Instituting Proceedings U/S 138 NI Act Does Not Imply A ‘Continuing Cause Of Action’ For Initiating Arbitration: Supreme Court
The Supreme Court held that the institution of the proceedings under Section 138 of the Negotiable Instruments Act 1881 (NI Act) does not imply a ‘continuing cause of action’ for the purpose of initiating arbitration.
The Court reiterated that the initiation of arbitration and criminal proceedings under Section 138 of the NI Act were separate and independent proceedings that arose from two separate causes of action.
A Bench of CJI Dhananjaya Y Chandrachud, Justice J.B. Pardiwala and Justice Manoj Misra observed, “The initiation of arbitration and criminal proceedings under Section 138 of the Negotiable Instruments Act 1881 are separate and independent proceedings that arise from two separate causes of action. Therefore, the institution of the proceedings under Section 138 does not imply a ‘continuing cause of action’ for the purpose of initiating arbitration, as erroneously contended by the petitioner. ”
Advocate Lzafeer Ahmad B. F. appeared for the petitioners, while Advocate B. Shravanth Shanker represented the respondents.
The petition, rooted in a Memorandum of Understanding (MoU), was brought before the court under Section 11(6) of the Arbitration and Conciliation Act 1996 (the Act). The petitioners, an entity incorporated in the United Arab Emirates, claimed to have disbursed funds for a telecommunication project undertaken by Telesuprecon Nigeria Limited (TNL).
When a supplementary MoU was executed, the respondents had allegedly agreed to lien their property as comfort and issue cheques to support their finances. However, fifteen cheques amounting to Rs. 7.30 crores were presented for payment but were dishonoured. Subsequently, the petitioners issued a legal notice to the respondents to enforce the MoU and ensure payment.
Eleven years later, the petitioners invoked arbitration under clause 19 of the MoU. After the respondents failed to reply, the petitioners sought the appointment of an arbitrator. The respondents contended that the claims were barred by limitation, urging the Court to dismiss the petition.
The Supreme Court noted that the notices invoking arbitration were issued well beyond the three-year limitation period, rendering the claim "hopelessly barred by limitation." The Court explained the necessity to protect parties from being drawn into arbitration for "deadwood" claims that were ex-facie time-barred, reiterating principles from its previous judgment in Vidya Drolia v. Durga Trading Corporation (2021).
Relying on the judgment in Sri Krishna Agencies v. State of A.P., (2009) 1 SCC 69, the Court explained that the initiation of arbitration and criminal proceedings under Section 138 of the NI Act were separate and independent proceedings that arose from two separate causes of action.
Consequently, the Court held, “Having regard to the uncontested chronology of events detailed in paragraphs 1 to 4 above, it is abundantly clear that the notices invoking arbitration were issued eleven years after the cause of action arose in 2011. This is well beyond the limitation period of three years, and the claim which is sought to be raised is hopelessly barred by limitation.”
Accordingly, the Supreme Court dismissed the Arbitration Petition.
Cause Title: Elfit Arabia & Anr. v. Concept Hotel BARONS Limited & Ors. (Neutral Citation: 2024 INSC 536)