Parties Cannot Restrict Limitation Period For Invoking Arbitration In Contravention To The Limitation Act

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  5. Parties Cannot Restrict Limitation Period For Invoking Arbitration In Contravention To The Limitation Act

The Delhi High Court, in the case of Municipal Corporation of Delhi v. Natraj Construction Company, by relying on Section 28 of the Indian Contract Act, held that parties under an arbitration agreement cannot restrict the period lesser than the statutory period of three years for invoking arbitration in contravention to the limitation period provided by law under the Limitation Act.

The case arose from a dispute between the Municipal Corporation of Delhi (MCD) and Natraj Construction Company (Natraj) regarding a contract for providing and fixing a retro-reflective sign board. The time for completion of work was three months, and Natraj completed the work within the stipulated time. However, MCD did not pay the amount due since the Central Bureau of Investigation registered an FIR alleging sub-standard quality of work in relation to the sign board. Natraj invoked the arbitration clause in the agreement between the parties for the unpaid amount, and an arbitral award was passed in favor of Natraj.

MCD challenged the award under Section 34 of the Arbitration Act, arguing that the claim was time-barred as per the terms of the contract, which required any challenge/dispute to be raised by the counterparty within 120 days. The Court held that MCD’s contention was meritless in view of amended Section 28 of the Contract Act, which voids any agreement that restricts a party from enforcing its rights or limits the time within which it may enforce its rights. The Court further emphasized that it must refrain from reassessing or reexamining the merits of the case as if it were a Court of Appeal against the award.

The Court’s judgment brings clarity to parties’ statutory rights, especially with reference to lopsided agreements that are usually in favor of the dominant party. The judgment also underscores an exception to the otherwise well-settled concept of arbitration being driven by party autonomy, wherein parties by mutual consent may decide the entire course of their dispute settlement mechanism.

In conclusion, the Court’s ruling ensures that parties cannot contractually agree to a shorter limitation period than the one provided by law for invoking arbitration.