Further Comments on Icomm v PSWSSB (March 2019: SCI)

In the previous post, we critiqued the decision of the Supreme Court in Icomm v PSWSSB (11 March 2019). Some more comments/ clarifications form the content of this post.

Whether High Courts Should Interfere in Government Contracts?

Generally, High Courts should not interfere in Government contracts unless the party will be unable to seek relief through the contracted dispute resolution mechanisms or the civil courts. Availability of alternative efficacious remedy is a well-entrenched defence in writs. Instead, courts have this nebulous test of arbitrariness and interfere at their discretion, especially when arbitrariness is such a nebulous term. 

In the instant case, the court could very well have interfered considering the contracted dispute resolution clause was onerous on the claimant. But for reasons stated in the previous post, such an argument is not well-founded. 

Another distinction in Government contracts must be kept in mind. There is a difference between commercial procurement by the state/ state entities as an end-in-itself and as a means to an end. For instance, procurement of 10 crores worth stationery for consumption by central government (end-in-itself) is totally different from procurement of goods for manufacture by a central PSU (means to an end). Although both are commercial and not sovereign acts of the state, there is a marked difference: The latter is usually a listed company competing in the market with other private players and should have a level playing field to enable it to compete. They are accountable to their shareholders ultimately. By ordering stay on their projects, the courts are only disabling them from being efficient by competing in open market. Therefore, the court interference in the latter cases should be only when absolutely necessary. There are agencies such as vigilance, government audit, etc. to take care of these things and court interfere in corrupt conduct is called for only if these institutions fail. 

Whether the fact that the Appellant in the instant case accepted the Tender Conditions meant that he had accepted it and cannot later complain?

This argument is well-founded. The Appellant, along with all other bidders, seem to have accepted the tender conditions, including the arbitration clause. It somehow does not comport with justice and prudence to challenge it much after accepting it, taking the benefit of being awarded the contract, and then later challenging it at its convenience.

Further, even in those judicial review cases, courts would not generally go into the question of invalidity of tender clauses but only of processes. Even when courts question tender clauses, such clauses should have laid down arbitrary processes. There are umpteen judgments which state that courts would not decide how tender conditions should be framed [See, for instance, Directorate Of Education v. Educomp Datamatics Ltd. (2004) 4 SCC 19]. The same principle would apply here. 

Now the question is whether the clause was a bad process. For reasons in the previous post, we disagree. Day in and day out, we see exaggerated claims being made in litigation/ arbitration. Many of the times, adjudicators don't really examine the evidence threadbare to see if the damages claimed is actually suffered.

Whether the Proportionality Test is Applicable only to Purely Public Law Aspects?

The proportionality test has been used in the realm of public law to review public law acts. While contracting by government is not a purely private act, contract law applies to it. 

The proportionality test looks at the following questions:

(a) the action must be sanctioned by law;

(b) the proposed action must be necessary in a democratic society for a legitimate aim; 

(c) the extent of such interference must be proportionate to the need for such interference;

(d) There must be procedural guarantees against abuse of such interference

How can one imagine to incorporate these sub-tests in the current context? Look at the second sub-test: "the proposed action must be necessary in a democratic society for a legitimate aim"? I am sure an expert in public law while provide us with insights on all the facets of the proportionality test as is applied in India. But even the most commonly found formulation of the test is wholly inappropriate for application in the present context.

Whether the Decision is Against the Party Autonomy Doctrine?

The doctrine of party autonomy cannot be simply raised as an argument because the dynamics of the party autonomy doctrine's application in government contracts has not yet been analysed theoretically in the Indian context. Many government contracts operate on a take it or leave it basis or government parties agree only to minor tweaks in the arbitration clause in the international context. A theoretical base has to be built in the Indian context before addressing the question. At the most, it could be argued that this clause found place in the tender document and was accepted by all the other bidders. It would now be unjust on the other bidders that Icomm should be awarded the contract and should then be allowed to say that certain clauses should not be applied to it.

