Limitation Laws in Arbitration Proceedings

Recently in a case before the Supreme Court, a petition was filed for the appointment of an arbitrator for the adjudication of disputes and claims arising from a contract dated March 21, 2013 entered into between the petitioner and the respondent.

The petitioner, a company based in Afghanistan was providing training in computer education, information technology, English language, etc. The respondent a company in India was in the business of providing training and education in information technology through its network in India and abroad.

The parties entered into three separate franchise agreements as petitioner/franchisee and the respondent/franchisor where the petitioner as the franchisee was granted a non-exclusive license by the respondent.

The parties signed the agreements in 2016, when the Indian Council for Cultural Relations, (“ICCR”) invited proposals for a short-term course for training in English (for short, “the course”) for the students from Afghanistan, who were selected to pursue degree courses in Indian Universities, under the scholarship scheme of the government of India.

The respondent was selected by the ICCR and as per the stipulations, the payments for the course were be released to the respondent by the ICCR at the end of every month after getting an endorsement from the Embassy of India [EOI], Kabul.

Disputes arose between the petitioners and the respondents. The present suit relates to one of the three agreements namely the ‘Aptech English Language Academy’ (“AELA”).

The petitioner first approached the Bombay High Court Mediation Centre under Section 12A of the Commercial Courts Act, 2015 and initiated pre-reference mediation proceedings.  As the mediation failed, the petitioner vide a notice dated November 24, 2022 invoked arbitration and inter alia nominated two senior advocates as its nominee arbitrators.

The respondent denied all the claims raised in the notice and claimed that the claims were barred by limitation. The respondent also stated that as the petitioner had initiated a commercial suit via mediation proceedings, it was not open to the petitioner to link it to the conciliation.

As the respondent did not nominate an arbitrator, the petitioner filed the present petition.

Contentions of the petitioner before the Court:

1. The case pertains to an “International Commercial Arbitration” within the meaning of Section 2(f) of the Act, 1996, and so the present Court will have the requisite jurisdiction to try the case.

2. The petitioner is entitled to receive 90 percent of the payments received from the ICCR as he is an independent non-exclusive partner of the respondent and has successfully executed the agreement.

3. As per the principal contract for the course signed between the ICCR and the respondent, the grant in aid was transferred by the ICCR to the respondent upon completion. However, the petitioner who has executed the course in Afghanistan as per the AELA franchise agreement, it is entitled to received 90 percent of the amount received.

4. Despite repeated requests, the respondent had failed to disclose the amount received from the ICCR to the petitioner for settlement of accounts. The respondent has no ground to withhold payments from the petitioner.

5. The cause of action first arose when the respondent withheld the information of receipt of monies from the ICCR and again when the respondent informed it had received part payment from the ICCR and that it had incurred some incidental expenses for the project.

6. As respondent has failed to disclose the actual amount received from ICCR, there is a continuing cause of action. The total amount due along with interest cannot be quantified as exact details of the amount received by the respondent from the ICCR are not disclosed and the cause of action for full and final settlement of claims is yet to accrue.

7. The return of Taliban created a force majeure situation and there was a break-down of all communication channels disabling the petitioner from approaching the courts on time.

8. The benefit of the extension of limitation courtesy the Covid-19 pandemic,  by which the period from March 15, 2020 to February 28, 2022 is liable to be excluded for the purposes of computing limitation, should be available to the petitioner.

9. The petitioner is not estopped from invoking arbitration even after having invoked pre-litigation mediation under the Commercial Courts Act, 2015 and the case should be referred to arbitration to adjudicate the differences between the parties as per the AELA agreement.

Contentions of the respondent before the Court:

1. The disputes raised by the petitioner are not arbitrable. The claims raised by the petitioner are in respect of the letter issued by the ICCR to the respondent which is not a part of the AELA franchise agreement entered into on March 21, 2013. There is no arbitration clause in the letter issued by the ICCR to the respondent and it is unrelated to the AELA franchise agreement.

2. As per the AELA franchise agreement, it was the respondent who was entitled to receive royalty fee from the petitioner as prescribed in the franchise agreement, and there was no arrangement by which the petitioner was entitled to a 90 percent payment.

