The Conundrum of the Limitation for Section 11 Arbitration Petitions – Amendment Bill Seeks to Resolve

Introduction

The law of limitation in India is based on the principle of “vigilantibus non dormientibus jura subveniunt” meaning the law assists the vigilant and not those who sleep over their rights. The law of limitation was enacted with the intent to assure the interested parties that they will not be subjected to an indefinite period of liability. The Limitation Act of 1963¹ (Limitation Act) prescribes different periods of limitation for different legal actions. However, in the case of a special law, the period of limitation prescribed in the special law would override the period specified in the Limitation Act.

For faster resolution of disputes and streamlining arbitration law, the Arbitration and Conciliation Act, 1996 (Arbitration Act) also provides strict limitations at most stages of the arbitral process. However, despite the law on arbitration evolving over the years, it still does not specify a definite limitation period for arbitration petitions under Section 11 of the Arbitration Act for the appointment of the Arbitral Tribunal. In this regard, the Indian courts through various landmark judgments, have clarified the power of courts at the referral stage and interpreted the limitation period under Section 11² of the Arbitration Act.

Evolving jurisprudence of limitation for arbitration petitions

Through various judicial pronouncements, it is now a settled position of law that Section 11 of the Arbitration Act would be governed by residue Article 137 of the First Schedule³ of the Limitation Act. Thus, the party invoking arbitration would have a limitation period of 3 years to file Section 11 arbitration petition from the date of failure of the opposite party to make an appointment as per the agreed procedure.⁴ Further, where the opposing party refuses to comply with the arbitration notice, another period of 3 years from the date of such refusal would be available for seeking the appointment of the arbitrator. However, it has also been noted by the Supreme Court that such a long period of limitation runs contrary to the intent of expeditious resolution of commercial disputes. Hence, it was suggested that the legislature should prescribe a specific period of limitation.⁵ Further, the courts should expeditiously decide applications under Section 11, if these applications are kept pending for years, it defeats the purpose of the Arbitration Act.⁶

Recently, the Indian courts have also held that the courts at the referral stage should refrain from assessing the merits or limitations of claims and should limit its inquiry to examining whether Section 11 petition has been filed within the period of limitation of 3 years or not thereby preserving the autonomy and efficacy of the arbitration process.⁷ The same is also essential in light of the fact that the parties do not have the right to appeal against any order passed by the referral court under Section 11, be it for either appointing or refusing to appoint an arbitrator. Therefore, if the referral court delves into the domain of the Arbitral Tribunal at Section 11 stage and rejects the application of the claimant, it would run a serious risk of leaving the party remediless for the adjudication of their claims.⁸ A suggestion for amendment to this effect, for making necessary amendments to Section 37⁹ of the Arbitration Act, providing for appeal against the order refusing the appointment of arbitrator has also been made by the Supreme Court.¹⁰

Draft Arbitration and Conciliation (Amendment) Bill, 2024

Pursuant to the several judgments of the Supreme Court regarding the applicability of the Limitation Act for arbitration petitions and recommendation for a shorter specific period for expeditious resolution of arbitrations, the Draft Arbitration and Conciliation (Amendment) Bill, 2024 (Amendment Bill) proposed that the parties must file Section 11 arbitration petitions for appointment of an arbitrator within 60 days of failure or refusal of appointment of the arbitrator by the parties, or as per the procedure agreed upon. Interestingly, the Amendment Bill accepts the recommendation of the Supreme Court and seeks to add Section 37(aa) providing for appeal against the order refusing to appoint an arbitrator under Section 11.

In prescribing the period of limitation for filing a Section 11 application, the aim of the legislature to set a specific shorter limitation period for Section 11 arbitration petitions is to foster a more streamlined and predictable arbitration landscape in India. However, the limitation period of 60 days as suggested in the Amendment Bill may also run the risk of rushing parties into arbitration. The fear of missing the deadline of the limitation period may compel parties to initiate arbitration proceedings prematurely without adequate time to negotiate and attempt settlement.

At this juncture, one may also note that the law of limitation generally gives discretion to courts to entertain time-barred claims in certain cases, exclude time periods while computing limitation, and condone delay in reasonable circumstances. In this regard, it is pertinent to note that the Amendment Bill should also provide for circumstances wherein courts can entertain time-barred arbitration petitions or exclude the time spent by parties for settlement or in pursuing remedies before wrong forums. The same will balance urgency and fairness, ensuring arbitration remains efficient and effective.

