Time to Fill the Legislative Vacuum for Limitation Under the Arbitration and Conciliation Act, 1996

The law of limitation is based on the Latin maxim ‘vigilantibus non dormientibus jura subveniunt’ meaning that the law serves the vigilant and not those who sleep. How this concept has been applied in the arbitration is sought to be examined in this paper.

Arbitration — What is?

In the world of commercial litigations, parties intend to resolve their disputes at the earliest possible. The Alternative Dispute Resolution (ADR) mechanism is the most efficient manner because the commercial world rightly believes that “time is money”. We all know that arbitration is indeed one of the three pillars of the much talked about ADR mechanism. Arbitration plays a vital role in resolving the disputes in a much faster and cost-effective manner, which otherwise would have moved at a slow pace considering the traditional court system.

Arbitration is a procedure where the parties opt for a private dispute resolution procedure instead of going to court. In arbitration, a dispute is agreed to be settled by agreement of the parties, to one or more arbitrators who make a binding decision on the dispute. In the case of future disputes arising under a contract, the parties insert an arbitration clause in the relevant contract. An existing dispute can be referred to arbitration by means of a submission agreement between the parties. Arbitration is an effective alternative dispute resolution process.

In India, Section 19 of the Arbitration and Conciliation Act, 1996¹ contemplates, that the Arbitral Tribunal shall not be bound by the Code of Civil Procedure, 1908² or the Evidence Act, 1872³ and that the parties are free to agree on the procedure to be followed by the Arbitral Tribunal. The Limitation Act, 1963⁴ applies to arbitrations as it applies to proceedings in court. Sub-section (2) of Section 43 of the Arbitration and Conciliation Act, 1996, contemplates that an arbitration shall be considered to have started on the date referred to in Section 21 of the Arbitration and Conciliation Act, 1996. Section 21 provides that arbitral proceedings in respect of a particular dispute starts on the date on which a request for that dispute to be referred to arbitration is received by the respondent. Section 37 of the Arbitration Act, 1940⁵ also provided that the Limitation Act, 1908, since repealed by the Limitation Act, 1963 would apply to arbitration proceedings as they apply to proceedings before the court.

Section 9 of the Code gives plenary jurisdiction to try all suits of civil nature except, where the jurisdiction is either expressly or impliedly barred. In terms of Section 8 of the Arbitration and Conciliation Act, 1996 a judicial authority is mandated to refer disputes to the arbitration, on satisfaction of the conditions mentioned in the said provision. Thus, an arbitration clause in the agreement expressly bars the jurisdiction of the civil court. Thus, the arbitration is a process alternate to the civil courts.

What is cause of action?

The expression cause of action is not defined either in the Code or in the Limitation Act. But it has received a definite meaning and interpretation by the courts in India. The foremost judgment is that of the Privy Council in Mohd. Khalil Khan v. Mahbub Ali Mian⁶. The Court explained the scope of the expression “cause of action” in the following words:

The phrase ‘cause of action’ has not been defined in any enactment, but the meaning of it has been judicially considered in various decisions. In Read v. Brown⁷, Lord Esher, M.R., accepted the definition given in Cooke v. Gill⁸, that it meant ‘every fact which it would be necessary for the plaintiff to prove, if traversed, in order to support his right to the judgment of the Court. It does not comprise every piece of evidence which is necessary to prove each fact, but every fact which is necessary to be proved’⁹. Fry, L.J., agreed, and said, ‘Everything which, if not proved, gives the defendant an immediate right to judgment, must be part of the cause of action’¹⁰. Lopes, L.J., said, ‘I agree with the definition given by the Master of the Rolls of a cause of action, and that it includes every fact which it would be necessary to prove, if traversed, in order to enable a plaintiff to sustain his action….’¹¹”. This decision has been followed in India. The term has been considered also by the Board. In Musummat Chand Kour v. Partab Singh¹², Lord Watson delivering the judgment of the Board observed as follows:

…Now the cause of action has no relation whatever to the defence which may be set up by the defendant, nor does it depend upon the character of the relief prayed for by the plaintiff. It refers entirely to the grounds set forth in the plaint as the cause of action, or, in other words, to the media upon which the plaintiff asks the court to arrive at a conclusion in his favour.”