[Post Script: Thanks to Ms. Juhi Gupta for raising somewhat similar questions on the decision and our previous post.]

Conflating Public Law & Private Law: Has the SC Blundered?

Punjab State Water Supply & Sewerage Board had a lengthy arbitration clause containing a unique provision:

“viii. It shall be an essential term of this contract that in order to avoid frivolous claims the party invoking arbitration shall specify the dispute based on facts and calculations stating the amount claimed under each claim and shall furnish a “deposit-at-call” for ten percent of the amount claimed, on a schedule bank in the name of the Arbitrator by his official designation who shall keep the amount in deposit till the announcement of the award. In the event of an award in favour of the claimant, the deposit shall be refunded to him in proportion to the amount awarded w.r.t the amount claimed and the balance, if any, shall be forfeited and paid to the other party.”

The first sentence of clause viii stated the objective of the clause: to avoid frivolous claims. It further provided that the party invoking arbitration (Claimant) would have to specify the dispute based on facts and calculations and has to state the amount claimed under each claim. So far so good. It then provided that the Claimant should furnish a "deposit-at-call" to the tune of 10% of the claim amount in the name of the arbitrator in a bank till the announcement of the award.

The clause stated that if the award was in favour of the Claimant, the deposit was to be refunded to him in proportion to the amount awarded with respect to what is claimed and the balance would be forfeited and paid to the Respondent. To explain this with an illustration, if the amount claimed is Rs. 10 lakhs, the deposit-in-call would be 10% thereof, that is, Rs. 1 lakh. If the Claimant is awarded only 6 lakhs out of Rs. 10 lakhs claimed, the Claimant would be entitled to be refunded Rs. 60,000/- of the deposit and the remaining Rs. 40,000/- in the deposit would be forfeited by the Respondent. If the Claimant was successful in the whole claim, she would be refunded the entire amount but if the claim was dismissed, Rs. 1 lakh deposited would be forfeited in full by the Respondent.

Clause xv of the agreement provided: "xv. No question relating to this contract shall be brought before any civil court without first invoking and completing the arbitration proceedings, if the issue is covered by the scope of arbitration under this contract. The pending arbitration proceedings shall not disentitle the Engineer-in-charge to terminate the contract and to make alternate arrangements for completion of the works."

From a purely objective stand point and seeing it without being prejudiced by the fact that clause viii was struck down as being violative of Article 14 of the Constitution of India, the drafter of this innovative clause has to be appreciated for the application of mind. The clause has three distinct advantages:

1. It provides negative incentives on the Claimant. It guards against exaggerated claims by the Claimant and provides a negative incentive for the Claimant not to do so.
2. If the Claimant is prevented from making exaggerated claims, the fee of the arbitrators is also kept at a reasonable level since it is ad valorem.
3. As we have argued in the past (see, here and here), the costs mechanism in India is not up to the mark and the arbitrators and the tribunals rarely award costs. This clause requires the tribunal to do what it should have otherwise done: award costs in favour of the Respondent and against the Claimant in respect of exaggerated claims. This is fairly standard in international arbitration practice.

The court held that the clause was violative of Article 14 of the Constitution of India, which is really erroneous and unfortunate. The unreasonable court interference in the commercial (as opposed to sovereign) acts of the state is uncalled for and the decision requires to be revisited by a larger Bench, The unjustified application of the public law principles in such disputes stifles innovation and protection of interests of the government sector. As such government sectors, especially, public sector undertakings, face a lot of heat with regard to competing with private sector and at the same time fulfilling the socio-economic obligations . The step-motherly treatment of these sectors from the courts, the unjustified contempt and prejudice shown by the courts when it comes to the public sector needs to be relooked at by courts.

