This article attempts to analyse and examine the applicability of the law of limitation to proceedings under the Arbitration and Conciliation Act, 1996, vis-à-vis two aspects in particular. The first of these aspects being the limitation as applicable to the initiation of arbitration, be it by reference to arbitration by the court or by filing an application of appointment of an arbitrator in court, and the second being the limitation as applicable to the substantive claims in arbitration.
The law of limitation and the statutory regime for applicability of limitation to arbitration
The law of limitation is essentially a statute in the civil law system, which prescribes a maximum period, after the happening of an event, in which legal action can be commenced. The happening of this event, is often called the cause of action, which means the bundle of facts which constitute to establish the infringement of right. In India, the law of limitation is governed by the Limitation Act, 1963 (hereinafter referred to as “the Limitation Act”), and Section 3 of the Limitation Act of bars the remedy of filing of suits, appeals and applications, after prescribed period of time.1 Thus, an action cannot be initiated by a party if the prescribed time has passed after accrual of cause of action on the basis of which the action has been initiated.
The law of limitation is based on the following maxim[1], vigilantibus non dormientibus jura subveniunt which means “laws serve the vigilant, not those who sleep.” Additionally, Halsbury’s Laws of England[2], states the objectives of the law of limitation as follows:
“The Courts have expressed at least three different reasons supporting the existence of statutes of limitation i.e.―
(a) that long dormant claims have more of cruelty than justice in them;
(b) that a defendant might have lost the evidence to dispute the State claim; and
(c) that persons with good causes of actions should pursue them with.”
Similarly, the Delhi High Court in Satender Kumar v. MCD[3] (Satender Kumar), while highlighting the objectives of law of limitation stated that due to long passage of time vital evidence which would be the defence of the opposite party is bound to get lost or misplaced. Therefore, seeking adjudication of claims preferred after long lapse of time would cause more injustice than justice.
Arbitration is not an exception to this principle, and the law of limitation also applies to it. Section 43(1) of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as “the Arbitration Act”)[4] states that “the Limitation Act, 1963 (36 of 1963), shall apply to arbitrations as it applies to proceedings in court”.
Applicability of the Limitation Act for initiation of arbitration
The question now arises as to when does the cause of action to initiate arbitration arise, and when does it stop. In this part, we go on to see the application of the law of limitation vis-à-vis initiation of arbitration. Broadly speaking arbitration can be initiated by means of three methods:
(i) By sending a notice of invocation to the other party within the meaning of Section 21 of the Arbitration Act. This is also the point of commencement of an arbitration proceeding.
(ii) By filing an application under Section 11 of the Arbitration 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.
(iii) By filing an application under Section 8 of the Arbitration Act. Section 8 empowers a party to apply, to a Court before which an action may have been brought in a case where an arbitration agreement exists, 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 or judicial authority, the opposing party can approach the court by filing an application under Section 8 praying for the matter to be referred to arbitration.
The question now to be analysed is what the time period for initiation of arbitration is, and when does the limitation for this begin. One of the early judgments which sets the law in this regard is the judgment of Inder Singh Rekhi v. DDA[5] (“Inder Singh Rekhi”), the Court observed that:
“… in order to be entitled to an order of reference under Section 20 (Section 11 of the Arbitration Act, which was previously Section 20 of the Arbitration and Conciliation Act, 1940) it is necessary that there should be an arbitration agreement and secondly, difference must arise to which this agreement applies. The existence of a dispute is, therefore, essential for appointment of an arbitrator under Section 8 or a reference under Section 20 of the Act.”
The Court’s reading was in respect of Section 20 of the Arbitration and Conciliation Act, 1940 (hereinafter referred to as “the old Act”) which is essentially Section 11 of the Arbitration Act, and the element of dispute is contained in Section 21 of the Arbitration Act. Therefore, even under the Arbitration Act, in order to get a dispute referred under Section 11 of the Arbitration Act, the necessary ingredients are the existence of a dispute, and the second ingredient being the existence of an arbitration agreement.
