Supreme Court of India: Whether A Delay In Challenging An Arbitral Award Caused Due To Fraud Can Be Condoned Beyond The Prescribed Limitation Period?

Supreme-Court-of-India-1_85138_730x419

In the case of P.Radha Bai and Ors. v. P. Ashok Kumar and Anr., Civil Appeal No(s) .7710 to 7713 of 2013 decided on 26 September 2018, the Supreme Court of India addressed the issue of whether by virtue of Section 17 of the Indian Limitation Act, 1963 (‘Limitation Act’), a delay in challenging an arbitral award can be condoned beyond the period prescribed under Section 34 (3) of the Indian Arbitration and Conciliation Act of 1996 (‘Act’) in a situation where such delay is alleged to be caused due to fraud played on the party challenging the award.

It is pertinent to mention that under section 34(3) of the Act, an application for setting aside an award is required to be made within 3 months from the date on which the party making such application has received the arbitral award. The proviso to sub-section (3) of section 34 upon sufficient cause being made out provides a further period of thirty days but not thereafter. The total time period allowed under section 34(3) of the Act to a party to move an application for setting aside of the award is limited to 120 days and not thereafter.

In this case, the Court relied on Section 29 of the Limitation Act which inter alia states that sections 4 to 24 of the Limitation Act will apply in deciding the limitation when: (1) There is a special or local law which prescribes different period of limitation for any suit, appeal or application; and (2) The special or local law does not expressly exclude those sections.

In light of the above introduction of the applicable legal principles, brief case analysis given below:

Factual Matrix

Appellants and the Respondents were the legal heirs of one Mr. P. Kishan Lal who have entered into disputes regarding distribution of property after his death. The dispute was referred to arbitration. The bunch of 5 arbitrators passed a unanimous award (‘Award’) dividing the properties and businesses.

As per the Respondents, the Appellants entered into a Memorandum of Understanding (‘MOU’) with them agreeing to give certain additional properties to them which were more than what was provided in the Award. This MOU was agreed to be preceded by Gift and Release Deeds to give effect to MOU. The signing of Gift and Release Deeds were deliberately delayed by the Appellants to make sure that the legal time period stipulated for assailing an award (three months period and the extended period of 30 days) under Section 34(3) of the Act expires.

After the expiry of the limitation period, the Respondents filed the execution petition for the execution of Award which was turned down by the Trial Court as non-maintainable. The Trial Court decision was set aside by the High Court directing the Trial Court to decide the execution petition on merits.

Meanwhile the Respondent moved an application to set aside an award under Section 34(3) of the Act with a delay of 236 days. This application was accompanied by an application for condonation of delay under Section 5 of the Limitation Act.

Order of Trial Court

Before the Trial Court, the Respondent alleged that being laypersons they were not aware of the legal requirement of filing objections within the period prescribed under the Act. Further, it was contended that the MOU contemplated for execution of Gift Deed and Release Deed in favour of Respondents but, the Appellants failed to execute the required documents as per the MOU with an intent to defeat their rights.

The Trial Court dismissed the application for condonation of delay holding that it is not empowered to stretch the limitation period beyond the requisite period given under Section 34 of the Act. Placing reliance of the Supreme Court rulings, the Trial Court further held that Section 5 of the Limitation Act was not applicable to an application filed under Section 34 of the Act.

The Court also noted that ignorance of law is not an excuse specifically noticing that equitable grounds cannot be utilized to create exceptions not mandated under the statutory law. In this order, the Trial Court failed to discuss the applicability of Section 17 of the Limitation Act which deals with the effect of fraud or mistake on deciding the limitation. The aggrieved Respondent filed a revision petition before the High Court which remanded the matter back to Trial Court to decide applicability of Section 17 of the Limitation Act in an application under Section 34 of the Act. This order of the High Court was impugned before the Supreme Court in the current case.

Issue

Whether by virtue of Section 17 of the Limitation Act, a delay in challenging an arbitral award can be condoned beyond the period prescribed under Section 34 (3) of the Act in a situation where such delay is alleged to be caused due to fraud played on the party challenging the award?

