Indian Courts will not refer the parties to Arbitration when the claim is ex facie time barred

Over the past two decades, in a series of judgments the courts have interpreted various provisions of the Arbitration and Conciliation Act, 1996 (the Act) to develop the arbitration jurisprudence in India in line with international arbitration jurisprudence.

Konkan Railway Case

In Konkan Railway Corpn. Ltd. v. Mehul Construction Co.[1] (Konkan Railway 1) and Konkan Railway Corpn. Ltd. v. Rani Construction (P) Ltd. [2] (Konkan Railway 2) the Supreme Court held that an order appointing an arbitrator under Section 11 of the Act is administrative in nature and hence the Chief Justice or his nominee do not decide any preliminary issue, or the issue of non-arbitrability, validity and existence of the arbitration agreement, which are to be decided by the arbitrator at the first instance.

Patel Engg. Ltd Case

However, in 2005 a seven Judges Bench SBP & Co. v. Patel Engg. Ltd[3] overruled Konkan Railway and held that the Chief Justice/his designee while exercising the power to appoint an arbitrator under Section 11(6) of the Act has to decide whether the applicant has satisfied the conditions for appointing an arbitrator. The Court further held that that the Chief Justice/his nominee has the power to decide the question pertaining to jurisdiction, the existence of the arbitration agreement, the locus of the person making the request and the subsistence of an arbitrable dispute.

In National Insurance Co. Ltd. v. Boghara Polyfab (P) Ltd.[4] elucidating Patel Engg. Ltd. the court identified three categories of the issues that arise for consideration in an application under Section 11 of the Act, viz.

(i) issues which the Chief Justice or his designate is bound to decide:

(a) Whether the party making the application has approached the appropriate High Court.

(b) Whether there is an arbitration agreement and whether the party who has applied under Section 11 of the Act, is a party to such an agreement.

(ii) issues which he can also decide, that is, issues which he may choose to decide or leave it to the Arbitral Tribunal to decide:

(a) Whether the claim is a dead (long-barred) claim or a live claim.

(b) Whether the parties have concluded the contract/transaction by recording satisfaction of their mutual rights and obligation or by receiving the final payment without objection, and

(iii) issues which should be left to the Arbitral Tribunal to decide:

(a) Whether a claim made falls within the arbitration clause (as for example, a matter which is reserved for final decision of a departmental authority and excepted or excluded from arbitration).

(b) Merits or any claim involved in the arbitration.

2015 Amendment

The judgments in Patel Engg. Ltd. and Boghara Polyfab (P) Ltd. gave leeway to the Chief Justice/his designee to decide a large number of preliminary issues while exercising the jurisdiction under Section 11 of the Act. Finding that this freedom available the Chief Justice/his designee under Section 11 is contrary to the stated objects of arbitration and pursuant to law commission recommendations Section 11(6-A) by an amendment of the Act in 2015.

Section 11(6-A) added by the 2015 Amendment reads as follows:

“11. (6-A) The Supreme Court or, as the case may be, the High Court, while considering any application under sub-section (4) or sub-section (5) or sub-section (6), shall, notwithstanding any judgment, decree or order of any court, confine to the examination of the existence of an arbitration agreement.”

The object and reason for insertion of of Section 11(6-A) in the Act was to provide that while considering any application for appointment of arbitrator, the High Court or the Supreme Court shall examine the existence of a prima facie arbitration agreement and not other issues[5].

Subsequent to the insertion of Section 11(6-A), in Duro Felguera, S.A. v. Gangavaram Port Ltd.[6] the Justice Kurian Joseph in his concurring judgment held that Section 11(6-A) clearly shows the intention of the legislature that the court should and need only look into one aspect—the existence of an arbitration agreement[7] and that after the amendment, all that the courts need to see is whether an arbitration agreement exists—nothing more, nothing less. The legislative policy and purpose is essentially to minimise the Court's intervention at the stage of appointing the arbitrator and this intention as incorporated in Section 11(6-A) ought to be respected[8].

