This article has been written by Geetika Sachdeva, pursuing a Diploma in Advanced Corporate Taxation and Tax Litigation from LawSikho and edited by Shashwat Kaushik.

It has been published by Rachit Garg.

Factual background of the case

In the case of Bharat Sanchar Nigam Ltd. vs. M/S Nortel Networks India Pvt. Ltd. (2021), through a tender process, Bharat Sanchar Nigam Ltd. (BSNL) granted a purchase order to Nortel Networks (Nortel). BSNL deducted an amount from the payment to account for some liquidated damages and levies. Nortel filed a payment claim, which was denied by BSNL.

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After five and a half years of rejection of the claim by BSNL, Nortel invoked the arbitration clause in their agreement and requested the appointment of an arbitrator to resolve the payment deduction dispute. BSNL stated that the case had been closed by that time and that such a request couldn’t be accepted because Nortel had slept on its rights. Nortel filed a Section 11 of the Arbitration and Conciliation Act, 1996, application before the Kerala High Court, and the case was referred to arbitration. BSNL unsuccessfully requested a judicial review of this decision by  filing an appeal before the Supreme Court.

Issues before the hon’ble Supreme Court

  1. What is the limitation period for filing an application under Section 11 of the Arbitration and Conciliation Act, 1996, and when does it commence?
  2. Whether the Court can refuse to appoint an arbitrator on the grounds that the underlying claim(s) is ex-facie time barred?

Judgement of the Court

The Hon’ble Court first looked into many sections under the Act highlighting the importance of limitation periods in arbitration, 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 the Commercial Courts Act, 2015, enacted concurrently with the 2015 Amendment Act for the prompt resolution of high-value commercial disputes. In response to the first issue, the court noted that expediency is crucial in arbitration, as Section 11 of the Arbitration and Conciliation (Amendment) Act, 2015, mandates the court to dispose of applications within a period of 60 days from the date of service of notice on the other party. However, Section 11 does not specify a time limit for filing an application.

The Court observed that Section 43 of the Act expressly states that the Limitation Act of 1963 is applicable. The Supreme Court previously ruled that, by virtue of Section 43, the Limitation Act applies to all proceedings (court and arbitration) under the Act, unless expressly excluded. All residual matters are covered by Article 137 of the Limitation Act. It specifies a three-year limitation period beginning on the day the right to apply is granted. In the absence of a provision establishing a time limit for Section 11 applications, the residual provision of the Limitation Act, i.e., Article 137, is held to apply.

The Supreme Court reaffirmed that the limitation period for substantive claims arising from contracts differs from the one for filing a Section 11 application. The limitation period for the latter begins on the date of the refusal of a request to appoint an arbitrator or on the expiration of 30 days from such a request, whichever is earlier. However, the Court also stated that a three-year limitation period for filing a Section 11 application is excessively long. The Act has been amended twice, in 2015 and 2019, to ensure the efficiency of the process, and thus this lengthy period is contrary to the intent of the Act. It has been recommended by this hon’ble court to the legislature to introduce the limitation period in Section 11. But for now, the court held that the application for arbitration under the section was filed within limitation.

In response to the second issue, the court first examined the objective behind introducing  Section 11  and noted that before the 2015 Amendment Act, by virtue of its decisions in S.B.P. & Co. vs. Patel Engineering Ltd. and Anr. (2005) and National Insurance Co. Ltd. vs. Boghara Polyfab Pvt. Ltd. (2008), the court/appointing authority had an expanded scope of power for appointing an arbitrator and settling issues at the pre-reference stage. At this stage, the courts could go beyond the mere existence of the arbitration agreement. Following that, the 2015 Amendment Act was passed to insert Section 11(6A), which provides that if there is no issue regarding the existence of the arbitration agreement, then all other issues would be decided by the arbitral tribunal. This was in accordance with the doctrine of kompetenz-kompetenz, which enables the tribunal to decide its jurisdiction, including any questions regarding the legality of the arbitration agreement, thereby minimising court involvement at the pre-reference stage. As a result, the scope of the Section 11 examination became restricted to the existence of an arbitration agreement.

