Unenforceable arbitral award does not trigger Section 43(4) limitation benefit, but bona fide proceedings may qualify under Section 14: Kerala High Court

The petitioner, a non-banking financial institution, advanced a loan of ₹75,00,000 to the first respondent under a loan agreement dated 4 August 2015; the second respondent stood as guarantor. The agreement contained an arbitration clause and contemplated repayment in 20 monthly instalments. Upon default, the petitioner issued a notice invoking arbitration on 9 May 2017, and arbitral proceedings commenced on 30 July 2017. A sole arbitrator, who had been named in the agreement, passed an award dated 28 December 2018 in the respondents’ absence.

The petitioner initiated execution proceedings before the III Additional District Court, Thrissur. By order dated 24 September 2024, the execution court held, relying on Hedge Finance Private Limited v. Bijish Joseph, that the unilateral appointment of the arbitrator was illegal and that the award was unenforceable. The petitioner’s earlier arbitration request was rejected as premature because a fresh notice under Section 21 of the Arbitration and Conciliation Act, 1996 had not been issued. Thereafter, the petitioner issued a fresh notice on 12 January 2026, which was received by the respondents, and filed the present arbitration request.

Whether an order of an execution court declaring an arbitral award unenforceable or a nullity can be treated as an order setting aside the award for the purpose of Section 43(4) of the Arbitration and Conciliation Act, 1996?

Whether the petitioner could invoke Section 14 of the Limitation Act, 1963 to exclude the time spent bona fide and diligently pursuing the earlier arbitral proceedings and execution proceedings?

Whether the arbitration request and the underlying claims were barred by limitation, and whether that question should be decided by the referral court or the arbitral tribunal?

Whether the matter should be referred to arbitration despite the respondents’ objections concerning limitation and the earlier invalid arbitral proceedings?

The Court applied Section 43(1) of the Arbitration and Conciliation Act, 1996, which makes the Limitation Act applicable to arbitration as it applies to court proceedings, and Section 43(4), which permits exclusion of the period between commencement of arbitration and the court’s order where an arbitral award is set aside.

Section 14 of the Limitation Act permits exclusion of time spent prosecuting, with due diligence and in good faith, a proceeding before a court unable to entertain it because of a jurisdictional defect or a cause of like nature.

Relying on State of Goa v. Western Builders, Gulbarga University v. Mallikarjun S. Kodagali, Shakti Tubes Ltd. v. State of Bihar and the three-Judge Bench decision in Consolidated Engineering Enterprises v. Principal Secretary, Irrigation Department, the Court held that Section 14 applies to arbitration proceedings where its statutory conditions are satisfied.

However, Section 43(4) applies specifically to an award set aside under Section 34 or Section 37 and does not extend to an execution court’s declaration that an award is unenforceable or void.

At the referral stage, following Aslam Ismail Khan Deshmukh v. Asap Fluids Private Limited, the court is required to undertake only a limited examination of limitation; intricate questions concerning the accrual of claims and their ultimate limitation are for the arbitral tribunal.

The Court rejected the petitioner’s principal argument under Section 43(4), holding that the statutory expression “where the Court orders that an arbitral award be set aside” refers to an order under the statutory framework of Sections 34 or 37. An execution court’s finding that an award is unenforceable or a nullity is legally distinct and cannot be judicially equated with setting aside an award.

Nevertheless, Section 14 was held applicable through Section 43(1). The petitioner had pursued the initial arbitration before an arbitrator specifically named in the agreement and thereafter pursued execution. Although the proceedings ultimately failed because the tribunal was found incompetent, the Court found no lack of diligence or bona fides, particularly because the legal position concerning unilateral appointment had subsequently developed. The time spent in the initial arbitration and execution proceedings was therefore liable to be excluded under Section 14.

Since the limitation issue involved calculation and possible evidentiary examination, the Court held that it was not appropriate to finally determine the claims’ limitation at the referral stage. The tribunal was left to decide limitation and other jurisdictional objections after considering the parties’ pleadings and evidence.

The Kerala High Court Arbitration Centre was directed to nominate a sole arbitrator from Panel II to adjudicate the disputes arising under the loan agreement. The arbitrator was authorised to decide all issues, including jurisdiction and limitation, and the parties were permitted to raise their claims and counterclaims in accordance with law.