In Raghwendra Sharan Singh v. Ram Prasanna Singh¹³, the Supreme Court quoted from the Church of Christ Charitable Trust and Educational Charitable Society v. Ponniamman Educational Trust¹⁴, holding that the cause of action is a bundle of facts which taken with the law applicable to them gives the plaintiff the right to relief against the defendant. Every fact which is necessary for the plaintiff to prove to enable him to get a decree should be set out in clear terms. A cause of action must include some act done by the defendant since in the absence of such an act no cause of action can possibly accrue.

In State of Goa v. Summit Online Trade Solutions (P) Ltd.¹⁵, the Supreme Court held that it is axiomatic that without a cause, there cannot be any action. However, in the context of a writ petition, what would constitute such “cause of action” is the material facts which are imperative for the writ petitioner to plead and prove to obtain relief as claimed. The Court held as under:

16. The expression “cause of action” has not been defined in the Constitution. However, the classic definition of “cause of action” given by Lord Brett in Cooke v. Gill¹⁶ that “cause of action means every fact which it would be necessary for the plaintiff to prove, if traversed, in order to support his right to the judgment of the court”, has been accepted by this Court in a couple of decisions. It is axiomatic that without a cause, there cannot be any action. However, in the context of a writ petition, what would constitute such “cause of action” is the material facts which are imperative for the writ petitioner to plead and prove to obtain relief as claimed.¹⁷

Limitation in arbitration proceeding

The Limitation Act, 1963 is an outcome of the Third Report of the Law Commission of India on “Limitation Act, 1908” (1956) which ultimately led to the repeal of the Limitation Act, 1908 and in the enactment of the present Act of 1963 which came into force w.e.f. 1-1-1964. Two articles from the Limitation Act, which may be relevant reads thus:

The Second Division of the Limitation Act is of period of limitation for appeals whereas the Third Division is that of an application. Part I of this division relates to application in specified cases whereas Part II relates to other applications. Article 137 is the only article in Third Division of Part II, which reads as under:

A comparison of Articles 113 and 137 shows that in any suit for which no period of limitation is prescribed, the time begins to run when the right to sue accrues whereas in Article 137 time to which period began to run when the right to apply accrues. Article 113 uses the word right to sue and Article 137 uses expression right to apply.

The question, which arises is as to whether there is distinction between the two expressions “right to sue” and the “right to apply”. The expression right to sue appearing in Article 113 has no material or substantial difference with the right to apply appearing in Article 137. The word “sue” is appearing in Article 113 for the reason that such article relates to the suit, whereas Article 137 relates to application, therefore the word “apply” appears in that article. The Limitation Act applies as it applies to the court in terms of Section 43 of the Act. Therefore, for a dispute between the parties, the period of limitation has to be referred to in Part I or Part II or Article 113 of the Limitation Act as the case may be. The application to seek appointment of an arbitrator is for resolution of dispute is not independent of “right to sue” in terms of the substantial provisions of the Limitation Act. The judgments of the Supreme Court in relation to appointment of an arbitrator has been arising out of Article 137 (earlier Article 181) of the Limitation Act.

In Wazir Chand Mahajan v. Union of India¹⁸, a three-Judge Bench held that as originally enacted Limitation Act, 1908, all applications contemplated to be made under Articles 158 to 180, were to be made under the Code of Civil Procedure and there was a catena of authorities holding that in Article 181 the expression “under the Code of Civil Procedure” must be deemed to be necessarily implicit. The Court held as under:

5. If Article 181 of the Limitation Act only governs applications under the Code of Civil Procedure for which no period of limitation is provided under the Schedule, an application under the Arbitration Act, 1940 not being an application under the Code of Civil Procedure, unless there is some provision, which by express enactment or plain intendment to the contrary in the Arbitration Act, 1940, will not be governed by that article.