Exclusion of time period while calculating limitation for arbitration petitions

As provisions of the Limitation Act have been held to be applicable to Section 11 arbitration petitions, it is also pertinent to examine the circumstances wherein the parties would be able to avail the benefit of exclusion of time spent in pursuing proceedings before courts without jurisdiction. In this regard, Section 14¹¹ of the Limitation Act provides that while computing the limitation period for any suit or application, the time spent in pursuing bona fide proceedings in court without jurisdiction shall be excluded. The Indian courts in the following cases have discussed the jurisprudence revolving around the exclusion and inclusion of periods while calculating limitation period for arbitration petitions:

(a) Negotiations — B and T AG v. Ministry of Defence¹²: The Supreme Court held that subsequent negotiations after the cause of action have arisen will not postpone the cause of action for computing limitation of arbitration petition. It was observed that negotiations may continue for a period of ten or twenty years but the prescribed limit of three years for the enforcement of a claim cannot be defeated on the ground that the parties were negotiating. However, if the entire history of the negotiation between the parties is specifically placed on record to find out the breaking point at which any reasonable party would have abandoned efforts of arriving at a settlement, such genuine negotiations for settlement are liable to be excluded while calculating the limitation period for arbitration petitions.

(b) Bona fide negotiations — Blooming Orchid v. FP Life Education Foundation¹³: The Delhi High Court noted that the email exchanges produced by the party evidenced attempts at settlement. Therefore, such a period of bona fide negotiations would be excluded from the limitation period for referring a dispute to arbitration, provided the entire negotiation history is well-documented and presented.

(c) Moratorium period of the corporate debtor — New Delhi Municipal Council v. Minosha India Ltd.¹⁴: The Supreme Court held that under Section 60(6) of the Insolvency and Bankruptcy Code, 2016 (IBC), the entire period during which a moratorium was in operation has to be excluded while computing limitation for arbitration petition under Section 11 of the Arbitration Act filed by the corporate debtor.

(d) IBC proceedings — HPCL Bio-Fuels Ltd. v. Shahaji Bhanudas Bhad¹⁵: The Supreme Court recently held that Section 11 arbitration petition is in the nature of an application and would be governed by Section 14(2) of the Limitation Act for availing the benefit of exclusion of time spent in a defective jurisdiction seeking the same relief. In this context, the Court analysed that the relief sought in the IBC proceedings is an initiation of insolvency proceedings and rehabilitation of the corporate debtor by appointment of new management. Whereas the relief sought in Section 11 arbitration petition is the appointment of an arbitrator for adjudication and amicable resolution of disputes arising out of contract. Therefore, as the reliefs sought in both proceedings are different, the benefit of Section 14(2) of the Limitation Act cannot be granted and the time spent in insolvency proceedings cannot be excluded while calculating the limitation period for Section 11 arbitration petition.

(e) Commercial court proceedings — JKR Techno Engineers (P) Ltd. v. JMD Ltd.¹⁶: The Delhi High Court held that after getting the commercial suit disposed of under Section 8 for being referred to arbitration, the respondent cannot argue that the suit was barred by limitation. Accordingly, the time spent in bona fide court proceedings without jurisdiction before the commercial court shall be excluded in calculating the limitation for arbitration petition under Section 11 of the Arbitration Act.

Whether the courts will apply the aforesaid principles and exclude these time periods while calculating limitations or will strictly adhere to the timeline of 60 days, would be interesting to note if the proposed amendments are accepted.

Conclusion and way forward

Indian legislature has attempted to make India a more attractive destination for arbitration by providing speedy justice. Further, Indian courts have also through various judgments highlighted the absence of a statutory prescription of limitation for arbitration petitions and emphasised the applicability of the Limitation Act over the same. The suggestion of 60 days’ limitation period by legislature attempts to rectify the legislative vacuum while preserving the objective of speedy trial.

However, it remains to be seen whether the legislature would also prescribe the consequences of parties missing the deadline to file Section 11 arbitration petition within 60 days. While the necessary consequence would be that the parties are forced to approach courts for resolution through commercial suit/litigation, it would be interesting to note whether a request for reference to arbitration under Section 8¹⁷ of the Arbitration Act would then be entertained or would the arbitration agreement/clause would be rendered infructuous.

What is also interesting to note is that while the legislature has attempted at equating treatment of applications under Section 11 with the applications under Section 8 by making the orders refusing to appoint an arbitrator also appealable under Section 37(aa). However, while providing a period of 60 days for disposal of application made to the courts under Section 8, the Amendment Bill fails to provide a similar timeline for disposal of applications under Section 11. This anomaly becomes relevant in light of huge pendency of applications for appointment of arbitrator before the High Courts as well as the Supreme Court thereby defying the entire objective of speedy resolution, despite the directions issued by Supreme Court from time to time for early disposal of Section 11 petition.