Applicable Legal Principle

Section 17 of the Limitation Act:

Section 17 – Effect of fraud or mistake

(1) Where, in the case of any suit or application for which a period of limitation is prescribed by this Act,–

(a) the suit or application is based upon the fraud of the defendant or respondent or his agent; or

(b) the knowledge of the right or title on which a suit or application is founded is concealed by the fraud of any such person as aforesaid; or

(c) the suit or application is for relief from the consequences of a mistake; or

(d) where any document necessary to establish the right of the plaintiff or applicant has been fraudulently concealed from him, the period of limitation shall not begin to run until plaintiff or applicant has discovered the fraud or the mistake or could, with reasonable diligence, have discovered it; or in the case of a concealed document, until the plaintiff or the applicant first had the means of producing the concealed document or compelling its production:……….

Section 34(3) of the Act

“Section 34 – Application for setting aside arbitral award

…..

(3) An application for setting aside may not be made after three months have elapsed from the date on which the party making that application had received the arbitral award, or, if a request had been made under section 33, from the date on which that request had been disposed of by the arbitral tribunal:

Provided that if the Court is satisfied that the applicant was prevented by sufficient cause from making the application within the said period of three months if may entertain the application within a further period of thirty days, but not thereafter.”

Parties Contentions

The Appellant contended as follows:

  • Limitation period provided under Section 34 (3) of the Act begins ‘only’ upon the receipt of the award by the parties and the same cannot be diluted by a different starting point provided under the Limitation Act;
  • The period of limitation under Section 34(3) of the Arbitration Act is ‘unbreakable’ and is meant to run continuously;
  • The expression ‘had received the arbitral award’ found in Section 34 (3) of the Act expressly excludes applicability of Section 17 of the Limitation Act.

Per contra, the Respondent urged as follows:

  • There is no express exclusion of Section 17 in the Arbitration Act and therefore the benefit of Section 17 of Limitation Act should be extended while determining the period of limitation under Section 34(3) of the Act;
  • Limitation Act is applicable to all proceedings before the court;
  • For ‘computation of the period of limitation’ or arriving at the ‘prescribed period’, the provisions of the Limitation Act would automatically apply unless they are expressly excluded by the special law i.e. Act;
  • It was highly inequitable for the Respondents, who were victims of bad faith negotiation undertaken by the Appellants to derail the Respondents from pursuing this case for enforcement of their rights.

Judgement

Section 29(2) of the Limitation Act

The Court relied on Section 29(2) of the Limitation Act. Sub-section (2) of section 29 of the Limitation Act creates a fiction by saying that where any special or local law prescribes for any suit, appeal or application, a period of limitation different from the period is prescribed by the Schedule I of the Limitation Act, the provisions of section 3 of the Limitation Act shall apply as if such period is prescribed by the Schedule I. For attracting section 29(2) three conditions are necessary to be satisfied:

(1) There must be a provision for period of limitation under any special law or local law in connection with any suit, appeal for application.

(2) The said prescription of period of limitation under such special or local law should be different from the period prescribed by the Schedule to the Limitation Act.

(3) There should not be any express provision in the special or local law contrary to the provisions in sections 4 to 24 of the Limitation Act. If these three conditions are satisfied, section 4 to section 24 will be applicable in view of section 29(2).

Section 29(2) states as under:

29 (2) Where any special or local law prescribes for any suit, appeal or application a period of limitation different from the period prescribed by the Schedule, the provisions of Section 3 shall apply as if such period were the period prescribed by the Schedule and for the purpose of determining any period of limitation prescribed for any suit, appeal or application by any special or local law, the provisions contained in Sections 4 to 24 (inclusive) shall apply only in so far as, and to the extent to which, they are not expressly excluded by such special or local law.

With regard to Section 29(2), the Court observed as under:

  • It is divided in two parts separated by ‘and’
    • First part stipulates the limitation period prescribed by the special law or local law will prevail over the limitation period prescribed in the Schedule to the Limitation Act.
    • Second part mandates that Sections 4 to 24 of the Limitation Act will apply for determining the period of limitation “only in so far as, and to the extent to which, they are not expressly excluded by such special or local law.”