Clearly, the court's invocation of Article 14 means that the private sector which is immune from claims regarding violation of fundamental (and not contractual or statutory) rights could insist on such a clause without qualms. With these preliminary remarks, let us how the court held the clause to be invalid:

Facts

Punjab State Water Supply & Sewerage Board, Bhatinda (PSWSSB) invited tenders for a project and Icomm Tele Ltd. (Icomm) was the successful bidder. A contract was entered into between the parties and it contained a arbitration clause, which included the above quoted provision. Disputes arose and Icomm wrote to PSWSSB for appointment of arbitrator and for waiver of the 10% deposit fee, which was not responded to.

Icomm challenged the clause through a writ petition contending that clause viii was unreasonable and arbitrary but the petition was dismissed. So Icomm approached the Supreme Court.

Contentions

Icomm challenged above clause on three grounds:

• The contract was hit by Section 23 of the Indian Contract Act, 1872 in that it was a contract of adhesion and was against the public policy of India.
• A 10% deposit is a clog on the arbitration process.
• The clause is arbitrary and highhanded.

PSWSSB on the other hand argued that the clause applied to both parties equally and that the argument as regards public policy is not applicable in case of commercial contracts.

Decision

On the first argument that the contract was against public policy and hit by virtue of the Supreme Court's decision in Central Inland Water Transport Corpn. v. Brojo Nath Ganguly, (1986) 3 SCC 156, the court held that this being a commercial contract, Icomm cannot make a valid argument that the clause was hit by Section 23 of the Indian Contract Act, 1872.

But the court accepted the argument that the clause in issue was arbitrary. Following were the reasons that led the court to so decide:

• Frivolous claims could be dismissed with exemplary costs, as was held in Dnyandeo Sabaji Naik v. Pradnya Prakash Khadekar, (2017) 5 SCC 496
• In General Motors (I) (P) Ltd. v. Ashok Ramnik Lal Tolat, (2015) 1 SCC 429, the concept of punitive damages was discussed and the important principle that unless the litigation was held to be frivolous, exemplary costs would not follow.
• In this case, the deposit-at-call clause called for 10% of the claim amount, which could amount to a large sum of money does not have any direct nexus to the filing of frivolous claims, as it applies to all claims, even non-frivolous, at the threshold.
• The deposit-at-call clause is totally disproportionate to the object sought to be achieved, that is, prevent frivolous claims.
• The clause is arbitrary in that it is unfair and unjust and no reasonable man would agree to it. There are situations where a claim may be dismissed not for reasons of frivolity as is the case with majority and minority awards. Take a case of illegal termination of contract. If the court declares the termination to be illegal and awards only one-tenth of the claim, the respondents gets to hold 10% of the that amount, which means that the party which lost the arbitration will be entitled to forfeit nine-tenths of the amount deposited. This is arbitrary, disproportionate, and would lead to unjust results.
• Arbitration being an important part of the dispute resolution process, such a clause would be a clog on arbitration and cannot be encouraged. The primary objective of arbitration is speedy and efficient resolution of disputes but such a clause militates against these purposes. This clause would render the arbitration process expensive.

Further Comments

Apart from the critique in the first part of this post, a few other aspects are noteworthy.

Unequal Bargaining Power: The court rightly rejected the argument that the clause is invalid in view of the unequal bargaining power between the parties. The concept of unequal bargaining power is generally not applied in commercial contracts and the law is fairly settled in this regard: see, for instance, Central Inland Water Transport Corporation Ltd. and Anr. v. Brojo Nath Ganguly and Anr. MANU/SC/0439/1986, Para 89; SK Jain v Haryana MANU/SC/0323/2009; General Assurance Society Ltd. v. Chandmull Jain and Anr. MANU/SC/0180/1966; Patel Engineering v BT Patil 2016(3) Arb LR 162 (Bom).

Are Frivolous Claims Dismissed with Exemplary Costs? The ground relied on by the court that there was another way to deal with frivolous claims: "It is well settled that a frivolous claim can be dismissed with exemplary costs." This argument is not at all convincing for two reasons: (1) It is well known that rarely do Indian courts and tribunals award costs, even in proceedings of commercial nature such as arbitration proceedings (see, here, here, and here). Therefore, that courts and tribunals can grant exemplary costs is really a mirage. They don't do that, especially when the Government and the PSUs are at the receiving end.

