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A Warning From Supreme Court: Do Not Sleep Over Your Claims

The recent judgement given by the Hon'ble Supreme Court in the matter of Bharat Sanchar Nigam Limited vs M/s Nortel Networks India Pvt. Ltd. has ruled on the applicability of Article 137 of the Limitation Act, 1963 (hereinafter referred to as Limitation Act) on a Section 11 application under the Arbitration Act, 1996 (hereinafter referred to as Arbitration Act). Through this judgement the Supreme Court has paved the way for speedy and expeditious resolution of commercial disputes.

Factual Matrix
The Appellant, Bharat Sanchar Nigam Limited (“BSNL”) issued a tender to invite bids for planning, engineering, supply, insulation, testing and commissioning of GSM based cellular mobile network in the southern region. The Respondent was awarded the tender and a purchase order was issued in favour of the Respondent. Upon the completion of the work under the Purchase Order by the Respondent, the Appellant on account of damages, withheld a certain amount due to the Respondent.

Date Sequence of Events
13 May, 2014 Respondent sent a letter to the Appellant claiming the withheld amount.
4 August, 2014 The Appellant, in response, rejected the claim raised by the Respondent
29 April, 2020 The Respondent invoked the arbitration clause and requested the appointment of an independent arbitrator and contending that the said dispute would fall within the ambit of arbitrable dispute.
9 June, 2020 The Appellant replied to the abovementioned notice and argued that the case had already been closed on 4 August, 2014 when the claim was rejected by the Appellant and as per S. 46 of the Arbitration Act, the notice invoking arbitration was time barred.

Subsequently, an application under S.11 of the Arbitration Act was filed by the Respondent before the High Court of Kerala.

High Court Decision

The High Court of Kerala referring to the reasoning used by the High Courts regarding the same matter held that the Section 11 application under the Arbitration Act has to be preferred within a period of three years from the expiry of 30 days of the receipt of the notice invoking arbitration an order was passed by the High Court referring the matter to arbitration.

It was held that the present request is not barred by limitation since the application for S.11 was filed barely a month after the Respondent received a letter from the Appellant dated 9 June, 2020. The Court referred the parties to Arbitration. A review petition was filed by the Appellant challenging the said order which was duly dismissed by the High Court of Kerala.

Supreme Court Decision
The Appellant aggrieved by the decision of the High Court of Kerala filed an appeal before the Supreme Court.
The following two issues were framed by the Supreme Court:
What is the period of limitation for filing an application under S.11 of the Arbitration Act, 1996.
Where the claims are ex facie time barred, can the court refuse to make an appointment under S. 11 of the Arbitration Act, 1996?

Judgement on the First issue
The Supreme Court while applying the same rationale applied in the previous decisions of the High Courts held that Article 137 of the Limitation Act would apply to a Section 11 application under the Arbitration Act, 1996. The reasoning for the same was that the application under section 11 of the Arbitration Act, 1996 is filed in a court of law and since no provision of the Limitation Act applies to the said application, the residual article 137 of the Limitation Act would apply, which provides for a period of three years from the date when the right to apply accrues and the period of limitation will begin from the date when there is a failure to appoint the arbitrator. It was held that Respondent filed the S.11 application under the Arbitration Act within the prescribed period under Article 137 of the Limitation Act.

The Court while deciding on the said issue also called upon the Parliament to effect an amendment to fill this vacuum in the law and provide for a specific period of limitation for filing a section 11 application under the Arbitration Act.

Judgement on the Second issue
The Court while relying on the judgement given in the case of Vidya Drolia v. Durga Trading Corporation[1], held that in rare and exceptional cases and in order to cut off the dead wood claims, the Court can interfere at the referral stage of the application only when it is “manifest” that the claim is ex facie time barred. Although the Court did clarify that this rule would be applicable only where there is not a single doubt of the case being prima facie time barred or non arbitrable.

However, if there is even the slightest doubt arises, the rule would be to refer the case to arbitration. In the present case, it was held that the Respondent's claim is ex facie time barred since it failed to take any action when its claim was rejected by the Appellant on 4th August, 2014. Once the claim was rejected the Respondent should have sent the arbitration notice within the period of three years from the date of rejection of the claim.

Analysis
The Supreme Court has through this judgement upheld the fundamental principles of arbitral proceedings which are speedy disposal of the dispute and minimal judicial interference. The applicability of Article 137 of the Limitation Act would ensure that parties would not sleep on their rights and claims as the law is not entitled to provide reliefs to those who sleep over their claims. One of the main objectives of the Arbitration Act, as stated under the preamble of the act, is to minimise the supervisory role of Courts in the arbitral process.

This objective was overlooked when the judgment of SBP & Co. v. Patel Engineering[2] was passed by the Supreme Court. Fortunately, this judgement was later overruled by Duro Felguera SA v. Gangavaram Port Limited[3] wherein the Supreme Court recognized the legislative intent behind passing the Arbitration Act and minimized the judicial intervention at the referral stage. This judgement has further affirmed the rule laid down in Duro Felguera (supra) and applied restrictions on the Court's power to interfere in arbitral proceedings at the referral stage. This would certainly help to streamline the process of arbitration and to project India as an arbitration friendly nation.

End-Notes:
  1. (2021) 2 SCC 1
  2. (2005) 8 SCC 618
  3. (2017) 9 SCC 729

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