[Arbitration] Referral Court Should Limit Enquiry To Whether Plea Has Been Filed Within Limitation, Not Whether Claims Are Ex-Facie Time Barred: Delhi HC

Facts

The Petitioner firm purchased certain quantity of scrap auctioned by Northern Railway (“the Department”) on 16.05.2001 for Rs. 19,26,400/-. Clause 2905(a) of the Indian Railways Standard Conditions Contract as revised vide letter dated 12.12.2018 contained an arbitration clause.

It is the Petitioner's case that the Department supplied 112.30 metric ton instead of 262.303 metric ton which cost only Rs. 11,66,380/- and hence, an excess amount of Rs. 7,60,020/- was deposited by the Petitioner for the purchase. It was submitted by the Petitioner, that despite various communications seeking refund of the excess amount, no refund had been made till date.

The Respondent vide letter dated 20.10.2021 sought consent of the Petitioner to waive off the applicability of Section 12(5) of the A&C Act. However, the Respondent in their letter dated 18.03.2024, stated that the Petitioner's request for appointment could not be entertained since the claim was time barred. Thereafter, the Petitioner sent the notice under Section 21 of the A&C Act on 05.04.2024

Contentions

The Counsel for the Petitioner submitted that the present petition was not barred by limitation and that there had been no delay on part of the Petitioner. It was submitted that the Petitioner had made continuous efforts over the years to recover its dues. In this regard, he relied on various communications and representations from 25.07.2001 to 11.08.2023 addressed to various representatives of the Respondents before the Petitioner finally issued a notice under Section 21 of the A&C Act. Lastly, it was submitted that the letter dated 20.10.2021 addressed by the Respondents to the Petitioner seeking waiver of the applicability of Section 12(5) of A&C Act would show that the Respondents were agreeable to the reference to arbitration.

The Counsel for the Respondent vehemently opposed the present petition and contended that there was no arbitration clause between the parties. It was submitted that the circular of Railways pertained to 2018 and would not apply to a dispute which had arisen in 2001. It was further contended that the claims were deadwood and hopelessly time barred as the purchase pertained to the year 2001 whereas the Petitioner first sought appointment of arbitrator on 03.03.2021 and finally sent a notice under Section 21 of the A&C Act on 05.04.2024 i.e. well after more than twenty years.

Observations

The Court noted that two major grounds for opposition to the present petition had been raised by the Respondents, namely non-existence of arbitration clause and limitation. In so far as the first contention was concerned, the Respondents had argued that Clause 2905(a) did not apply to the present dispute as it had first arisen in 2001. However, the Court noted that a perusal of the letter dated 20.10.2021 showed that the Respondents did not raise even a sliver of doubt regarding the applicability of the arbitration clause. Similarly, in a follow up letter dated 20.10.2021, by which the Respondents refused the request of the Petitioner regarding appointment of sole arbitrator on the ground that the claims were time barred, no mention regarding the inapplicability of the arbitration clause was made.

Regarding the contention of the Respondents that the claims were time barred, the Court discussed the law regarding the applicability of the Limitation Act, 1963 to petitions under Section 11 of the A&C Act. The Court noted that a lack of time limit being prescribed in Section 11 and a combined reading of Section 43(1) of the A&C Act with the residual provision in Article 137 of the Limitation Act made it clear that a limitation period of three years from the time when the right accrued applies to Section 11.

The Court observed that a petition under Section 11 of the A&C Act may be barred by limitation in two ways; (i) either the petition itself may be barred by limitation from sending of the notice under Section 21 of the Act or (ii) the claims to be sought to be arbitrated are ex-facie dead and thus barred by limitation on the date of commencement of arbitration. The objection of Respondent fell in the latter category.

The Court held that the issue of limitation is one of admissibility and disputes which are factual in nature would be best left to be decided by the Arbitrator. The Court made reference to the decision of the Supreme Court in In Re: Interplay between Arbitration Agreements under Arbitration Act, 1996 & Stamp Act, 1899 (2024) 6 SCC 1, wherein a Constitutional bench of the court had held that at the stage of appointment of arbitrator only prima facie existence of an arbitration agreement has to be examined and nothing else.

Relying on this decision, the Supreme Court in SBI General Insurance Co. Ltd. V. Krish Spinning 2024 SCC OnLine SC 1754 (“Krish Spinning”) had expressed doubts about the approach of weeding out ex-facie non arbitrable and frivolous disputes by the referral court and held that matters which are in the sole domain of the arbitral tribunal should not be looked at by the court even for prima-facie determination. It was further held that tests like “eye of the needle” and “ex-facie meritless” are not in conformity with modern arbitration principles.

In Krish Spinning, the Supreme Court went on to clarify that the findings in Arif Azim Co. Ltd. V. Aptech Ltd. (2024) 5 SCC 313 to hold that the referral court while determining the issue of limitation should limit its enquiry to examining whether the petition has been filed within the period of limitation of three years or not and such period would commence once a valid notice invoking arbitration has been sent by the applicant to the other party and there has been a failure or refusal by the other party in complying with the notice.

Applying the above discussed law to the facts of the case, the Court refrained from expressing its prima facie opinion on the aspect of the claims being time barred before the arbitral tribunal has had an opportunity to look at the same. As far as the petition under Section 11 was concerned, the Court noted that the latest notice under Section 21 was sent on 05.04.2024 and therefore, the petition itself was not time barred. Thus, the Court left the issue of whether the claims were deadwood or not for the consideration of the arbitral tribunal.

Accordingly, the Court allow the present petition and appointed Mr. Vaibhav Tomar, Advocate as the Sole Arbitrator.

Case Title – M/s Pavan Metal Refiners v. Union of India

Citation: 2025 LiveLaw (Del) 418

Case No. – ARB. P. 1097/2024

Appearance-

For Petitioner - Mr. Umesh Kumar Shukla, Mr. S. Mukharjee and Mr. Avinash Shukla, Advocates.

For Respondent - Ms. Radhika Biswajit Dubey, CGSC for UOI with Mr.Devvrat Yadav, Advocate

Date – 28.03.2025

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