In this blogger's experience in PSUs for ten years, courts rarely penalise petitioners for frivolous claims. Government subsidising frivolous litigation is a drain on taxpayer's money. Subsidisation of frivolous claims in commercial contracts is a massive drain on government's and taxpayer's wealth, especially in the context of PSUs. In the annals of Indian legal history, one can rarely find courts ordering costs on frivolous and unsuccessful challenges to awarding of contracts on a party instead of the petitioners. In sum, the argument relied on by the court is mere rhetoric and not a well-founded argument.

On the one hand, law is purported to be certain that assessment of damages is possible prior to a decision from a court and on the other hand, the court puts forth a hypothetical test wherein the claimant actually makes an exaggerated claim but the court gives the claimant the benefit. The hypothetical argument doesn’t comport with justice or any legitimate moral, social or economic principle.

Note that the clause does not state that if the claimant claims Rs. 10 lakhs and is awarded Rs. 10 lakhs, the respondent could forfeit the whole or part of it. It only states that if the claimant is awarded Rs. 1 lakh as against a claim of Rs. 10 lakhs (exaggerated), the respondent would be entitled to foreit Rs. 90,000 from Rs. one lakh deposited.

Stifling of Innovation: Stifles innovation in government sector, especially in the commercial contracts entered into by the Government and the Public Sector Undertakings. Having held that the contract is a commercial contract, invocation of Article 14 is shocking to the least, and is against the trends in jurisprudence of limited interference.

Application of Proportionality Test to Contractual Clauses: Private law proceeds on the principle that that the contracting parties are best judges of their contractual arrangement and the state cannot and should not interfere in contracts, unless absolutely justified. In this case, the bidder assessed the risk associated with all clauses in the tender and submitted its bid agreeing to all the clauses therein, including the arbitration clause when a contract is entered into. Therefore, interference by the Supreme Court by applying the proportionality test on a contract clause was wrong. The Supreme Court cannot be a judge of what is essentially an economic decision: using the deposit-at-call clause as a disincentive to frivolous claims. In fact, the clause fills the gap or defect in the application of law by courts and tribunals in ordering costs in case of exaggerated or frivolous claims. Can the proportionality test which is used in constitutional contexts be applied to test the validity of a contract clause is the larger question that requires a detailed consideration. The decision has created a new Frankenstein monster akin to public policy by applying the proportionality test to examine the validity of contractual clauses.

Is the Impugned Clause a Clog on Arbitration?: The finding that the clause is a clog on arbitration does not appeal to reason. It is only a clog on an exaggerated claim in arbitration and cannot be considered a clog on arbitration. Had the clause provided, for instance, that even if the Claimant is awarded the claim, the Claimant and not the PSWSSB will bear the costs of arbitration, will probably be a clog on arbitration. The court has not really justified how it will be so.

In all, the decision is least convincing and lacks an objective and incisive analysis of the underlying justifications that the issue really called for.

[Food for Thought: If the impugned clause is construed as an agreement to pay costs, wouldn’t it be hit by Section 31A(5)of the Arbitration and Conciliation Act, 1996?]

The decision can be accessed from here.

Exemplary Costs? No Sir, It is Now a Right!

Exemplary costs are costs imposed by a court on a party for abuse of the court's process or for some conduct that is deprecable. These are imposed in exceptional cases where the party's conduct clearly demonstrates abuse of process or deprecable conduct.

