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.]