Cause of Action to Appoint Arbitrator Commences from the “Breaking Point” Between Parties: Supreme Court
DISMISSAL OF PLEA UNDER SECTION 11(6) OF THE ARBITRATION AND CONCILIATION ACT, 1996 DUE TO TIME BAR
A plea brought under Section 11(6) of the 1996 Arbitration and Conciliation Act was dismissed by the Division Bench, which was composed of DY Chandrachud, CJI, and J.B. Pardiwala, J. A Swiss-based company engaged in the arms manufacturing industry lodged the petition.
The business requested the appointment of an arbitrator to settle disputes and claims resulting from a contract signed on March 27, 2012, with the Indian Ministry of Defence. The petition was dismissed by the Bench, which found that the claim was time-barred because the petitioner had been inactive for more than five years.
The Arbitration and Conciliation Act, 1996’s Section 11, which handles arbitrator appointments, was recognised by the court. It was noted that there is no set deadline for submitting an application for the appointment of an arbitrator under Section 11(6) of the Act. The Limitation Act, 1963 applies to arbitration proceedings in the same manner as it does to court proceedings, according to Section 43 of the Act, which the Court also noted.
INTERPRETATION OF LIMITATION PERIOD AND LEGAL PRINCIPLES FOR APPLICATION UNDER ARTICLE 137 AND SECTION 9 OF THE LIMITATION ACT
According to the Court, Article 137 of the Schedule to the 1963 Act would be applicable because a petition for the appointment of an arbitral tribunal under Section 11(6) of the Act 1996 must be filed before the High Court or Supreme Court. The Court found the limitation period for situations covered by Article 137 to be three years, beginning with the accrual of the right to apply.
According to the Court’s ruling in Merla Ramanna v. Nallaparaju, (1955) 2 SCR 938, the beginning of the statute of limitations under Article 137 is the day “the right to apply arises.” The phrase “the right to apply” expresses a wide common law principle and should be interpreted based on the individual circumstances of each case because Article 137 is a residual rule applied to diverse sorts of applications. It has been interpreted to signify the right to submit an application when the opportunity presents itself.
The Court further referred to Section 9 of the 1963 Act, which stipulates that once the limitation period has begun, any ensuing impossibility of bringing a claim or submitting an application does not stop the passage of time.
In the case of Major (Retd.) Inder Singh Rekhi v. Delhi Development Authority, (1988) 2 SCC 338, the Bench established three legal principles.
- First, the right to payment usually becomes due once the task is finished.
- Secondly, a conflict also develops when one party asserts a claim and the other party rejects or disputes it.
- Thirdly, a person cannot keep sending letters or reminders to avoid the cause of action accruing. Thus, continuing “bilateral discussions” indefinitely does not prevent the emergence of a claim or the ability to request the appointment of an arbitrator.
SIGNIFICANCE OF DETERMINING THE ‘BREAKING POINT’ AND RESOLVING THE LEGAL GAP IN LIMITATION PERIODS FOR APPLICATIONS UNDER SECTION 11 OF THE ARBITRATION AND CONCILIATION ACT, 1996:
The Court emphasised the significance of determining the “breaking point” at which a reasonable party would discontinue efforts to negotiate a settlement and consider referring the issue to arbitration after analysing a number of judgements.
The Court acknowledged that there is a legal gap regarding the provision of a precise limitation time under Section 11 of the Arbitration and Conciliation Act, 1996, citing the case of BSNL v. Nortel Networks (India) (P) Ltd., (2021) 5 SCC 738.
As a result, the courts have resorted to using Article 137 of the Limitation Act of 1963, which establishes a three-year window beginning on the day the right to apply. The Court stated that in order for Parliament to provide a clear deadline within which a party may petition the court for the appointment of arbitrators, Section 11 of the Act must be amended.
The Court came to the conclusion that there is a distinct difference between the argument that the raised claims are time-barred and the argument that the application for the appointment of an arbitrator is time-barred after carefully examining the aforementioned cases.
The Bench further emphasised the relevance of determining the cause of action while determining the window of time to file a lawsuit. A party must be aware of when a cause of action manifests.
Due to doubt over the occurrence of the cause of action, a party may unduly postpone delivering a notice demanding arbitration under the Act of 1996. If this happens, the claim may expire before the party even realises it.
The Court emphasised that rather than focusing only on the formalities of the action, the determination of whether certain facts constitute a cause of action should be based on the particular circumstances and substance of each case.
When a right is violated at a particular point in time, the entire cause of action is deemed to have started at that time. In these situations, a party cannot take any action and fail to submit an application to resolve the issue within the Limitation Act’s stipulated time frame.
It would be deemed an application for the revival of a right that has already been terminated under the 1963 Act, rendering it legally void, to allow the right to be extinguished by the passage of time and then seek to begin proceedings under Section 11 of the Act in order to establish a right that is no longer alive and has long been extinguished. According to Article 137 of the 1963 Act, such proceedings would be regarded as inadmissible and be susceptible to the defence of limitation.
In addition, the Court made it clear that the current issue was resolved in 2016 when the bank guarantee was fulfilled and the necessary funds were transferred to the government account. For the purpose of establishing the statute of limitations, this “Breaking Point” should be taken into account as the date the cause of action first materialised.
Additionally, the Court noted that discussions can go on for ten or twenty years after the cause of action has arisen. However, under terms of the statute of limitations, simple agreements do not bar or prolong the cause of action. The three-year statute of limitations provided by the Legislature for the execution of a claim cannot be extended on the pretext that the parties were in discussions during that time.
As a result, the Court denied the petition, stating that because the petitioner had recklessly neglected their rights for more than five years, the case was unquestionably hopelessly time-barred.