The Court also went on to define that “A dispute arises where there is a claim and a denial and repudiation of the claim.”
Further, even R.S. Bachawat’s Law of Arbitration[6] defines the word dispute in following terms:
“…there can only be a dispute when a claim is asserted by one party and denied by the other on whatever grounds. Mere failure or inaction to pay does not lead to the inference of the existence of dispute. Dispute entails a positive element and assertion in denying, not merely inaction to accede to a claim or a request. Whether in a particular case a dispute has arisen or not has to be found out from the facts and circumstances of the case.”
The Court then went on to hold that the starting point for the cause of action for determining the limitation for a Section 20 petition or a Section 8 application would be the point from when the dispute arose, by observing that:
“4. In order to be entitled to ask for a reference under Section 20 of the Act there must not only be an entitlement to money but there must be a difference or dispute must arise. … when the assertion of the claim was made on 28-2-1983, and there was non-payment, the cause of action arose from that date.”
The observation of the Supreme Court was in view of the applicability of Article 137 of the Limitation Act to a petition under Section 11 (Section 20) or a petition under Section 8. Article 137 is the article which applies to any petition which is filed in court, which reads “Three years from when the right to apply accrues”. Therefore clearly, the “right to apply” for a petition under Section 8 or Section 11 would accrue only once the dispute has accrued, and therefore the starting point for limitation of an application under Section 8 or Section 11 would be the accrual of the dispute.
Even before the judgment of Inder Singh Rekhi8, the Supreme Court of India had clarified that Article 137 (erstwhile Article 181) of the Limitation Act, 1963, would be applicable to petitions moved before the Court, even if they are moved under the Arbitration Act. This was the observation in Wazir Chand Mahajan v. Union of India9, which laid down that Article 181 of the old Limitation Act, 1908 would be applicable to applications filed under Section 20 of the old Act.
There could also be other instances where a dispute could arise. A dispute could also arise when one party gives a notice of invocation/appointment of arbitrator to the other party, and the other party either fails to do so, or fails to agree on an appointment10. The limitation would then start from that date, for the purpose of filing a petition under Section 11 or Section 8.
In view of the above discourse, it is evident, that the starting point of limitation for initiation of arbitration, is from the date when the dispute arose, and the stopping point is the giving of the notice of invocation, or the filing of the Section 11 or Section 8 petition.
Applicability of the Limitation Act to substantive claims in arbitration
The next question which arises is how to judge when the limitation for the substantive claim starts, and when does it stop. While in the previous section we discussed what is the right time period to initiate arbitration, we contrast this section by analysing the prescriptive time period for a substantive claim within the arbitration. Therefore, this section deals with the cause of action for a claim, and not the cause of action for an arbitration.
One such question arose for consideration in Panchu Gopal Bose v. Board of Trustees for Port of Calcutta11 (“Panchu Gopal”). In this case, the petitioner had made its claim for the first time in the year 1979. Thereafter no payment was forthcoming towards this claim. However, the petitioner thereafter failed to take any follow-up action, up until November 1989, that means well over 10 years. In November 1989 the petitioner sent a notice of invocation for appointment of arbitrator to the respondent, where after the respondent immediately refuted it. In this case, the Court held that the cause of arbitration arises when the claimant becomes entitled to raise the question, that is, when the claimant acquires the right to require arbitration. The Court therefore observed that “the limitation would run from date when the cause of arbitration would have accrued, but for the agreement”. Therefore, the Court found that in this case the cause of arbitration had accrued back in 1979, when it became entitled to payment, and not in 1989 when the dispute arose. Therefore, the claim of payment was held to be hopelessly barred by limitation.
Similarly, even in J.C. Budhraja v. Orissa Mining Corpn. Ltd.12 (“J.C. Budhraja”), where it was the petitioner’s contention that the limitation for the claims would begin to run from the date on which the difference arose between the parties, the Court refuted the contention and observed to the contrary. In this case the Court took notice that the notice for invocation of arbitration was served on 4-06-1980, and it had to be seen whether on that date, the claims were barred. The Court then went on to observe that that claim arose on 14-4-1977 when the final bill was prepared, and not on 4-6-1980, when the notice invoking arbitration was sent.
