Introduction
Section 11 of the Arbitration and Conciliation Act 1996 (hereinafter "the Act") provides for appointment of an arbitrator. Under Section 11, the parties can mutually appoint an arbitrator to establish the arbitral tribunal, or where they fail to do so, assistance from a Court can be sought under Section 11(6). Section 11(6) of the Act provides for making a request to a Court to appoint the arbitrator. Such a request can be in the event where the parties fail to appoint an arbitrator or their arbitrators fail to appoint the third arbitrator. Section 11(6A) of the Act provides that the Court while considering an application for appointment of arbitration shall confine to the examination to the existence of an arbitration agreement.
While interpreting the scope of Section 11, the Supreme Court ("SC") has advised the referral Court to confine the scope of an application under the section.1 In this regard, the SC outlined that at the pre-referral stage, the Court must only undertake 2 principal enquires. One, the referral Court must examine the existence of the arbitration agreement between the parties. Second, the referral Court should take an ex-facie view on the arbitrability of the underlying subject dispute. Additionally, the SC has also ruled that the question of limitation being an admissibility issue, should be prima facie examined to weed out dead claims.2
However, the referral Court is placed in a dichotomous position, having to balance the need to sift out spurious claims while ensuring that parties are not left remediless from rejection of their claim under Section 11. Accordingly, following strict stead from Section 11(6A), a single bench of the Delhi High Court allowed an application under Section 11(6) of the Act and referred the parties to arbitration in a matter after 10 years.3 This article examines whether the failure to decide the question of limitation under Section 11, in a case hopelessly barred by limitation, would fall foul of a Court's juridical duty.
The Nature and Scope of Section 11
The nature of a Court under Section 11 was initially appraised as judicial. The judgments in SBP & Co. v. Patel Engineering Ltd.4 and National Insurance Co. Ltd. v. Boghara Polyfab (P) Ltd.5 viewed the role of a Court as more magisterial than administerial. This meant that the Courts possessed the scope of examining a wider range of preliminary issues in an application seeking appointment of an arbitrator. Illustratively, the SC in Boghara Polyfab deemed that issues surrounding the limitation and discharge of the claim could be dealt by the Court. Additionally, the SC surmised that issues which the Court and the Tribunal may decide were concurrent i.e., the tribunal should not deal with issues that the Court has already examined under Section 11.
However, to align arbitration law with modern arbitration principles, the Parliament in 2015 introduced Sections 11(6A) to the Act. Vide Section 11(6A), the Parliament underscored the legislative intent to confine the role of the Court under Section 11 to merely ascertaining "the existence of an arbitration agreement".
In Vidya Drolia v. Durga Trading Corpn.6 the SC reasoned that it would be apposite for the tribunal to look into the question of limitation since disputed facts concerning limitation are factual in nature. Vidya Drolia laid down that the Court at the referral stage can only interfere in cases demonstrating manifest lapse of limitation or where no underlying dispute exists between the parties – and any other issues should be left for the arbitral tribunal.
Following the course in Vidya Drolia, the SC in BSNL v. Nortel Networks (India) (P) Ltd.7 also ruled that under Section 11, the Court may exercise the prima facie test to nip claims that are demonstrably frivolous. The Court circumscribed that only in a subset of cases where there is no doubt of over the statutory limitation of the claim, should the Court decline the reference to arbitration.
The Big Crunch: Prima Facie & Eye of the Needle Test
This position resonated in Indian Oil Corpn. Ltd. v. NCC Ltd.8, wherein the SC held that the referral Court exercises synchronal jurisdiction to decide issues of non-arbitrability where the facts are clear and glaring. Thus, the SC interpreted that the amended Section 11(6A) does not denude the Court of its judicial function to look beyond the bare existence of an arbitration Clause to cut the deadwood.9
Standardizing the tests related to pre-referral domain of the Court under Section 11, the SC handed down an important judgment in NTPC v. SPML Infra Ltd.10 The SC in the case propounded the 'eye of the needle test' to determine the level of enquiry necessitated at the pre-referral stage. The Court reasoned that the jurisdiction of the referral Court inheres inquiry into the existence of an arbitration agreement and the competence of parties, including their privity, to the arbitration agreement. The Court held that these questions require a thorough examination. The Court also discussed that at such stage, a referral Court may also be broached with questions surrounding the non-arbitrability of a dispute – including limitation. Herein, the Court specified that as a general rule, the Tribunal is the preferred authority to determine questions of non-arbitrability. However, in exceptional cases, where it is certain that the claims are ex facie time-barred, the Court should refuse reference and preserve the time and resources of the parties.
