Introduction
Arbitration is a form of alternative dispute resolution where the parties agree to submit their disputes to one or more arbitrators who render a binding decision. Arbitration is governed by the Arbitration and Conciliation Act, 1996 (the Act) in India, which provides for the procedure and rules for initiating and conducting arbitration. One of the important aspects of arbitration is the appointment of arbitrators by the parties.
What is the ‘breaking point’?
In Arbitration, “breaking point” is defined as the point at which any reasonable party would abandon efforts for at arriving at a settlement and contemplate referral of the dispute for arbitration by clearly and unequivocally expressing its intention to arbitrate the disputes and the other party refuses or fails to cooperate with the said party in resolving their disputes amicably or through arbitration.
Significance of ‘breaking point’ in Arbitration
The significance of the ‘breaking point’ in any arbitration to decide the limitation period is that it marks the date on which the cause of action for the appointment of an arbitrator arises. The limitation period for filing an application under Section 11 (6) of the Act would commence only from the date of the ‘breaking point’, regardless of whether the arbitration agreement mentions a clause on pre-arbitration negotiation or not. The purpose of this principle is to avoid unnecessary delay and multiplicity of proceedings in arbitration and to ensure that the parties invoke arbitration within a reasonable time after exhausting their attempts to resolve their disputes amicably.
Legal Provisions
The Arbitration and Conciliation Act, 1996 gives the parties the freedom to choose their own arbitrators and devise their own procedure for appointment, subject to the provisions of the Act. However, if the parties fail to appoint an arbitrator in accordance with their agreement or within 30 days of receiving a request from the other party, then either party can approach the court for the appointment of an arbitrator under Section 11 of the Act.
- Section 43 (1) of the Arbitration and Conciliation Act, 1996 (the Act) states that the Limitation Act, 1963 (the Limitation Act) applies to arbitration as it applies to proceedings in court.
- Section 43 (2) of the Act states that for the purposes of the Limitation Act and of setting in motion the legal machinery for enforcement of any award, the arbitration shall be deemed to have commenced on the date referred to in Section 21 of the Act.
- Section 21 of the Act states that unless otherwise agreed by the parties, the arbitral proceedings in respect of a particular dispute commence on the date on which a request for that dispute to be referred to arbitration is received by the respondent.
- Article 137 of the Schedule to the Limitation Act provides that any other application for which no period of limitation is provided elsewhere in this division shall be made within three years from the date when the right to apply accrues.
When does the right to apply for the appointment of an arbitrator and invocation of arbitration accrue?
The answer to this question depends on the facts and circumstances of each case and the nature and terms of the arbitration agreement between the parties. The Supreme Court of India has held in several cases that the cause of action for the appointment of an arbitrator arises when there is a ‘deadlock’ or a ‘breaking point’ between the parties with respect to their disputes. This means that when one party refuses or fails to cooperate with the other party in resolving their disputes amicably or through arbitration, then the other party has a right to apply for the appointment of an arbitrator.
For instance, in State of Goa v. Praveen Enterprises,[1] the Supreme Court held that:
“The cause of action for filing an application under Section 11(6) would arise only after the expiry of thirty days from receipt by one party from another party a notice invoking arbitration clause and calling upon him to appoint his arbitrator.”
Similarly, in M/s B and T AG v Ministry of Defence,[2]the Supreme Court held that:
“The cause of action for filing an application under Section 11(6) would arise only after the expiry of thirty days from receipt by one party from another party a notice invoking arbitration clause and calling upon him to appoint his arbitrator.”
Thus, it is clear that the mere existence of disputes between the parties is not enough to trigger the limitation period for the appointment of an arbitrator. There must be a clear indication from one party that it is not willing or able to participate in arbitration or appoint its arbitrator. This could be done by sending a notice invoking arbitration and requesting for appointment of an arbitrator, or by responding negatively or evasively to such a notice from the other party.