The Delhi High Court, in Satender Kumar13 observed that limitation for filing a petition for appointment of an arbitrator would be different from the limitation for a claim and the accrual/arising of cause of action for a claim would vary as per the facts and circumstances of each case, and the nature of jural relationship between the parties. In this particular case, the Court held that Article 18 of the Limitation Act would be applicable, and the cause of action arose in that particular case upon completion of work. Similarly, in MCD v. Gurbachan Singh and Sons14 (“Gurbachan Singh”) it was observed that a claim pertaining to work completed in 1994 for which the claim was filed only in the year 2000, was barred by limitation, as the cause of action arose in the year 1994.
Therefore, what becomes apparent from this discourse is, that as far as the starting of limitation period for a substantive claim is concerned, the instance where the cause of action arises, depends on the facts and circumstances of each case, and is not merely the point where the dispute arises.
As far as the stopping of the period of limitation of a claim or a counterclaim is concerned, the Supreme Court’s judgment in State of Goa v. Praveen Enterprises15 makes the law very clear. In respect of claims in arbitration, the Court clarifies by a combined reading of Section 21 of the Arbitration Act, and Section 3 of the Limitation Act, 1963, the following aspects:
- A claim for which a notice invoking arbitration is given, the date of stopping of limitation, is the date when a notice invoking arbitration is given.
- In case of the claims, where there is no notice of invocation given, and they are added directly in the statement of claim, then the date of filing of the statement would be the relevant date when the limitation stops to run.
- In the case of a claim, for which neither a notice of invocation is given, nor they were contained in the original statement of claims, the relevant date for stopping of the limitation period would be, the date on which the amendment in the original statement of claims, incorporating this new claim is filed.
- In the case of a claim in the nature of a set-off, the same above rules being Rules 1, 2 and 3 would apply. That means the date of stopping of limitation would be the date when either the main claim is invoked, or filed in the statement of claims, or incorporated by way of an amendment, respectively.
- In the case of a counterclaim, ordinarily, the date when the counterclaim is filed would be the date relevant for determining the date of stopping of limitation period.
- However, in the case of a counterclaim, where before filing the counterclaim, the counter claimant has, by way of a separate notice of invocation, invoked the counterclaim, then that would be the date relevant for the stopping of the limitation period.
Court’s view on the difference between the period of limitation for a claim and for filing of a petition
The Courts in India have time and again reiterated that there is a marked difference between the limitation period for filing a petition under Section 11 or Section 8, and the limitation period for a claim to be raised in arbitration.
The Supreme Court has in J.C. Budhraja16 cautioned that “the period of limitation for filing a petition under Section 8(2) seeking appointment of an arbitrator cannot be confused with the period of limitation for making a claim”. In this case the Court had highlighted the error made by the arbitrator while confusing both issues.
In Union of India v. L.K. Ahuja and Co.17, an application was made to the Court for the appointment of arbitrator in year 1976 after the denial of the request by respondent in the same year. However, the claim which anticipated to be referred to the arbitration was pertaining to the work completed in the year 1972. The Supreme Court observed that:
“8. In view of the well-settled principles we are of the view that it will be entirely a wrong to mix up the two aspects, namely, whether there was any valid claim for reference under Section 20 of the Act and, secondly, whether the claim to be adjudicated by the arbitrator, was barred by lapse of time. The second is a matter which the arbitrator would decide unless, however, if on admitted facts a claim is found at the time of making an order under Section 20 of the Arbitration Act, to be barred by limitation.”
Apart from the key difference of the limitation period itself, the difference also exists in the stage when the limitation aspect of both issues can be looked into by a Court or an arbitrator. While the limitation period for filing a petition for appointment of an arbitrator or reference of disputes to arbitration is to be seen by the Court, the limitation aspect of the substantive claims is looked into by the Arbitral Tribunal and not the Court. The only exception to this rule is if the claims to be referred to arbitration are hopelessly barred by limitation, which is apparent from admitted facts and documents.