Applying the above to parts in the instant case the Court concluded:

  • That the Act is a special law which prescribes a specific period of limitation in Section 34(3) for filing objections to an arbitral award. Further, there is no provision under the Limitation Act dealing with challenging an Award passed under the Act
  • That the extent of the application of Sections 4 to 24 of Limitation Act will apply for determining the limitation period under the Act only if they are not expressly excluded by Act

The Court also noted that on several occasions it had extended Section 12 & 14 of Limitation Act to Section 34 of Act and thereby excluded the time spent in bonafide pursuing proceedings in a Court which lacks jurisdiction.

Express Exclusion

While interpreting the expression “expressly excluded” in Section 29(2) of the Limitation Act, the Court held that the express exclusion can be inferred either from the language of the special law or it can be necessarily implied from the scheme and object of the special law.

This further led to the question that whether the text or the scheme and object of the Act excludes the application of Section 17 of Limitation Act while determining the limitation period?

On conjoint reading of Section 17 of the Limitation Act with Section 34(3) of the Act, the Court held:

  • Section 17 does not extend or break the limitation period. It only postpones or defers the commencement of the limitation period. This is evident from the phrase “the period of limitation shall not begin to run”;
  • In light of Section 34(3) of the Act, one does not have to look at the Limitation Act or any other provision for identifying the limitation period for challenging an Award passed under Part I of the Act;
  • The time limit for commencement of limitation period is also provided in Section 34(3) i.e. the time from which a party making an application “had received the Arbitral Award” or disposal of a request under Section 33 for corrections and interpretation of the Award;
  • Section 34(3) prohibits the filing of an application for setting aside of an Award after three months have elapsed from the date of receipt of Award or disposal of a request under Section 33. Section 34(3) uses the phrase “an application for setting aside may not be made after three months have elapsed”. The phrase “may not be made” is from the UNCITRAL Model Law1 and has been understood to mean “cannot be made” as held by High Court of Singapore in ABC Co. Ltd v. XYZ Co. Ltd, [2003] SGHC 107);
  • The limitation provision in Section 34(3) also provides for condonation of delay. Unlike Section 5 of Limitation Act, the delay can only be condoned for 30 days on showing sufficient cause. The crucial phrase “but not thereafter” reveals the legislative intent to fix an outer boundary period for challenging an Award;
  • Once the time limit or extended time limit for challenging the arbitral award expires, the period for enforcing the award under Section 36 of the Act commences. This is evident from the phrase “where the time for making an application to set aside the arbitral award under Section 34 has expired”. There is an integral nexus between the period prescribed under Section 34(3) to challenge the Award and the commencement of the enforcement period under Section 36 to execute the Award.

Inconsistencies between Section 17 of the Limitation Act and Section 34(3) of the Act

The Court also observed that If Section 17 of the Limitation Act were to be applied to determining the limitation period under Section 34(3), then it will have following inconsistencies:

  • In Section 34(3), the commencement period for computing limitation is the date of receipt of award or the date of disposal of request under Section 33 (i.e correction/additional award). If Section 17 were to be applied for computing the limitation period under Section 34(3), the starting period of limitation would be the date of discovery of the alleged fraud or mistake. The starting point for limitation under Section 34(3) would be different from the Limitation Act.
  • The proviso to Section 34(3) enables a Court to entertain an application to challenge an Award after the three months period is expired, but only within an additional period of thirty dates, “but not thereafter”. The use of the phrase “but not thereafter” shows that the 120 days period is the outer boundary for challenging an Award. If Section 17 were to be applied, the outer boundary for challenging an Award could go beyond 120 days. The phrase “but not thereafter” would be rendered redundant and otiose.

In view of the above inconsistencies, the Court concluded that the aforesaid inconsistencies with the language of Section 34(3) of Act tantamount to an “express exclusion” of Section 17 of Limitation Act.

Exclusion of Section 17 of the Limitation Act is implied under Section 34(3) of the Act

The Court relied on following facts to substantiate the above connotation:

  • The purpose of Arbitration Act was to provide for a speedy dispute resolution process and Section 34(3) reflects this intent when it defines the commencement and concluding period for challenging an Award. If Section 17 were to be applied, an Award can be challenged even after 120 days. This would defeat the Act’s objective of speedy resolution of disputes;
  • Extending Section 17 of Limitation Act to Section 34 would do violence to the scheme of the Arbitration Act;
  • Section 34(3) reflects the principle of unbreakability and extending Section 17 of the Limitation Act would go contrary to the principle of ‘unbreakability’ enshrined under Section 34(3) of the Act.

