3 Jun 2023 5:59 AM GMT
It is not uncommon for arbitration practitioners to come across agreements, the provisions of which are lop-sided and designed to favour the dominant party or the employer. These clauses are almost non-negotiated and one party is often made to sign on the dotted lines. These may inter alia include clauses like the requirement of mandatory pre-arbitration deposit, unilateral option...
It is not uncommon for arbitration practitioners to come across agreements, the provisions of which are lop-sided and designed to favour the dominant party or the employer. These clauses are almost non-negotiated and one party is often made to sign on the dotted lines.
These may inter alia include clauses like the requirement of mandatory pre-arbitration deposit, unilateral option clauses, unilateral appointment clauses, clauses restricting the right to nominate an arbitrator from a narrow panel to clauses restricting the right to initiate to a very limited period. However, the scope of this article is limited to the examination of the legality of the restrictive clauses which seek to restrict the right to arbitration to a period lesser than that provided under the Limitation Act, 1963.
Arbitration and Law of Limitation
The Limitation Act, 1963 is essentially a statute that prescribes a maximum period within which a legal action can be commenced. Section 3 of the Act bars any legal action that is instituted beyond the period of limitation. Section 43(1) of the A&C Act provides for the applicability of the Limitation Act to proceedings under the Act. Further, Section 43(2) provides that an arbitration shall be deemed to have commenced on the date of notice under Section 21.
However, Section 21 of the A&C Act does not provide any period of limitation within which this notice must be issued. Therefore, the period of limitation for invoking arbitration is governed by the Article 137 of the Schedule to the Limitation Act which provides for three years period of limitation for applications for which no period of limitation is prescribed otherwise.
As observed, the period of limitation for invoking arbitration is three years. However, there may be contracts wherein the period for invoking arbitration is restricted to a lesser period, the question that now arises is the legal validity of these clauses.
Section 28 of the Indian Contract Act vis-à-vis restrictive limitation clauses
Section 28 of the Indian Contract Act makes agreements in restraint of legal proceedings void. Clause (b) specifically declares any agreement void that seeks to restrict the right of a party to a lesser period. It is important to note that an amendment was made to Section 28 in the year 1997 and clause (b) was added. Prior to amendment, such agreements were not hit by the mischief of the Section.
Can the period of limitation be restricted to a lesser period?
The judgment in Hindustan Construction Corporation v. DDA, by the High Court of Delhi is one of the earliest judgments that interpreted the amended Section 28 vis-à-vis clause restricting the right to invoke arbitration to a lesser period. The Court held that a clause that restricted the right of a party to invoke arbitration to a mere 90 days from the date of the final bill would be in the teeth of Section 28(b) of the Indian Contract Act. Accordingly, the Court set aside the arbitral award on the ground that the claims were rejected on limitation as provided under the invalid clause.
In Union of India v. Simplex Concrete Piles, the Delhi High Court held a contractual provision that sought to limit the time during which a claim can be made by the contractor is against public policy and Section 28 of the Indian Contract Act.
Another co-ordinate bench of the High Court of Delhi in Avinash Sharma v. Municipal Corporation of Delhi, invalidated a contractual provision that restricted the right to arbitration to a period of 90 days only. The Court held that such a contractual provision cannot deprive a party of its valuable right to claim damages as per the law. In Manohar Singh v. Raksha Karamchari the Court held that any clause that seeks to restrict the period of limitation to a lower period than that provided under Article 137 of the Limitation Act would be invalid.
A similar view was taken by the Himachal Pradesh High Court in Sanjay Gupta v. Himachal Pradesh Power Corporation, wherein the Court held that any condition in an agreement that limits the right to invoke arbitration to a lesser period would be hit by Section 28 of the Indian Contract Act and has to be treated as void ab initio. The High Court of Punjab and Haryana has also agreed with the unanimous view taken by the Delhi High Court in the above-mentioned cases.
Finally, a three-judge bench of the Supreme Court in Grasim Industries Limited v. State of Kerala, held that even if a restricted period for raising a dispute is provided under the contract, the period of limitation would continue to be determined as per Article 137 of the Limitation Act and such conditions would be void as falling within the rubric of the mischief provided under Section 28(b) of the Indian Contract Act.
Most recently, the issue again cropped up before the Delhi High Court in MCD v. Natraj Construction. The Court followed its earlier decisions and held that any agreement that seeks to restrict the right of a party to initiate arbitration to a period lesser than that provided under the Limitation Act would fall foul of Section 28 of the Indian Contract Act.
A closer look at the cases discussed above would reveal that such clauses are most prevalent in government contracts. These clauses must be avoided especially in arbitrations as any possible objection premised on these illegal conditions would consume precious judicial time. However, the unanimous stand taken by the various high courts and the Apex Court is a strong reminder to all government agencies that lop-sided clauses would not pass the test of judicial scrutiny. The judiciary has also made certain that the principle of party-autonomy cannot be extended to immune a provision that violates a substantive law. However, these clauses continue to find a place in government contracts, therefore, it is high time that the judiciary should consider imposing costs on the dominant party for incorporating such clauses aimed at denying the weaker party of its legitimate rights guaranteed by the law.
About the authors.
Dhritiman Roy, Advocate, Supreme Court of India.
Arshad Ayyub, Law Student, Delhi University.
Ausaf Ayyub, Arbitration Reporter at LiveLaw.
Supreme Court held such a requirement to be illegal in its judgment in ICOMM Tele Ltd v. Punjab State Water Supply Board, (2019) 4 SCC 401. ↑
See Emmsons International v. Metal Distributors, 2005 SCC OnLine Del 17, Lucent Technologies v. ICICI Bank, 2009 SCC OnLine 3213 and Tata Capital Housing Finance v. Shri Chand Construction, 2021 SCC OnLine Del 5091. ↑
Perkins Eastman Architects DPC v. HSCC (India) Ltd., 2019 SCC OnLine SC 1517 ↑
Overnite Express Ltd v. DMRC, Arb P. No. 18 of 2020 and Gangotri Enterprises Ltd v. General Manager Northern Railways, 2022 LiveLaw (Del) 1032. ↑
Section 3 of the Limitation Act, 1963. ↑
Explore Computers Pvt Ltd v. Cals Ltd, 131 (2006) DLT 477; National Highways Authority India v. Mecon – Gea Energy Systems India Ltd. JV: 199 (2013) DLT 397. ↑
1998 SCC OnLine Del 727, see also J.K. Anand v. Delhi Development Authority, 2001 SCC OnLIne Del 535. ↑
2003 SCC OnLine Del 1127. ↑
2007 SCC OnLIne Del 535. ↑
See also Pandit Construction Company v. Delhi Development Authority, 2007 SCC OnLine Del 993. ↑
2009 SCC OnLine Del 4172. ↑
2018 SCC OnLine HP 1625. ↑
Gulshan Rai Jain v. Housing Board Haryana, 2013 SCC OnLIne P&H 24365. ↑
(2018) 14 SCC 265 ↑
2023 LiveLaw (Del) 263. ↑