To bar or not to bar – the Indian Supreme Court on limitation and applications for appointment of arbitrators

In a significant decision in Arif Azim Co. Ltd. v. Aptech Ltd. 2024 INSC 155, the Supreme Court of India (Court) has clarified the applicability of the law of limitation to applications made to courts for the appointment of arbitrators under Section 11(6) of the Indian Arbitration & Conciliation Act, 1996 (Arbitration Act) when the agreed appointment mechanism fails, or a party fails to act in accordance with agreement.

The Court found that parties have a period of three years, calculated from the date when the respondent fails to comply with the agreed appointment procedure on receipt of a valid notice invoking arbitration, to apply to the courts for appointment of arbitrators. Failure to do so could mean that parties are left without recourse to pursue the substantive claims in arbitration.

The Court also considered the scope of its power to examine whether the substantive claims in respect of which arbitration has been commenced are within limitation while dealing with such applications. The Court found that courts could refuse to appoint an arbitrator where "the claims are ex-facie and hopelessly time-barred". The Court held that although limitation "is an admissibility issue", it is "the duty of the courts to prima-facie examine and reject non-arbitrable or dead claims".

The Court also observed that a limitation period of three years for filing an application to appoint arbitrators is unduly long and goes against the spirit of the law, which is aimed at expeditious resolution of commercial disputes. The Court recommended that the Parliament of India consider providing a specific limitation period for such applications by way of a legislative amendment.

Background

The petitioner, a company based in Kabul, Afghanistan, filed an application for appointment of an arbitrator in its dispute with the respondent, an Indian company, having invoked arbitration in respect of the dispute. The dispute arose under one of three franchise agreements between the parties under which the respondent granted a non-exclusive licence to establish and operate an English language training academy and involved a claim by the petitioner for non-payment of royalty and renewal fees. The petitioner invoked arbitration pursuant to an arbitration agreement providing for an ad hoc arbitration in India and, when the respondent refused to appoint an arbitrator as per the agreed procedure, the petitioner approached the Court under Section 11(6) of the Arbitration Act.

The respondent argued before the Court that the dispute was barred by limitation, arbitration having been invoked more than three years after the dispute arose. The respondent also claimed that the petitioner had not acted with vigilance in protecting its rights and thus, its application for appointment of an arbitrator should be rejected.

In the context of these arguments, the Court framed the following questions for consideration:

1. Whether the Indian Limitation Act, 1963 (Limitation Act) is applicable to an application for appointment of arbitrator under Section 11(6) of the Arbitration Act? If yes, whether the petition before it was barred by limitation?
2. Whether the court may refuse to make a reference to arbitration (by appointing arbitrators) when approached under Section 11 of the Arbitration Act where the claims are ex facie and hopelessly time-barred?

Decision of the Court

Applicability of the Limitation Act to an Application under Section 11(6) of the Arbitration Act

The Court examined the statutory framework and previous cases and concluded that the Limitation Act was applicable to arbitration proceedings and, also, to applications under Section 11 (6) of the Arbitration Act for appointment of arbitrators. According to the Court, under the Limitation Act, parties have a three-year period from the date when the right to apply accrues to file applications under Section 11(6) of the Arbitration Act.

In respect of applications under Section 11(6) of the Act, the Court concluded that the "right to apply" would accrue when there is a failure or refusal on the part of a party to make an appointment as per the agreed procedure pursuant to a valid notice invoking arbitration issued by one of the other parties.

Courts' power to refuse applications for appointment of an arbitrator where substantive claims are time-barred

In addition to finding that the application under Section 11(6) of the Arbitration Act was made well within the limitation period, the Court considered its power to refuse such applications where substantive claims sought to be arbitrated are obviously barred by limitation. Although the Court acknowledged that the issue of limitation was one of admissibility (relating to the nature of the claim) rather than one of jurisdiction (relating to the power and authority of the arbitrators to decide a claim), it found that it had a duty 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". The Court observed that this power is to be used exceptionally and as circumscribed by the "eye of the needle" test referred to in the previous case of NTPC Ltd. v SPML Infra Ltd. 2023 9 SCC 285. This test, as the Court in NTPC explained, advocates "limited scrutiny, through the eye of the needle", is "necessary and compelling" and is intertwined with the duty of the Courts to protect parties from being forced to arbitrate non-arbitrable matters and, also, to prevent wastage of resources,both public and private.

Applying these findings to the facts of the case, the Court found that neither the application for appointment of arbitrator nor the substantive claim was barred by limitation and proceeded to appoint an arbitrator.

Relevance of the decision

This important decision provides certainty to parties regarding limitation issues that arise at the stage of appointment of arbitrators. However, the Court's conclusion that there should be an examination of the substance of the claims to answer questions of limitation is the latest in a string of recent cases that mark a clear shift towards an increased scope of review by the Court while exercising its powers under Section 11(6) of the Arbitration Act that goes beyond an examination of the existence of an arbitration agreement, the standard prescribed by the Arbitration Act. Whether the law develops to further expand the scope of review by the Court at the stage of appointment of an arbitrator and, consequently, the impact on timelines for such applications, remains to be seen.

For more information, please contact Andrew Cannon, Co-Head, Global Arbitration Practice, Anuradha Agnihotri, Of Counsel, or your usual Herbert Smith Freehills contact.

The authors would like to thank Praveena NS for her contribution to this blog post.