In the recent decision of the Supreme Court in LMJ International Ltd. and Ors. vs. Sleepwell Industries Co. Ltd. (20.02.2019 - SC) : MANU/SC/0251/2019, the Supreme Court rejected the plea for overturning a decision of the court refusing to entertain the plea to refuse to recognise or enforce a GAFTA award. After rejecting the arguments of the Petitioner/ Award Debtor, the court went on to award "exemplary costs" on the Petitioner:

"18. In view of the above, these special leave petitions are dismissed with exemplary costs, quantified at an aggregate amount of Rs. 20,00,000/- (Rupees Twenty Lakh only). The amount towards costs be paid to the Respondent within six weeks from today."

While the eventual decision to award costs and the quantum was reasonable, branding it a "exemplary" is not in accordance with the recent amendments in the form of Section 31A where the court was obligated to award costs on the winning party. Detailed reasons may be found in this blog post and this paper. The long and short of it is that under Section 31A the losing side bears the costs is the norm and the court is obligated to grant reasons for not doing so. Considering the fee that the Supreme Court counsels charge and the likely costs incurred by the Respondent/ Award-Holder in briefing the counsels, stay, time spent,etc., the costs awarded in this case seem reasonable.

The Need to Overhaul the Costs Regime in Indian Arbitration

Over at the Kluwer Arbitration Blog, this blogger has penned a post on the "Need for Overhaul of the Costs Regime in Indian Arbitration Law". The post argues that despite the 2015 amendments on costs (in the form of Section 31A) there have not been marked differences in the costs awarding behaviour, especially by courts). The post calls for the change in judicial behaviour and also amendments to Section 31A. Happy reading!

Can Parties Give Up Limitation by Consent?

Assume a hypothetical scenario: Claimant invokes arbitration and makes a claim. The Respondent contends that the claim is barred by limitation and makes a counter-claim. The Claimant replies to the counter-claim by putting forth the defence that counter-claim is also time-barred. When the arbitrator is to frame issues, both parties give up their respective defences of limitation. The tribunal allows the claim but dismisses the counter-claim on merits. 

The Respondent challenges the award under Section 34(2)(b)(ii) arguing that the award is against the fundamental policy of Indian law since the tribunal has awarded a time barred debt to the Claimant. The Respondent contends that limitation cannot be given up by consent of the parties and limitation law cannot be contract around. In other words, the Respondent's contention is that the law of limitation consists of mandatory rules and not default rules, which could be contracted around. 

Whether parties can contract around the law of limitation? Whether the Respondent was correct in so arguing in the Section 34 petition is the subject-matter of this post.

Unlike most other cases on limitation, this is a rare case where both the parties gave up the issue of limitation in the arbitral proceedings. In India, the question as to whether parties can enter into an agreement or a consensus regarding giving up defences regarding limitation before or after the cause of action has arisen has never been dealt with in detail considering the international practices. There are one or two old decisions (pre-1950) which question the validity of agreements to give up the plea of limitation. Some commentaries also state that agreements which extend limitation periods fall foul of Section 23 of the Indian Contract Act, 1872 (regarding unlawful objects and consideration). It is the endeavour of this post to argue that such views do not take into account provisions such as Section 25(3) of the Indian Contract Act, 1872 which expressly permit such agreements and also are in discordance with the current realities of international commercial law and best international practices.  

At the threshold, it is important to explore whether there is scope for contracting around or agreeing to extend, limit, or otherwise alter the Law of Limitation through contract. 

The Basis of the Law of Limitation and Contracting it Around

The law of limitation is based on public policy as encapsulated in the legal maxim- interest reipublicae ut sit finis litium (it is for the general welfare that a period be put to litigation). [See, for instance, Popat and Kotecha Property vs. State Bank of India Staff Association (29.08.2005- SC): MANU/SC/0516/2005, Para 8]. 

However, merely because the law is based on public policy does not mean that there is no scope for contracting about or, even, around it. The most common example of the law allowing such contracting about or around the law of limitation is the enforceability of agreements to pay the whole or a part of debt that was enforceable but for the law of limitation [See, Section 25(3)]. Other examples of such agreements include standstill agreements and agreements extending the period of limitation. International practice suggests that such agreements are routinely enforceable in the commercial world. Let us first look at the international practice on this point. 