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7. There is no doubt that clause (1) of Section 37 of the Arbitration Act, 1940 deals only with the authority of the arbitrator to deal with and decide any dispute referred to him: it has no concern with an application made to the court to file an arbitration agreement and to refer a dispute to the arbitrator. After an agreement is filed in court and the matter is referred to the arbitrator, it is for the arbitrator to decide by the application of the law contained in the Limitation Act, whether the claim is barred. But, Section 37(1) does not confer authority upon the court to reject the application for filing of an arbitration agreement under Section 20 of the Arbitration Act, 1940 because the claim is not made within three years from the date on which the right to apply arose. In dealing with an application for filing an arbitration agreement, the court must satisfy itself about the existence of a written agreement which is valid and subsisting and which has been executed before the institution of any suit, and also that a dispute has arisen with regard to the subject-matter of the agreement which is within the jurisdiction of the court. But, the court is not concerned in dealing that application to deal with the question whether the claim of a party to the arbitration agreement is barred by the law of limitation: that question falls within the province of the arbitrator to whom the dispute is referred.

A three-Judge Bench judgment reported as Kerala SEB v. T.P. Kunhaliumma¹⁹, took a different view. The Court held as to an application for appointment of an arbitrator is not under the Code. It was held that an application shall lie before the court, therefore such an application would be governed by Article 137. It did not agree with the view that an application under Article 137 is maintainable as it is an application under the Code. The judgment in Wazir Chand Mahajan case²⁰ was not brought to the notice of the Court. It was held as under:

18. The alteration of the division as well as the change in the collocation of words in Article 137 of the Limitation Act, 1963 compared with Article 181 of the Limitation Act, 1908 shows that applications contemplated under Article 137 are not applications confined to the Code of Civil Procedure. In the Limitation Act, 1908 there was no division between applications in specified cases and other applications as in the Limitation Act, 1963. The words ‘“any other application’” under Article 137 cannot be said on the principle of ejusdem generis to be applications under the Civil Procedure Code other than those mentioned in Part I of the Third Division. Any other application under Article 137 would be petition or any application under any Act. But it has to be an application to a court for the reason that Sections 4 and 5 of the Limitation Act, 1963 speak of expiry of prescribed period when court is closed and extension of prescribed period if applicant or the appellant satisfies the court that he had sufficient cause for not preferring the appeal or making the application during such period.

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22. The conclusion we reach is that Article 137 of the Limitation Act, 1963 will apply to any petition or application filed under any Act to a civil court. With respect we differ from the view taken by the two-Judge Bench of this Court in Town Municipal Council v. Presiding Officer²¹ and hold that Article 137 of the Limitation Act, 1963 is not confined to applications contemplated by or under the Code of Civil Procedure. The petition in the present case was to the District Judge as a court. The petition was one contemplated by the Telegraph Act, 1885 for judicial decision. The petition is an application falling within the scope of Article 137 of the Limitation Act, 1963.²²

Thus, there is material change in the interpretation in respect to applicability of Article 137 to an application for the appointment of an arbitrator. The view that an application under Article 181 is in fact an application under the Code is changed to the say that an application under Article 137 (old Article 181) is maintainable before the court. The said judgment in Kerala SEB case²³ holds the field even now. The difference was in the reasoning and not in respect of applicability of Article 137 of the Limitation Act.

The Supreme Court held that an application for appointment of an arbitrator under Section 20 of the Arbitration Act, 1940 or that under Section 11 of the Act is required to be filed within period of three years in terms of Article 137 of the Limitation Act (earlier Article 181 of the Limitation Act), when the demand for appointment is raised and not accepted by the respondents. The question as to whether the subject-matter of arbitration, it is within the period of limitation or not, will be gone into by the arbitrator.

The consistent view of the courts is that the period of limitation for an application for appointment of an arbitrator is under Article 137 of the Limitation Act.

The interpretation that Article 137 would be applicable in all situations of appointment of an Arbitral Tribunal, in my view, is fallacious. Section 43 of the Arbitration and Conciliation Act, 1996 or Section 37 of the Arbitration Act, 1940 states that the Limitation Act would apply as it applies to proceedings in courts. Therefore, the limitation would be the same as if the parties are approaching the civil court. Arbitration is an alternative to the civil court. The law does not provide a different period of limitation, then what would be limitation, if the cause is to be brought before the civil court?