The issue has again come up before the Supreme Court in Mayavati Trading (P) Ltd. v. Pradyuat Deb Burman[9]. Referring to findings of Justice Kurian Joseph in paragraphs 48 and 59 of Duro Felguera, S.A. v. Gangavaram Port Ltd.[10], the Supreme Court held that it is clear that the law prior to the 2015 Amendment that has been laid down in Patel Engg. Ltd. etc. has now been legislatively overruled and that scope of Section 11(6-A) is confined to the examination of the existence of an arbitration agreement and is to be understood in the narrow sense.

2019 Amendment

The Act has been amended once again in 2019 to omit Section 11(6-A) from the statute. However, this amendment has not been notified and hence has not come to into force yet. The object of 2019 Amendment to omit Section 11(6-A) is to provide that the appointment of arbitrators under the section shall only be done by designated arbitral institutions without the Supreme Court or High Courts being required to determine the existence of an arbitration agreement[11]. Thus, the 2019 Amendment is in no way intended to revive the legal position that was prevailing prior to the 2015 Amendment.

Vidya Drolia Case

In 2021, by a judgment of a three-Judge Bench in Vidya Drolia v. Durga Trading Corporation[12], the Supreme Court elaborated the development of legal position as to who decides the question of non-arbitrability under the Act and observed that it can be divided into four phases. The first phase was from the enforcement of the Act till the decision in Patel Engg. Ltd. The second phase commenced with the decision in Patel Engg. Ltd. till the legislative amendments in 2016 (effective from 23.10.2015), which substantially reduce court interference and overrule the legal effect of Patel Engg. Ltd. The third phase commenced with effect from 23.10.2015 and continued till the amendment in 2019 (effective from 09.08.2019) from where commenced the fourth phase, with a clear intent to promote institutionalised arbitration rather than ad hoc arbitration.

The Supreme Court held that while exercising the powers under Section 8 and Section 11 of the Act, the court must undertake a primary first review to weed out “manifestly ex facie non-existent and invalid arbitration agreements, or non-arbitrable disputes”. When the court is certain that no valid arbitration agreement exists, or that the subject-matter is not arbitrable, that reference may be refused. The Court further opined that Mayavati Trading (P) Ltd. rightly held that Patel Engg. Ltd. has been legislatively overruled.

In Vidya Drolia the court proceeded to hold that limitation law being procedural law and disputes relating to limitation normally being factual, would be for the arbitrator to decide. However, it has been held that the court at the referral stage can interfere when it is manifest that the claims are ex facie time-barred and dead, or there is no subsisting dispute.

Nortel Networks (India) (P) Ltd Case

Following Vidya Drolia the Supreme Court in BSNL v. Nortel Networks (India) (P) Ltd.[13] distinguished between the issues of ‘jurisdiction’ and ‘admissibility’[14] and held that the issue of limitation, in essence, goes to the maintainability or admissibility of the claim, which is to be decided by the Arbitral Tribunal. However, referring to Vidya Drolia which affirmed Duro Felguera and Mayavati Trading (P) Ltd. held that in the limited category of cases, where there is not even a vestige of doubt that the claim is ex facie time-barred, or that the dispute is non-arbitrable, that the court may decline to make the reference.

Within few days[15] of the judgment in Nortel Networks (India) (P) Ltd. the Supreme Court again considered the court’s jurisdiction to examine the issue of limitation while exercising the powers Section 11 of the Act in Secunderabad Cantonment Board v. B. Ramachandraiah & Sons[16]. The court applying the judgments in Vidya Drolia and Nortel Networks (India) (P) Ltd ventured into examining whether the claim of the claimant is ex facie time-barred. Finding that the claim is ex facie time-barred, the Supreme Court set aside the judgment of the High Court which had appointed an arbitrator under Section 11(6) of the Act to adjudicate the claim.