Standstill Agreements and Tolling Agreements- International Practice

Standstill Agreements in the context of the law of limitation operate to suspend time, that is, they preserve or freeze both sides' positions so that, at the end of the agreement, they are both in the same position in relation to limitation as they were when they entered into the agreement. Such agreements have been regarded as enforceable under English Law. 

In Oxford Architects Partnership v Cheltenham Ladies College, [2006] EWHC 3156 (TCC), the England and Wales High Court (TCC) held:

“The Limitation Act 1980 provides a statutory defence which a party may rely on. A party is not obliged to rely on a statutory limitation defence but is generally entitled to do so. It is possible for a party to agree that it will not rely on a statutory limitation defence or for the parties to agree that a statutory limitation defence will apply from an agreed date, for instance in a standstill agreement. In certain circumstances a party may be precluded from relying on a statutory defence because of an estoppel. However, absent such an agreement or an estoppel a party is entitled to rely on a statutory limitation defence. In common with all other such rights any provision which seeks to exclude a party's right to rely on a statutory limitation defence must do so in clear terms.”

{See also, Russell & Anor v Stone (t/a PSP Consultants) & Ors [2017] EWHC 1555 (TCC)}

The said case suggests that English law is not averse to an agreement, which provides even for extension of limitation period since the argument regarding whether the agreement had actually extended the time was considered and rejected not on the basis of whether law allows it but on the basis of construction of contract (see, Paras 46 to 56 of Russell v Stone). 

These agreements are called as Tolling Agreements in USA and are also enforceable. For instance, the New York General Obligations Law Section 17-103 - Agreements waiving the statute of limitation provides:

“1. A promise to waive, to extend, or not to plead the statute of limitation applicable to an action arising out of a contract express or implied in fact or in law, if made after the accrual of the cause of action and made, either with or without consideration, in a writing signed by the promisor or his agent is effective, according to its terms, to prevent interposition of the defense of the statute of limitation in an action or proceeding commenced within the time that would be applicable if the cause of action had arisen at the date of the promise, or within such shorter time as may be provided in the promise.

2. A promise to waive, to extend, or not to plead the statute of limitation may be enforced as provided in this section by the person to whom the promise is made or for whose benefit it is expressed to be made or by any person who, after the making of the promise, succeeds or is subrogated to the interest of either of them.

3. A promise to waive, to extend, or not to plead the statute of limitation has no effect to extend the time limited by statute for commencement of an action or proceeding for any greater time or in any other manner than that provided in this section, or unless made as provided in this section.” 

Such agreements have been recognized as valid by various courts in USA such as in Department of Labor v. Preston, et al (US Court of Appeals 11th Circuit, No. 17-10833 dt. 12.10.2017)

In the Australian context, the Limitation Act, 2005 as applicable to Western Australia allows agreements to extend or restrict time periods. Section 45 reads: 

“(1) Nothing in this Act prevents a person from agreeing to extend or shorten a limitation period provided for under this Act. 

(2) Despite subsection (1), a provision in, or condition of, an agreement is of no effect if it purports to — 

(a) exclude the operation of section 33, 36 or 38; or (b) extinguish (rather than bar) a right or title in relation to an action in a manner that would be inconsistent with a provision of Part 5.”

Therefore, international practice suggests that clauses that contract around limitation period are not invalid, except in certain limited extents. 

Agreements regarding Limitation Periods in India 

Section 3 of the Limitation Act, 1963 does not deal expressly with consequences of agreements which contract around or alter the law of the limitation or the limitation periods prescribed in the said law. Section 3(1) reads: “Subject to the provisions contained in sections 4 to 24 (inclusive), every suit instituted, appeal preferred, and application made after the prescribed period shall be dismissed, although limitation has not been set up as a defence.”

Section 28 expressly bars agreements that limits the time within which a party may enforce its rights. The relevant portion of Section 28 provides: “Every agreement- (b)… which limits the time within which he may thus enforce his rights… is void to that extent.” 