Therefore, the Court concluded that once the party has received the Award, the limitation period under Section 34(3) of the Act commences. Section 17 of the Limitation Act would not come to the rescue of such objecting party.

My Comment

As noticed in the case above, Section 34(3) of the Act is premised on Article 34(3) of the UNCITRAL Model Law except few changes which are highlighted below:

Section 34(3) of the Indian Arbitration Act Article 34(3) of the Model Arbitration Law
(3) An application for setting aside may not be made after three months have elapsed from the date on which the party making that application had received the arbitral award, or, if a request had been made under section 33, from the date on which that request had been disposed of by the arbitral tribunal:

Provided that if the Court is satisfied that the applicant was prevented by sufficient cause from making the application within the said period of three months if may entertain the application within a further period of thirty days, but not thereafter

(3) An application for setting aside may not be made after three months have elapsed from the date on which the party making that application had received the award or, if a request had been made under article 33, from the date on which that request had been disposed of by the arbitral tribunal.

As it is clear from the above, the Act also provides an exception to the general rule on limitation assigned for assailing an award on the ground of showing “sufficient cause”. Even then it is at most extendable to 30 days which is evident from the expression “but not thereafter” appearing in the latter part of the provision

The expression “sufficient cause” under Section 34(3) also finds its place under Section 5 of the Limitation Act as a ground for condoning delay. The Supreme Court of India in catena of cases have laid down that the said expression should receive a liberal construction so as to advance substantial justice when no negligence or inaction or want of bona fide is imputable to a party (The State of West Bengal v. The Administrator, Howrah Municipality and others (1972) 1 Supreme Court Cases 366). But in case of Section 34(3), this expression cannot be interpreted liberally because of the preceding words “but not thereafter” which makes it water tight and exclusive.

Coming back to the parent Article 34(3) of Model Law, the time limit for assailing an award is not flexible which can be evinced from the UNCITRAL Analytical Commentary on Draft Text of Model Law on International Commercial Arbitration, Report of the Secretary General, UN Doc, A/CN 9/264, 25 March 1985 (“UNCITRAL Commentary A/CN 9/264”) on Art 34 of the Model Law, where it is stated as follows:

“Sole action for attacking award, paragraph (1) 1. Existing national laws provide a variety of actions or remedies available to a party for attacking the award. Often equating arbitral awards with local court decisions, they set varied and sometimes extremely long periods of time and set forth varied and sometimes long lists of grounds on which the award may be attacked. Art 34 is designed to ameliorate this situation by providing only one means of recourse (paragraph (1)), available during a fairly short period of time (paragraph (3)) and for a rather limited number of reasons (paragraph (2)). It does not, beyond that, regulate the procedure, neither the important question whether a decision by the Court of Art 6 may be appealed before another court nor any question as to the conduct of the setting aside proceedings itself.”

Thus, it is safe to infer that Art 34(3) is meant to ensure that any challenge is brought promptly within the period specified. There is no reason for not transposing this interpretation from the Report of the General Secretary to interpret Section 34(3) of the Act as very correctly held by the Supreme Court in the given case by relying on Singapore High Court judgement of ABC v XYZ Co Ltd [2003] 3 SLR(R) 546 which was decided on similar lines. In that case, the question was whether new grounds could be added after the expiry of the prescribed three-month period. Judith Prakash J held (at [9]):

All [Art 34(3)] says is that [an] application [to set aside] may not be made after the lapse of three months from a specified date. Although the words used are “may not” these must be interpreted as “cannot” as it is clear that the intention is to limit the time during which an award may be challenged. This interpretation is supported by material relating to the discussions amongst the drafters of the Model law. It appears to me that the court would not be able to entertain any application lodged after the expiry of the three-month period as art 34 has been drafted as the all-encompassing, and only, basis for challenging an award in court. It does not provide for any extension of the time period and, as the court derives its jurisdiction to hear the application from the Art alone, the absence of such a provision means the court has not been conferred with the power to extend time.

Meaning thereby, an award cannot be challenged where the prescribed time limit of 120 (in case of Act) has lapsed.

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