3. The claim is barred by limitation as per the Limitation Act, 1963 even after considering the Covid exclusion.

4. The petitioners cannot seek protection under the plea of a force-majeure  as the exchanges between the parties took place on email and the email facility was available even in the month of August 2021.

5. The petitioner has not been vigilant in protecting its rights and not entitled for any relief. The petition is liable to be dismissed as barred by limitation as mere exchange of letters would not extend the cause of action and the period of limitation for the purposes of filing the arbitration petition.

6. The petitioner should not be allowed to change course by invoking arbitration after having previously submitted to the jurisdiction of the Commercial Courts Act, 2015.

7. The dispute arising out of the tripartite arrangement between the petitioner, respondent and the ICCR has no nexus with the arbitration clause of the AELA franchise agreement.

8. The notice sent by the petitioner for invocation of arbitration was not valid and, on this ground, too, the petition is liable to be dismissed.

9. The claims of the petitioner are barred by limitation.

Issues framed by the Court and its analysis:

1. Whether the Limitation Act, 1963 is applicable to an application for appointment of arbitrator under Section 11(6) of the Arbitration and Conciliation Act, 1996?

If yes, whether the present petition is barred by limitation?

The Court opined that as per the provisions of Article 137 of the Limitation Act, 1963, the time for calculation will commence from the date the request for appointment of an arbitrator was made, that is, the Notice dated November 14, 2022. The said notice was delivered to the respondent on November 29, 2022 and a months’ time was given to the respondent to comply with the said notice, which came to an end on December 28, 2022.

It was from this date that the clock of limitation for filing the present petition started to tick. The present petition was filed on April 19, 2023, which is well within the time period of three years  and thus the present petition under Section 11(6) of the Act, 1996 is not 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?

The Court considered the issue of limitation in relation to a petition under Section 11(6) of the Act, 1996, and held that the courts should apply the two-pronged test and satisfy themselves on two aspects–

a. whether the petition under Section 11(6) of the Act, 1996 is barred by limitation; and

b. secondly, whether the claims sought to be arbitrated are ex-facie dead claims and are thus barred by limitation on the date of commencement of arbitration proceedings.

If either of these issues are answered against the party seeking referral of disputes to arbitration, the court may refuse to appoint an arbitral tribunal.

It is a settled law that mere failure to pay does not give rise to a cause of action. The cause of action arises when the applicant asserts its claim and the respondent either denies or fails to reply to it. 

A perusal of the communication exchanged between the parties show that the right of the petitioner crystallised only on March 28, 2018, when vide an email, the respondent denied further discussion regarding payment.

The Court averred that usually the limitation period available for raising a claim would end after an expiry of three years, that is, on March 27, 2021. However, due to the Covid-19 pandemic, the Supreme Court directed that the period from March 15, 2020 to February 28, 2022 be excluded for the computation of limitation. The balance period of limitation as available on March 15, 2020 would become available from March 1, 2022.

In the present case the balance limitation left on March 15, 2020 would become available with effect from March 1, 2022. Accordingly, the balance period of 1 year 13 days becomes available to the petitioner from March 1, 2022, and therefore the limitation period available to the petitioner for invoking arbitration proceedings ends on March 13, 2023.

The Court held, in view of the above, as the notice invoking arbitration received by the respondent is within the three-year period from the date on which the cause of action for the claim had arisen, it cannot be said that the claims sought to be raised by the petitioner are ex-facie time-barred or dead claims on the date of the commencement of arbitration.

The Court allowed the petition and appointed a sole arbitrator.

The Court concluded with its observation that:

“….. the period of three years is an unduly long period for filing an application under Section 11 of the Act, 1996 and goes against the very spirit of the Act, 1996 which provides for expeditious resolution of commercial disputes within a time-bound manner……the Parliament should consider bringing an amendment to the Act, 1996 prescribing a specific period of limitation within which a party may move the court for making an application for appointment of arbitrators under Section 11 of the Act, 1996…”

About the authors: Dhanashree Chowdhury is a Partner and Mahua Roy Chowdhury is the Managing Partner at Royzz & Co.