The High Court of Delhi in a recent judgment in Gail (India) Limited v Kesar Alloys & Metals Private Limited[17] followed the above dictum laid down by the Supreme Court and dismissed the petition under Section 11(6) of the Act finding that the claim of the claimant is ex facie barred by limitation.

However, the Delhi High Court in Parsvnath Developers Ltd v. Future Retail Limited[18] found that the question whether a claim is barred by limitation is a mixed question of fact and law and thus held that the same is required to be examined by the arbitral tribunal.

Conclusion

Now it is settled under Indian law that the 2015 Amendment and subsequent judgements of the courts limited the scope of examination under Section 11(6) to the existence of an arbitration agreement to be understood in the narrow sense. However, while exercising the powers under Section 8 and Section 11 of the Act, the court must undertake a primary first review to weed out manifestly ex facie non-existent and invalid arbitration agreements, or non-arbitrable disputes. This mandates the courts to examine the issue of limitation and decline to make reference if the claim is ex facie time-barred.

However, the 2019 Amendment further limits the courts’ jurisdiction by proving that the appointment of arbitrators under the section shall only be done by the designated arbitral institutions without the courts being required to determine the existence of an arbitration agreement. Thus, once the 2019 Amendment is notified, the Courts’ role will be limited to designating arbitral institutions to exercise the powers under Section 11(6). This would in line with the role given to the Singapore International Arbitration Centre (SIAC) under International Arbitration Act, and to the Hong Kong International Arbitration Centre (HKIAC) under Hong Kong Arbitration Ordinance as default appointing authorities.

In view of Section 11(6-B) of the Act, such arbitral institutions will not have any judicial powers of the courts and hence will not have the jurisdiction or power to examine the issue of limitation or to decline to make reference even if the claim is ex facie time-barred.

[1] (2000) 7 SCC 201 [2] (2002) 2 SCC 388 [3] (2005) 8 SCC 618 [4] (2009) 1 SCC 267 [5] The Statement of Objects and Reasons which were appended to the Arbitration and Conciliation (Amendment) Bill, 2015 [6] (2017) 9 SCC 729 [7] Ibid para 48 [8] Ibid para 59 [9] (2019) 8 SCC 714 [10] (2017) 9 SCC 729 [11] Recommendation of High-Level Committee headed by Justice B.N. Srikrishna regarding institutionalisation of arbitration in India, [12] (2021) 2 SCC 1 [13] (2021) 5 SCC 738 [14] The court held that "38. limitation is normally a mixed question of fact and law, and would lie within the domain of the Arbitral Tribunal. There is, however, a distinction between jurisdictional and admissibility issues. An issue of “jurisdiction” pertains to the power and authority of the arbitrators to hear and decide a case. Jurisdictional issues include objections to the competence of the arbitrator or tribunal to hear a dispute, such as lack of consent, or a dispute falling outside the scope of the arbitration agreement. Issues with respect to the existence, scope and validity of the arbitration agreement are invariably regarded as jurisdictional issues, since these issues pertain to the jurisdiction of the tribunal. 39. Admissibility issues however relate to procedural requirements, such as a breach of pre-arbitration requirements, for instance, a mandatory requirement for mediation before the commencement of arbitration, or a challenge to a claim or a part of the claim being either time-barred, or prohibited, until some precondition has been fulfilled. Admissibility relates to the nature of the claim or the circumstances connected therewith. An admissibility issue is not a challenge to the jurisdiction of the arbitrator to decide the claim.” [15] The judgment in Nortel Networks (India) (P) Ltd. was delivered on 10.03.2021 and the judgment in Secunderabad Cantonment Board was delivered on 15.03.2021 [16] (2021) 5 SCC 705 [17] 2022 SCC OnLine Del 847 [18] ARB.P. 14 of 2020 decided on 12.04.2022