However, it is also possible that there may be more than one cause of action for the appointment of an arbitrator, depending on how many disputes arise between the parties and how they communicate with each other regarding them. For example, if one party sends a notice invoking arbitration for some disputes and later sends another notice for some additional disputes, then each notice may give rise to a separate cause of action for the appointment of an arbitrator. Similarly, if one party responds to a notice invoking arbitration by denying some disputes and admitting others, then there may be different causes of action for different disputes.
Therefore, it is advisable for parties who wish to resort to arbitration to keep track of their correspondence and communication with each other regarding their disputes and their attempts to resolve them through arbitration. They should also ensure that they invoke arbitration and seek the appointment of an arbitrator within the prescribed limitation period of three years from the date of the ‘breaking point’ between them, failing which they may lose their right to arbitrate their disputes.
Landmark Judgments
In M/S NN Global Mercantile Pvt Ltd v. M/S Indo Unique Flame Ltd & Others,[3] the Supreme Court held that the arbitration agreement is an independent agreement between the parties, and is not chargeable to payment of stamp duty. The non-payment of stamp duty on the commercial contract would not invalidate the arbitration clause since it has an independent existence of its own.
In Amazon.Com NV Investment Holdings LLC v. Future Coupons Private Limited & Ors,[4] the Delhi High Court decided the legal status of the appointment of emergency arbitrators between the parties and held that an emergency arbitrator is an arbitrator for all purposes and his order is enforceable as an order of the court under Section 17 (2) of the Act. The court also held that the bar under Section 9 (3) of the Act would not apply to an application already entertained by the court before the constitution of the tribunal.
In Indus Biotech Private Limited v. Kotak India Venture (Offshore) Fund & Ors,[5] the Supreme Court held that if a petition under Section 7 of IBC is admitted, any application under Section 8 of the Act made thereafter, will not be maintainable. The court also held that an arbitration clause in a shareholder’s agreement would not be inoperative or incapable of being performed merely because it is contained in or related to a contract which is alleged to be induced by fraud or misrepresentation.
In M/s. Zillon Infraprojects Pvt. vs Bharat Heavy Electricals Limited[6], the High Court of Calcutta held that the Breaking point should be decisive for concluding on the limitation while deciding upon Section 11 Application under Arbitration & Conciliation Act, 1996.
Geo Miller & Company Private Ltd. v. Rajasthan Vidyut Utpadan Nigam Ltd.
The Supreme Court held that the period of genuine negotiation towards a settlement may be excluded when calculating the limitation period for arbitration under the 1996 Act. However, the complete negotiation history must be explicitly presented and considered by the Court. The Court determines the “breaking point,” the moment when a reasonable party would abandon settlement attempts and consider arbitration. This “breaking point” becomes the date of the cause of action for limitation purposes. The threshold for identifying this point is lower in commercial disputes focused on securing payment, compared to family disputes where amicable resolution is prioritized, delaying formal claim adjudication.
Conclusion
When examining the “breaking point” between parties in arbitration and its relationship to the limitation period, several key considerations arise. Firstly, the period of genuine negotiations aimed at reaching an amicable settlement can be excluded when calculating the limitation period for referral to arbitration. However, it is vital to comprehensively document the entire negotiation history and present it to the Court for a thorough review. The Court’s responsibility is to identify the specific moment when a reasonable party would have ceased settlement efforts and turned to arbitration. This critical “breaking point” becomes the starting date for the cause of action within the limitation period. It is important to recognize that the threshold for determining this point may vary depending on the nature of the dispute at hand. By comprehending the significance of the breaking point and its impact on the limitation period, we can ensure a fair and efficient arbitration process. Through a meticulous examination of the negotiation history and the identification of the breaking point, the Court can strike a balance between encouraging settlement attempts and preventing unnecessary delays in initiating arbitration proceedings.
[1] MANU/SC/0812/2011
[2] 2023 LiveLaw (SC) 466
[3] 2023 SCC Online SC 495
[4] Civil Appeal 4492 – 4493 of 2021
[5] 2021 SCC OnLine SC 268
[6] 2023 SCC OnLine Cal 756