Supreme Court Asks Parliament to Consider Amending Section 11 of Arbitration Act

 The Supreme Court (SC) in the case titled Bharat Sanchar Nigam Ltd. (Appellants) and v. M/s Nortel Networks Pvt Ltd (Respondent) suggested the Parliament consider amending Section 11 of the Arbitration Act, 1996 (Arbitration Act) prescribing a specific period of limitation within which a party may move to the Court for filing an application for the appointment of an arbitrator.

The SC bench comprising of Justices Indu Malhotra and Ajay Rastogi stated that such limitation period should be in consonance with the object of expeditious disposal of arbitration proceedings.

In the instant case, the Top Court was dealing with an appeal filed by Bharat Sanchar Nigam Limited (BSNL) challenging the Kerala High Court's (HC) order to refer a dispute between the parties to the arbitration.

In April 2020, a notice invoking arbitration was served by the respondents on the appellant and subsequently, the respondents moved an application under Section 11 of the Arbitration Act in the HC.

The HC referred the matter to arbitration and the said decision was confirmed after a review petition was filed by the appellant that was dismissed by the HC. Hence, the BSNL moved to the Apex Court filing an appeal against the said order of the HC.

The SC found that the respondents' claims were time-barred as it was over 5.5 years' delay in agitating the issue. The bench further stated that the limitation period applicable to the substantive claims made by the respondents was 3 years from the cause of action.

The Court clarified that according to Article 55 of the Limitation Act that deals with the limitation period for cases pertaining to breach of contract. Hence, in this case, the limitation period began to run when the appellant rejected the respondents' claim in 2014.

The SC opined that the claims made by the respondents were, ex-facie time-barred, it ruled that the Court can refuse to refer the dispute for arbitration. It cautioned that such power can be exercised in a very limited category of cases, where there is not even a vestige of doubt that the claim is ex-facie time-barred or the dispute is non-arbitrable.

The SC found that Article 137 of the Limitation Act applies to the period of limitation for filing a Section 11 of the Arbitration Act had not run out in this case.

It noted that the limitation period would start to run after the failure to appoint an arbitrator within 30 days of the issuance of notice invoking arbitration. It further observed that due to a vacuum in law in this area, Courts have to lay down that the period of limitation for filing an application under Section 11 is governed by Article 137 of the First Schedule of the Limitation Act, 1963.

Article 137 of the Limitation Act deals with applications "for which no period of limitation is provided elsewhere". The limitation period under this provision is 3 years from the date on which the "right to apply accrues."

The Court added that this is a very long period for filing an application under Section 11 of the Arbitration Act. It further stated that it would defeat the very object of the Act, which provides for expeditious resolution of commercial disputes.

The Court urged the Parliament to amend the said provision and it opined that "In view of the legislative intent, the period of 3 years for filing an application under Section 11 would run contrary to the scheme of the Act."

The bench stated, "It would be necessary for Parliament to effect an amendment to Section 11, prescribing a specific period of limitation within which a party may move the court for making an application for appointment of the arbitration under Section 11 of the Arbitration Act."

The Court further emphasized that "The period of limitation for filing a petition seeking appointment of an arbitrator(s) cannot be confused or conflated with the period of limitation applicable to the substantive claims made in the underlying commercial contract."

It explained, "The period of limitation for such claims is prescribed under various Articles of the Limitation Act, 1963. The limitation for deciding the underlying substantive disputes is necessarily distinct from that of filing an application for the appointment of an arbitrator.

"If there is even the slightest doubt, the rule is to refer the disputes to arbitration, otherwise it would encroach upon what is essentially a matter to be determined by the Tribunal."

The SC concluded, "The notice invoking arbitration was issued 5 ½ years after the rejection of the claims on 04.08.2014. Consequently, the notice invoking arbitration is ex-facie time-barred, and the disputes between the parties cannot be referred to arbitration in the facts of this case."

The SC allowed BSNL's appeals and set aside the HC's orders which had allowed the disputes to be referred to arbitration.

The Apex Court held, "There is not even an averment either in the notice of arbitration, or the petition filed under Section 11, or before this Court, of any intervening facts which may have occurred, which would extend the period of limitation falling within Sections 5 to 20 of the Limitation Act."