Introduction 

• This is a landmark judgment discussing the applicability of Article 137 of the Limitation Act, 1963 on the petition filed under section 11 (6) of the Arbitration and Conciliation Act, 1996.   
• This judgment was delivered by a 3-judge bench comprising of Justice JB Pardiwala, Chief Justice DY Chandrachud and Justice Manoj Misra. 

Facts  

• The genesis of the dispute in this case is the franchise agreement entered into between M/s Arif Azim Co. Ltd (a Kabul based Franchisee and Petitioner in this case) and M/s Aptech Limited (a Mumbai based franchisor and Respondent). 
• These franchise agreements (AELA, ACE, AHNA) were entered into in March 2013. 
• A specific dispute arose under the AELA agreement regarding the execution of a training program sanctioned by the ICCR (Indian Council for Cultural Relations) for Afghan students. 
• The petitioner conducted the training from February to April 2017 for 440 students in Kabul. 
• The petitioner claims entitlement to 90% of the payments received from ICCR by the respondent after deductions. 
• The respondent contends deductions by ICCR for quality and TDS, asserting incidental expenses and a 15% royalty claim. 
• The petitioner issued a legal notice in August 2021 demanding payment of Rs. 73,53,000 with interest, later invoking mediation in July 2022. 
• After mediation failed, the petitioner initiated arbitration in November 2022, claiming Rs. 1,48,31,067, including interest. 
• The respondent denies the petitioner's claims, raising issues about payment deductions, royalties, and compliance with the agreements. 
• This petition was filed under Section 11 (6) of the Arbitration and Conciliation Act, 1996 (A & C Act) for appointment of arbitrator and for adjudication of disputes arising out of the contract entered in March 2013. 

Issues Involved  

• Whether the Limitation Act, 1963 (LA) 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?   
• Whether the court may refuse to make a reference under Section 11 of Act, 1996 where the claims are ex-facie and hopelessly time-barred? 

Observations 

• With Respect to Issue (i): 
  • The Court in this regard observed that Section 43 of the Arbitration and Conciliation Act, 1996 (A & C Act) provides that the Limitation Act, 1963 will apply to arbitrations as it applies to proceedings in Court. 
  • Since none of the Articles provide a time limit for filing application under Section 11 (6) of A & C Act it would be covered by Article 137 of the LA which is a residual provision (3 years from the date right to apply accrues). 
  • Thus, the Court concluded that the LA applies to arbitration proceedings in general and that Article 137 of the LA applies to the petition under Section 11 (6) of the Act in particular. 
  • In order to determine from where the period of limitation shall commence it has to be ascertained when does the right to apply accrue. 
  • The Court observed that as per the Hohfeld’s scheme of jural relations conferring right on one entity must entail the vesting of a corresponding duty in another. 
  • Thus, the Court held that the limitation period for filing a petition under Section 11 (6) of the Act can only commence once a valid notice invoking arbitration has been sent by the applicant to the other party, and there has been a failure or refusal on part of that other party in complying with the requirements mentioned in such notice. 
  • The Court applied the law stated above to the facts of the present case. 
  • In the facts of the case at hand the notice for invocation of arbitration was issued by petitioner on 24th November 2022 (which was received by the respondent on 29th November 2022) proposing names of two arbitrators and calling upon the respondent to either to release the allegedly withheld payment or nominate an arbitrator from their side within a period of 30 days from the date of receipt of the notice. 
  • The period of 30 days here would expire on 28th December 2022 and it is only from this day that the clock of limitation for filing the present petition shall start. 
  • The present petition was filed on 19th April 2023 which would be well within the time period of 3 years provided in Article 137 of LA. 
  • Thus, the Court held that the present petition under Section 11 (6) is not barred by limitation.  
•  With Respect to Issue (ii): 
  • The Court observed that limitation is an admissibility issue, yet it is the duty of the courts to prima-facie examine and reject non-arbitrable or dead claims, so as to protect the other party from being drawn into a time-consuming and costly arbitration process. 
  • In the case of Vidya Drolia v. Durga Trading Company (2021), the Court held that at the referral stage the Court can interfere only when it is manifest that the claims are ex facie time-barred and dead, or there is no subsisting dispute. All other cases should be referred to the Arbitral Tribunal for decision on merits. 
  • In NTPC Ltd v. SPML Infra Ltd (2023), the Court laid down the eye of needle test which provides that : “As a general rule and a principle, the Arbitral Tribunal is the preferred first authority to determine and decide all questions of non-arbitrability. As an exception to the rule, and rarely as a demurrer, the Referral Court may reject claims which are manifestly and ex facie non-arbitrable.” 
  • The Court concluded that whenever a petition is filed under Section 11 (6) the Court should satisfy themselves of the two aspects: 
    • Whether petition under Section 11 (6) is barred by limitation 
    • Whether the claims sought to be arbitrated are ex facie dead claims and thus barred by limitation. 
    • If the answer to any of the two is against the party seeking referral of disputes to arbitration, the Court may refuse to appoint an arbitral tribunal. 

Conclusion 

• This is the landmark judgment of the Supreme Court which provides that the application filed under Section 11 (6) of the Arbitration and Conciliation Act, 1996 is governed by Limitation Act, 1963. 
• The Court in this case also observed that period of three years for filing an application under Section 11 (6) is an unduly long period and hence goes against the spirit of the Arbitration Act which aims at expeditious disposal of disputes. 
• Thus, the Court recommended an amendment to the Act in order to fill this lacuna.     

[Original Judgment]