But for this provision, there is no statutory provision that bars other types of contractual clauses regarding limitation, such as clauses extending the period of limitation or even reviving them. Section 28 was amended in 1997 to bring about the above quoted provision. It would be correct to argue that by consciously using the phrase "limits the time", the legislature barred only agreements limiting and not expanding the time period for limitation. Had the legislature intended to bar agreements expending the time period, it would have consciously used the phrase "expands or limits" or its variant. 

Section 25(3) of the Indian Contract Act, 1872 is an important example of a provision by which parties can agree that one of them would pay a time-barred debt. In other words, it allows parties to contract around the law of limitation. Even Sections 18 and 19 refer to unilateral acts and not agreements or consensuses. 

Mutual Giving up of the Plea of Limitation

It is true that the settled law is that even if a party does not raise a plea of limitation, the court, by virtue of Section 3 has to look into the question of limitation. However, Section 3 of the Limitation Act, 1963 neither bars nor allows an agreement or a consensus between the parties to give up a defence of limitation altogether. In other words, Section 3 as well as the Limitation Act, 1963 is silent on whether parties can expressly give up the defence of limitation or not. 

In such a case, it is not that the court or the arbitral tribunal does not look into the question at all. It is a situation where the court or the arbitral tribunal does look into the question but the parties state that they were willing to give up the defence of limitation thereby leaving the tribunal to deal with the issues relating to merits. In other words, the court or the tribunal deals complies with its duty under Section 3 but because of the parties’ mutual act of giving up, the court or the tribunal goes to the other questions. 

Such an agreement or a consensus is no different from any other agreement or a consensus to give up any other defence in a suit or an arbitral proceeding. [See, for instance, Gopalakrishna Pillai v. K.M. Mani (1984) 2 SCC 83]. 

While there are umpteen case laws on whether a party has waived the defence of limitation or not, there seem to be no case law on whether parties mutually give up the plea of limitation. 

It is well-settled law that when the law of limitation is set up as a defence it cannot be extended to cases that are not strictly within its enactment. As early as in 1898, a Full Bench of the Calcutta High Court held in Poorno Chunder Ghose and Ors. v. Sassoon and Ors. (04.02.1898 - CALHC) : MANU/WB/0060/1898: 

“Reading the language of Section 13---a section be it remembered in a Limitation Act, the provisions of which must be construed strictly, and which, when set up as a defence, must nit be extended to cases which are not strictly within the enactment, whilst exceptions or an exemption from its operation are to be construed liberally...” 

Therefore, when Section 3 does not have the effect of covering cases where the court or the tribunal looks into the issue of limitation but the parties mutually give up the same, there is no question of going back on such mutual agreement or consensus. Such agreements are enforceable unless expressly prohibited by law more so in the case of arbitrations where the arbitral tribunals are creates of contract have to act within the confines of the agreement between the parties.

Conclusion

To conclude, there is no law which expressly bars parties from agreeing for increase in the time period given in the law of limitation. Limitation law is not something sacred or sacrosanct that parties should not be allowed to contract around by mutually giving it up or by agreeing for freezing or extension of limitation periods. International practice is in that direction. However, in the light of Section 28, agreements which limit the time period for limitation purposes are invalid. 

[Full disclosure: The subject-matter of this post is a question to be decided by the Madras High Court in a pending case. The author of this post was an employee till recently with one of the parties to the case.] 

Scope of Interference in Section 34 Applications on Public Policy & Patent Illegality Grounds

One of the most important topics that has always caught the attention of scholars and commentators on arbitration is the scope of review of arbitral awards on the ground of public policy. The Indian scenario is no exception. In the past few years, there have been many clarificatory amendments and judgements attempting to elucidate the law but there are certain questions that have required answers and are rarely forthcoming.