The Delhi High Court explained this distinction in Satender Kumar18, by observing:
“The limitation for filing a petition, seeking reference of disputes to arbitration, is different than the period of limitation for the subject claims as such. Meaning thereby, that the petition may be within limitation because, it may be filed within three years of arising of disputes, however the main claims are time barred or not is an issue on merits to be decided in arbitration proceedings The second aspect, and which is in fact is the more important aspect, is that, if on admitted facts, the claims are clearly barred by limitation at the time of passing of the order under Section 20 of the Arbitration Act, 1940, then there need not be reference of the disputes to arbitration because there is no entitlement to money, and therefore a dispute or difference with respect to the same, once the same are clearly time barred.”
Another instance where the Court refused to refer dead claims to arbitration is in Progressive Constructions Ltd. v. National Hydroelectric Power Corpn. Ltd.19, wherein it was been held that claims which are ex facie barred by limitation need not be referred for decision in the arbitration proceedings. Further, even in National Insurance Co. Ltd. v. Boghara Polyfab (P) Ltd.20, it has been held that dead claims (long barred) need not be referred to arbitration.
Since these judgments, there has been a slight evolution in law, in terms of the amendment brought in Section 1121, where the Court, while considering an application for appointment, now needs to confine itself to the question whether the arbitration agreement exists or not, and need not go into any other aspects. However, despite this marked change in law, it can still be argued, that in the case of dead claims, which are hopelessly barred by limitation, there is nothing to be referred to arbitration, and thus the Court may still refuse an appointment on this ground.
Conclusion
Applicability of the law of limitation to arbitration proceedings is much more similar to its applicability to a suit initiated under the Code of Civil Procedure, 1908. However, the difference arises with respect to the date on which the dispute arises and the date on which request for arbitration has been made to the respondent. As these dates decide the validity of application made to the court, with respect to the law of limitation.
Ultimately, the Courts are empowered to dismiss the application even if it is within time, in case where substantive claim is time barred on admitted facts. As, it would save the party from the cost of arbitration, especially in case where the arbitrator could erroneously hold the time-barred claim as claim within time, ultimately leading to a failure in being able to enforce such a claim.
† Working with Adwitya Legal LLP as Partner, Arbitration and Dispute Resolution, e-mail: gunjan@adwlegal.co.in.
Author is grateful to Mr. Akash Kishore, who is currently interning with Adwitya Legal LLP, for his research inputs.
1 Provided under First Schedule to the Limitation Act, 1963.
[1] Vanka Radhamanohari v. Vanka Venkata Reddy, (1993) 3 SCC 4.
[2] Fifth Edn. (2008).
[4] S. 37 of the Arbitration Act, 1940.
[6] Wadhwa and Co. (2005).
[10] State of Orissa v. Damodar Das, (1996) 2 SCC 216.
[19] 2009 SCC OnLine Del 2199.
[21] By way of the Arbitration and Conciliation (Amendment) Act, 2015, S. 11(6-A) was inserted which reads, “The Supreme Court or, as the case may be, the High Court, while considering any application under sub-s. (4) or sub-s. (5) or sub-s. (6), shall, notwithstanding any judgment, decree or order of any court, confine to the examination of the existence of an arbitration agreement.”
By way of the Arbitration and Conciliation (Amendment) Act, 2015, S. 11(6-A) was inserted which reads, “The Supreme Court or, as the case may be, the High Court, while considering any application under sub-s. (4) or sub-s. (5) or sub-s. (6), shall, notwithstanding any judgment, decree or order of any court, confine to the examination of the existence of an arbitration agreement.”
With the above amendment in place, the limitation aspect for the appointment of an arbitrator is over. How the individual claims pass the muster of limitation (see Inder Singh Rekhi) is important now. The article is one-sided, there are judgments of counter-view like ML Dlmiya and Co vs UOI [02 May 1963, Calcutta HC] and others. Please make the article comprehensive in the next write-up.
deepak.thakur@airliquide.com