There are multiple ways of appointment of an Arbitral Tribunal, firstly, if a party fails to appoint an arbitrator after 30 days’ notice is served in terms of Section 11(4) of the Arbitration and Conciliation Act, then by filing an application under Section 11(6) of the Arbitration and Conciliation Act. This section provides that a party can approach the court for appointment of arbitrator, if both parties fail to appoint an arbitrator, either under an agreed procedure as per the agreement between the parties, or upon notice of invocation of arbitration. This aspect would be covered by the judgment in Kerala SEB case²⁴. In other words, the view is that the limitation is independent of cause of action to resolve disputes, as the period of limitation would be deemed to arise when the notice seeking appointment of an arbitrator is not accepted by the other side.

Secondly, the question is what would be the period of limitation if the other party agrees to appoint an arbitrator without the intervention of the court or if the parties have agreed to seek resolution of disputes by an arbitral institution. The limitation for resolution of disputes is the period prescribed for raising claim under the Limitation Act. Thus, in case of refusing to appoint an arbitrator, when the intervention of the court is required to be invoked, there would be extended period of limitation, which will start from the date of refusal but not in the case of appointment of an arbitrator without the intervention of the court or appointment of an arbitrator by an institution.

Thirdly, what would be the period of limitation, if an issue of arbitration agreement arises, before a judicial authority in terms of Section 8 of the Act. Section 8 deals with the situation where a party invokes the jurisdiction of a civil court even though there is an arbitration agreement. Such a court is competent to refer the parties to arbitration. Therefore, in a case where an arbitration agreement exists between the parties, and one party has still brought a civil action before the court, the opposing party can approach the court by filing an application under Section 8 praying for the matter to be referred to arbitration. Thus, if a judicial authority in terms of Section 8 of the Act is called upon to appoint an Arbitral Tribunal, the period of limitation would be as that is before the civil court.

The answer to the above questions would be different if an application for appointment of an arbitrator is treated to be one under Article 137 of the Limitation Act. In a situation where a party to an agreement appoints an arbitrator without intervention of the court, the period of limitation would be that under Part I or Part II or under Article 113 of the Limitation Act of the First Division relating to suits. Article 137 would not come into play at all in such a scenario.

Section 21 of the Arbitration and Conciliation Act, 1996 deals with the commencement of arbitration proceedings and not the period of limitation, or as to when the cause of action accrues to a party.

Identifying the statutory snag

The Act requires the entire arbitration proceedings to be decided within 12 months (excluding the 6-month time for statement of claim and defence). While, on the other hand, in view of the judgments referred to above, an application under Section 11(6) of the Act, the period of limitation is three years. Such time is contrary to the concept of arbitration to ensure time-bound completion of the proceedings.

22. In Arif Azim Co. Ltd. v. Aptech Ltd.²⁵ an arbitration application was filed within a period of three years from the date when the respondent failed to comply with the notice of invocation of arbitration, which was issued by the petitioner. In the said petition, the following two issues were decided:

(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?

(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 observed that the Parliament should consider bringing an amendment to the Act 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. The relevant extract from the judgment reads as under:

94. Before we part with the matter, we would like to mention that this Court while dealing with similar issues in many other matters has observed that the applicability of Section 137 to applications under Section 11(6) of the Arbitration and Conciliation Act, 1996 is a result of legislative vacuum as there is no statutory prescription regarding the time-limit. We would again like to reiterate that the period of three years is an unduly long period for filing an application under Section 11 of the Arbitration and Conciliation Act, 1996 and goes against the very spirit of the Arbitration and Conciliation Act, 1996 which provides for expeditious resolution of commercial disputes within a time-bound manner. Various amendments to the Arbitration and Conciliation Act, 1996 have been made over the years so as to ensure that arbitration proceedings are conducted and concluded expeditiously. We are of the considered opinion that the Parliament should consider bringing an amendment to the Arbitration and Conciliation 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 Arbitration and Conciliation Act, 1996.…²⁶

In my view, the Act is required to be amended so as to make it implicit about the period of limitation in all situations and not merely in case of an application for appointment of an arbitrator under Section 11 of the Arbitration and Conciliation Act, 1996, so that purpose of the Act to provide an effective alternative dispute mechanism for a quick resolution of disputes becomes a reality. In order to make India as a global arbitration hub, the procedure should not be allowed to defeat the very essence of arbitration. An ideal periphery on an equal footing in the arbitration laws is the need of the hour especially when the arbitration world is looking upon India as a “light bearer” in the field of ADR mechanism.