Interestingly, the Court deemed that such scrutiny – metaphorized through the eye of the needle – should be succinct. The "eye of the needle" metaphor refers to the extremely narrow scope of review to be conducted by the referral Court. It signifies that the Court's examination should focus only on obvious cases of non-arbitrability. Herein, the act of looking through the eye of the needle – through a tiny aperture would make visible only apparently avoidable cases. The vast majority of disputes, even those with some potential arbitrability concerns, will and should pass through this "eye" and proceed to arbitration. In this sense, the Court isn't magnifying the issues, but rather filtering them, allowing only the most glaring examples of non-arbitrable disputes to be caught and addressed. However, it is unfortunately confusing that the Court used the verb of looking through the eye of the needle – a rather strenuous exercise to describe a situation where the Court is expected to conduct a bare minimum enquiry.
However, a Constitution bench in Interplay Between Arbitration Agreements under A&C Act, 1996 & Stamp Act, 1899, In re11 disagreed with Vidya Drolia's magnification the referral Court's role at the stage of Section 11. In Interplay, the bench observed that the legislative intent is to confine the enquiry under Section 11 only to the existence of arbitration agreement and nothing else. Agreeing and supplementing the observations in Interplay a 3-judge bench of the SC in SBI General Insurance Co. Ltd. v. Krish Spinning12 criticized the eye of the needle and ex facie meritless claims test. The SC held that the tests require the referral Courts to examine contested facts and appreciate evidence which is perverse to modern arbitration principles. Additionally, Krish Spinning lays down that frivolity in litigation is an aspect that the tribunal can be fittingly deal with. Clarifying the scope of its previous ruling in Arif Azim13, Krish Spinning specified that the Court at the stage of Section 11 should only see if the application has been filed within a period of 3 years and must not examine the limitation of the individual claims. Thus, the SC has laid down that the question of limitation that should be examined by the Court pertains only to whether the application under Section 11 has been filed within limitation and not of the claims themselves.
Concluding Remarks
There are certain considerations that forfend a referral Court from interfering or refusing to refer a dispute to arbitration. First, an arbitral agreement denotes the intention of the parties to have their disputes resolved by an arbitrator – promoting arbitral autonomy and minimizing judicial intervention. Second, the negative kompetenz-kompetenz principle provides that a referral Court should refrain from determining preliminary issues in an arbitration, such issues being the exclusive domain of the tribunal. Third, the tribunal when seized of the matter, has access to extensive pleadings and evidence to determine questions of limitation and arbitrability. This also follows that having a wider view of the dispute could lead the tribunal to a difference determination concerning limitation than what the Court while taking a prima facie view could reach. Fourth, if the tribunal were to accept an objection of limitation, the party has recourse to challenge the same. However, there is no corresponding right of appeal that is available to a party, if such an objection were accepted at the stage of Section 11.
Therefore, referral Courts are generally apprehensive against rejecting a reference to arbitration at such stage. However, at the same time, the referral Court is also saddled with the duty to filter frivolous cases and ensure that an innocent party is not forced to contest a dead claim. This is why the jurisprudence that has emerged only seeks to examine the limitation for filing of the Section 11 application. Section 11 provides that the limitation for filing an application under the section commences from the date when the notice invoking arbitration is served onto the other party.
In KR Anand v. NDMC14 the Delhi HC was seized of a matter wherein the parties exchanged communication concerning their dispute up until 2013. Thereafter, only a decade later in August 2024, did one of the parties serve the notice invoking arbitration and asked the respondent to constitute a tribunal for resolving the disputes. The Section 11 application, being filed within the prescribed timeframe of 3 years since serving the notice invoking arbitration, was appositely allowed by the High Court. While the proffered interpretation of Section 11 justifiably prioritizes minimal judicial intervention as seen in KR Anand it also highlights the fault lines in the position.
By prioritizing the existence of an arbitration agreement coupled with the application's punctuality over the limitation of underlying claims, the Court inadvertently sanctions a scheme which allows for resurrection of claims so long as the notice invoking arbitration, and application to appoint an arbitrator are preferred well in time. Whether such a scheme can duly safeguard innocent parties against specious proceedings remains moot.
Disclaimer: This article was first published in the S&A Law Offices - 'Indian Legal Impetus' newsletter in December 2024.
Footnotes
1. Magic Eye Developers (P) Ltd. v. Green Edge Infrastructure (P) Ltd., (2023) 8 SCC 50.
2. Arif Azim Co. Ltd. v. Aptech Ltd., (2024) 5 SCC 313.
3. KR Anand v. NDMC, 2024 SCC OnLine Del 8388.
4. (2005) 8 SCC 618.
5. (2009) 1 SCC 267.
6. (2021) 2 SCC 1.
7. (2021) 5 SCC 738.
8. (2023) 2 SCC 539.
9. DLF Home Developers Ltd. v. Rajapura Homes (P) Ltd., (2021) 16 SCC 743.
10. (2023) 9 SCC 385.
11. (2024) 6 SCC 1.
12. 2024 SCC OnLine SC 1754.
13. Arif Azim Co. Ltd. v. Aptech Ltd., (2024) 5 SCC 313.
14. 2024 SCC OnLine Del 8388.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.