While adjudicating, the Hon’ble Court also examined various precedents in which sub section (6A) came up for consideration, such as M/S Duro Felguera S.A. vs. Gangavaram Port Ltd. (2017), in which the Apex Court held that from a reading of Section 11(6A), the legislature’s intention was apparent, i.e., the court should only inquire whether there is an arbitration agreement or not. It was observed that the scope of Section 11(6) of the 1996 Act was broad in light of the decisions in SBP and Co. and Boghara Polyfab, and this position was maintained until the amendment was made in 2015. However, following the amendment, all the courts are required to examine only one question, i.e., the existence of an arbitration agreement. The court also considered the subsequent amendment proposed in Section 11 of the Act by way of the Arbitration and Conciliation (Amendment) Act, 2019, which resulted in Section 11(6A) being omitted once the amendment was notified. The Supreme Court also cited the three-judge bench decision in Vidya Drolia vs. Durga Trading Corporation (2019) on the scope of power under Sections 8 and 11, which ruled that   “the court must carry out a primary first review to rule out undoubtedly ex facie non-existent and invalid arbitration agreements or non-arbitrable disputes.” It was observed that the court might reject the reference if it was sure that no valid arbitration agreement had existed or that the subject matter was not arbitrable.

In light of the aforementioned judgements and settled legal principles, the court found that the court could decline to make reference only in cases where there was no uncertainty as to whether the claim was ex-facie time-barred or the dispute was non-arbitrable. But if there is a probability of uncertainty, the rule is to refer the disputes to arbitration, lest it encroach on what is essentially a matter for the tribunal to decide.

Therefore, in the light of the above-mentioned judgements, legal principles, and statutes, since there was a delay of 5 1/2 years after BSNL’s rejection, it was determined that Nortel’s claim was ex-facie time barred, and thus the Section 11 application was rejected. The Court observed that limitation is a matter that is both legal and factual in nature. As a result, determining limitations falls under the purview of an arbitral tribunal. The Court also distinguished between jurisdictional issues, which concern the authority of the arbitral tribunal to decide the case, and admissibility issues, which concern the nature of the claim or related circumstances such as mandatory requirements prior to arbitration, the claim being time-barred or prohibited, and so on, but do not involve a challenge to the tribunal’s jurisdiction.

The Court also mentioned its recent and historic decision in Vidya Drolia v. Durga Trading Corporation (2020). It was held that the court may refuse to refer the case to arbitration only if it is certain that the subject matter is not arbitrable or that no arbitration agreement exists. This was not meant to be interpreted as a revival of the pre-amendment position, but rather as a means of removing deadwood.

Analysis of the the judgement

In this decision, the Supreme Court upheld the fundamental principles of arbitration, namely, speedy resolution of the dispute and minimalistic judicial intervention. Article 137 of the Limitation Act  ensures that parties do not sleep on their rights and claims, as the law does not grant relief to those who do. As stated in the Preamble, one of the primary objectives of  the Arbitration Act is to reduce the role of the court in the procedure of arbitration.

This goal was overlooked when the Supreme Court delivered its verdict in SBP & Co. vs. Patel Engineering (2005). Fortunately, in Duro Felguera SA vs. Gangavaram Port Ltd. (2017), the Supreme Court overruled this decision, acknowledging the legislative objective behind the Arbitration Act and restricting judicial participation at the recommendation stage. This decision reaffirmed the principle established in Duro Felguera (above), and the court’s power to take part in arbitral proceedings at the recommendation stage was restricted. This will undoubtedly help to streamline the arbitration process and represent India as an arbitration-friendly country.

In it’s notice of arbitration, Nortel said the time limit for referring to arbitration will be extended on the basis of the parties’ discussions about the controversy. On the basis of communication between BSNL and Nortel and  negotiations regarding settlement, the Supreme Court rejected Nortel’s claim of an extended limitation period. As a result, no pleadings were submitted on the ground of extending the limitation period under the Limitation Act. According to the Supreme Court, Nortel’s claims are presumptively barred since the request to appoint an arbitrator was filed more than 5 years after Nortel’s claims were rejected by BSNL.

Conclusion

The Supreme Court’s decision is a progressive  step towards delivering crucial clarification on Section 11 of the Arbitration and Conciliation Act, 1996, of the  jurisprudence, especially in light of the numerous decisions and changes to the statute itself. The court has made it clear that only exceptional circumstances warrant involvement at the Section 11 stage. However, given the Vidya Drolia decision, in which the court equated examination under Section 11 of the Act with review under Section 8 of the Act, a well-defined and concise explanation from a larger bench is still required.

In addition, the Apex Court correctly observed that the 3 year limitation for applying Section 11 of the Act, as provided by Article 137 of the Limitation Act, is excessive. It is often seen that obstinate parties take advantage of the long statute of limitations, so reducing the time limit for applying Section 11 of the Act would be extremely beneficial under the Indian arbitration regime.

References

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