The law as it stands today is that if the court finds that an arbitral award is in conflict with public policy, the award can be set aside [Section 34(2)(b)(ii)]. By virtue of the 2015 amendments, the scope of public policy has been made even narrower. Explanation 1 to Section 34(2)(b)(ii) explains what public policy is. It says that an award is in conflict with public policy only if:

• the making of the award was induced by fraud or affected by fraud or corruption or was in violation of Section 75 (confidentiality) or Section 81 (admissibility of conciliation material in other proceedings), or 
• the award is in contravention with the fundamental policy of Indian law. The second explanation states that the test as to whether the award is in contravention of the fundamental policy of Indian law does not entail the review of merits of the award, or
• the award is in conflict with the basic notions of morality or justice.

Section 34(2A) carves out an exception to the above rule. It says in purely domestic awards (without international context), a review of the arbitral award on the ground of patent illegality on the face of the award is permissible but not on mere erroneous application of law or re-appreciation of evidence. 

This is the entire gamut of provisions permitting review of arbitral awards on the ground of public policy and patent illegality. There are a few notable things:

1. Patent illegality does not include public policy post-2015. Both grounds are different. Public policy is dealt with under Section 34(2)(b)(ii) and the two explanations while patent illegality is provided in Section 34(2A).
2. Mere error in interpretation of contract is not a sufficient ground for testing the validity of the award. 
• Where two plausible views can be taken and the arbitrator has taken one such views, the award cannot be reviewed that she did not take the other. 
• The question regarding whether a contractual clause is against public policy of India is different from the question as to whether the interpretation of a contractual provision necessitates setting aside the arbitral award. The former comes under Section 34(2)(b)(ii) while the latter comes under Section 34(2A)[as applicable for awards rendered after 2015]. Hence, unless Section 34(2A) is pleaded, an arbitral award cannot be questioned for error in contractual interpretation under Section 34(2)(b)(ii), except in exceptional situations. 
• Further, Section 28(3) has been amended such that post-2015, the tribunal needs to "take into account the terms of the contract" while rendering the award as against the earlier position that the "tribunal shall decide in accordance with the terms of the contract". The effect of this is aptly explained in a recent article: "Whereas as per the pre-amended Section, the Arbitral Tribunal was necessarily required to decide the dispute strictly ‘in accordance’ with the terms of the contract, while being entitled to merely ‘take into account’ the usages of trade; under the amended Section, the necessity to decide ‘in accordance’ with the contract has been done away with and replaced with a softer approach requiring the Tribunal to ‘take into account’ the terms of a contract just as it would ‘take into account’ usages of the trade." Thus, even if the tribunal deviates from the contract, so long as sufficient and cogent reasons for the deviation, the award should be upheld. 
• On the other hand, if no reason is given for the deviation or if the deviation is patently wrong, the award could be set aside. But the patent illegality as provided in Section 34(2A) in the deviation from the contract should appear on the face of the award and not on the materials relied upon. In other words, if the tribunal interprets or ignores a contractual provision and such an act is grossly wrong and shocks the conscience of the court on the perusal of the arbitral award, such an act can entail review of merits.  
3. In all cases in Section 34(2A), the patent illegality should be apparent on the face of the arbitral award. This means that that in order to make a case for setting aside an arbitral award under this provision, the petitioner cannot rely on any material except the arbitral award. However, this provision does not prohibit the award holder from relying on the materials in the arbitration proceedings to support an interpretation. For instance, if the conclusion of the arbitral tribunal is that an agreement is actually an integral part of another agreement based on interpretation of the contract, the petitioner can only rely on the award to support his reasons for setting aside, while the Respondent can rely on, say, a term of the contract defining the term "agreement" even if the definition does not appear in the award. 

The next post will deal with the the concepts such as "review on merits", "erroneous application of the law", "reappreciation of evidence", etc. and also with the other aspects relating to setting aside the award on the grounds of patent illegality and public policy such as the procedure to be followed, and the restrospective operation of the 2015 amendments for reviewing awards.