of deciding limitation at the pre-reference stage. The court used Geo Miller and Company Private Limited v. Chairman, Rajasthan Vidyut Utpadan Nigam Limited, (2020) 14 SCC 643* to highlight that the limitation period for referring a dispute to arbitration is three years from when the cause of action arises. The court used State of Orissa v. Damodar Das, (1996) 2 SCC 216* to explain that the limitation period for an application for appointment of an arbitrator commences when the “cause of arbitration” accrues. The court used Panchu Gopal Bose v. Port of Calcutta, (1993) 4 SCC 338* to demonstrate that the period of limitation for arbitration runs from when the cause of action would have accrued had there been no arbitration clause. The court used Bharat Sanchar Nigam Limited & Another v. Nortel Networks India Private Limited, (2021) 5 SCC 738* to clarify that the limitation for filing a Section 11 application arises upon failure to appoint an arbitrator within 30 days of the notice invoking arbitration. The court used J.C. Budhraja v. Orissa Mining Corpn. Ltd., (2008) 2 SCC 444* to emphasize that an arbitration is deemed to have commenced when a notice requiring the appointment of an arbitrator is served. The court used Utkal Commercial Corpn. v. Central Coal Fields Ltd., (1999) 2 SCC 571* to determine when the right to apply under Section 8 of the Arbitration Act, 1940, accrues. The court used Secunderabad Cantonment Board v. B. Ramachandraiah & Sons, (2021) 5 SCC 705* to highlight that time begins to run from the date when no arbitrator is appointed after a notice for arbitration. The court relied on Vidya Drolia and Others v. Durga Trading Corporation, (2021) 2 SCC 1* to define the scope of the court’s primary examination at the referral stage, emphasizing that the court can interfere when claims are manifestly time-barred. The court relied on NTPC Ltd. v. SPML Infra Ltd., (2023) 9 SCC 385* to explain the “Eye of the Needle” test, which requires a limited scrutiny of non-arbitrability. The court used Major (Retd.) Inder Singh Rekhi v. Delhi Development Authority, (1988) 2 SCC 338* to explain that a dispute arises when a claim is asserted and denied, and the cause of action arises from that date. The court distinguished M/s B and T AG v. Ministry of Defence, 2023 SCC OnLine SC 657*, stating that while it held that mere writing of letters would not extend the cause of action, the facts of the present case are different. The court cited Prakash Corporates v. Dee Vee Projects Ltd., (2022) 5 SCC 112* to explain the operation and effect of the orders passed by this Court in SMWP No. 3 of 2020 regarding extension of limitation during the COVID-19 pandemic. The court referred to Milkfood Ltd. v. GMC Ice Cream (P) Ltd., (2004) 7 SCC 288* to explain that arbitration proceedings commence when a notice invoking arbitration is sent by the claimant to the other party.

What weighed in the mind of the Court?

The Supreme Court’s decision wasinfluenced by several key factors:

• Applicability of the Limitation Act: The Court reaffirmed that the Limitation Act, 1963, applies to arbitration proceedings, including applications under Section 11(6) of the Arbitration Act. This ensures that arbitration proceedings are subject to the same time constraints as court proceedings.
• Commencement of Limitation Period: The Court clarified that the limitation period for filing an application under Section 11(6) begins when a valid notice invoking arbitration is issued and the other party fails to appoint an arbitrator within 30 days. This prevents parties from delaying arbitration by simply not responding to a notice.
• Ex-facie Time-Barred Claims: The Court held that while the issue of limitation is an admissibility issue, it has the power to refuse to refer a dispute to arbitration if the claims are ex-facie and hopelessly time-barred. This prevents the misuse of the arbitration process for claims that are clearly beyond the limitation period.
• COVID-19 Extension: The Court took into account the extension of the limitation period granted by the Supreme Court during the COVID-19 pandemic. This ensured that parties were not penalized for delays caused by the pandemic.
• Cause of Action: The Court determined that the cause of action arose when the respondent explicitly denied the petitioner’s claim. This specific date was crucial in determining whether the arbitration notice was issued within the limitation period.
• Limited Scrutiny: The Court emphasized that its scrutiny at the referral stage is limited and that it should not delve into the merits of the case. However, it can interfere when claims are manifestly time-barred.

Flowchart of the Limitation Period for Arbitration

Conclusion

The Supreme Court’s judgment in Arif Azim Co. Ltd. vs. Aptech Ltd. (2024) provides crucial clarity on the limitation period for appointing arbitrators under Section 11 of the Arbitration and Conciliation Act, 1996. The Court reaffirmed that the Limitation Act, 1963, applies to arbitration proceedings and clarified that the limitation period for filing an application under Section 11(6) begins when a valid notice invoking arbitration is issued and the other party fails to appoint an arbitrator. The Court also held that it can refuse to refer a dispute to arbitration if the claims are ex-facie and hopelessly time-barred. This judgment ensures that arbitration proceedings are subject to time constraints similar to court proceedings and prevents the misuse of the arbitration process for stale claims. The Court’s decision to consider the extension of limitation due to the COVID-19 pandemic further highlights its commitment to fairness and justice. This ruling is significant for parties involved in arbitration, as it provides a clear framework for determining the limitation period and ensures that arbitration proceedings are conducted in a timely manner.