Undue hardship

by Mihir Naniwadekar | September 15, 2011

Courts are often faced with a dilemma when it comes to issues concerning the validity of invocation of an arbitration clause. They must balance two competing policies of commercial law. First, the law presumes that the jurisdiction of a court is not lightly taken away by the parties. On the other hand, courts also have a policy of promoting arbitration by giving full effect to an arbitration clause. The conflict between these divergent policies comes to the fore when a court is faced with an arbitration clause where, while it is clear that the parties intended the dispute to be referred to arbitration, certain procedural formalities are required to be complied with before the commencement of arbitration. Should those procedural formalities be strictly complied with? Does a court have the power to relax procedural formalities? If so, when should it exercise such power? These were some of the issues which Justice S.J. Vazifdar, sitting as a Single Judge of the Bombay High Court, was required to consider in Pluto Shipping Limited v. Dharti Dredging and Infrastructure Limited, Arbitration Petition 1169 of 2010 (judgment dated August 23, 2011).

Justice S.J. Vazifdar of the Bombay High Court.

Image above (and on article thumbnail) taken from the Bombay High Court website here.

In Pluto Shipping, the petitioner sought the exercise, under Section 43 of the Arbitration and Conciliation Act, 1996 (“the Act”), of the discretion of the Court in waiving procedural compliance with the arbitration clause between the parties. The contractual dispute between the parties crystallised on or about July 10, 2008. After this date, there were several meetings and negotiations between the parties. In view of the ongoing negotiations, the petitioner did not immediately pursue its legal remedy of initiating arbitration. On July 29, 2010, the petitioner, invoking arbitration under Clause 41 of the contract between the parties, finally filed an arbitration petition.

However, Clause 41 – the arbitration clause – included a formidable barrier to the petitioner’s claim. Clause 41 (b) stated, “Any dispute, disagreement of questions arising out of or relating to this Contract or relating to construction or performance (except as to any matter the decision or determination whereof is provided for by these conditions), which cannot be settled amicable (sic amicably), shall within sixty (60) days or such longer period as may be mutually agreed upon, from the date on which either party informs the other in writing by a notice that such dispute, disagreement or questions exists, will be referred to the Arbitration Tribunal consisting of three arbitrators…”

In other words, under Clause 41, there was an effective limitation period of sixty days, failing which there had to be fresh mutual agreement between the parties for a longer period of limitation. Typically, of course, limitation bars the remedy but does not extinguish the right itself. However, Clause 42 of the contract stated, “If no request in writing for arbitration is made by the contractor within a period of six months from the date of completion of the contract, all claims of the contractor under the contract shall be deemed to be waived and absolutely barred and the client, shall be discharged and released of all his liabilities under the contract.” (Emphasis supplied.) Thus, not only was there an effective limitation for initiation of arbitration (sixty days) but there was also a provision that failure to make a request for arbitration in six months would be deemed as a waiver of claims. The respondent contended that the arbitration petition was liable to be dismissed for failure to comply with Clause 41. (Should the respondent’s contention on Clause 41 fail, the question of whether Clause 42 applies to take away the claimant’s rights is presumably a question for the arbitrators.)

The question before the Bombay High Court was whether the limitation period should be extended by the Court under Section 43 of the Act. The relevant parts of Section 43 are as follows:

“43. Limitations:-

(1) The Limitation Act, 1963 (36 of 1963), shall apply to arbitrations as it applies to proceedings in Court.

…

(3) Where an arbitration agreement to submit future disputes to arbitration provides that any claim to which the agreement applies shall be barred unless some step to commence arbitral proceedings is taken within a time fixed by the agreement, and a dispute arises to which the agreement applies, the Court, if it is of opinion that in the circumstances of the case undue hardship would otherwise be caused, and notwithstanding that the time so fixed has expired, may on such terms, if any, as the justice of the case may require, extend the time for such period as it thinks proper…” (Emphasis supplied.)

In order to decide whether to exercise its powers under Section 43 (3), the Bombay High Court had to consider the scope of the expression “undue hardship” used in the Section. In interpreting this phrase, the Court held that the relevant Section in the Act was not materially different from the relevant Section 37 (4) of the Arbitration Act, 1940. Hence, it placed reliance on the judgment of the Supreme Court in Sterling General Insurance Company Limited v. Planters Airways Private Limited, (1975) 1 SCC 603. In that decision, the Supreme Court had observed, “… we will have to take a liberal view of the meaning of the words ‘undue hardship’. ‘Undue’ must mean something which is not merited by the conduct of the claimant, or is very much disproportionate to it…” Starting from this legal proposition, the Bombay High Court held that there must be a presumption of undue hardship when a party is prevented from having its claim adjudicated. This presumption can be rebutted only if there is strong prejudice caused to the respondent. In general, where the respondent itself has willingly participated in negotiations after the dispute has crystallised, it is fair and reasonable to hold that it agreed by the act of negotiation to extending the time limits, and that it was not being unfairly prejudiced. (The Court noted that the exercise of discretion under Section 43 (3) is possible when there is a time bar in the contract itself; when there is a violation of the statutory period of limitation, recourse is not possible under Section 43 (3), but is possible only under the Limitation Act, 1963. Further, the contention that there is a violation of statutory period of limitation must – unless the violation is clearly established in the pleadings – be left to the arbitral tribunal.)

In view of these facts, the Bombay High Court extended the time to comply with the bar in Clause 41 of the contract. The Court has elaborately analysed the law on the exercise of discretion under Section 43 (3) of the Act, and (particularly in view of the respondent’s participation in negotiations after the dispute) has held that except in cases where the defendant is put to undue hardship, discretion must be exercised. Even in the context of arbitration proceedings, then, it seems that procedural compliance is only the handmaiden and not the mistress of justice.

Mihir Naniwadekar is a Mumbai-based advocate.