Execution Court's Finding That Arbitral Award Is Unenforceable Does Not Extend Limitation: Kerala High Court

The Kerala High Court has ruled that the time spent in an earlier arbitration cannot be excluded from the limitation period merely because an execution court later finds that the resulting arbitral award is unenforceable or a nullity.

Section 43(4) of the Arbitration and Conciliation Act, 1996, provides for exclusion of the period between the commencement of an arbitration and the date on which a court sets aside the arbitral award while calculating the limitation period for subsequent proceedings, including a fresh arbitration, concerning the same dispute.

Justice S. Manu held that this exclusion applies only when a court actually orders that the award be set aside under Sections 34 or 37 of the Act.

An execution court's finding that an award is unenforceable or a nullity cannot be treated as an order setting aside the award.

“On a literal reading, the phrase 'an arbitral award be set aside' used in sub-section (4) of Section 43 does not allow for the inclusion of any other circumstance within the purview of the clause,” the court observed.

The court further held that Section 43(4) “would apply only when the Court orders that an arbitral award be set aside under Section 34 or Section 37 of the Act."

An execution court's order holding an award unenforceable or a nullity “cannot be equated with an order passed under Section 34 or Section 37 of the Act.”

The court, however, allowed KLM Axiva Finvest Limited's request for the appointment of a fresh arbitrator in a loan dispute. It held that the finance company could seek exclusion of the relevant period under Section 14 of the Limitation Act, 1963, since it had pursued the earlier proceedings bona fide and with due diligence.

The dispute arose from a loan agreement dated August 4, 2015.

The dispute arose from a ₹75 lakh loan taken by the borrower from KLM Axiva, with another party as guarantor. The loan agreement contained an arbitration clause.

After the borrower and guarantor allegedly defaulted, KLM Axiva commenced arbitration. An award was passed in December 2018 after they failed to appear before the arbitrator.

The finance company later sought to execute the award. In September 2024, the execution court held that the unilateral appointment of the arbitrator was illegal and found the award unenforceable.

KLM Axiva's first request for appointment of a fresh arbitrator was rejected by the High Court in January 2026 as premature. It then issued a fresh notice invoking arbitration and filed the present request.

The borrower and guarantor received the notice but did not respond. The present arbitration request was then filed.

Before the High Court, KLM Axiva argued that the time spent in the earlier arbitration and execution proceedings should be excluded while calculating limitation for the fresh arbitration.

The company calculated 3,764 days between the alleged date of default and commencement of the present arbitration. It submitted that 2,689 days spent in the earlier arbitral proceedings and execution proceedings should be excluded, leaving 1,075 days.

KLM Axiva first relied on Section 43(4) of the Arbitration Act. The provision excludes the period between the commencement of arbitration and the date of a court's order setting aside an arbitral award while calculating limitation for subsequent proceedings concerning the same dispute.

The finance company argued that the execution court's finding that the arbitrator's appointment was illegal and that the award was therefore unenforceable virtually amounted to setting aside the award.

The borrower and guarantor opposed the argument.

The borrower and guarantor argued that an award being declared a nullity was different from an award being set aside under Section 34 of the Arbitration Act.

The High Court agreed. It held that Section 43(4), which allows certain periods to be excluded when calculating limitation, applies only when an award is set aside under Sections 34 or 37.

The court then considered KLM Axiva's alternative reliance on Section 14 of the Limitation Act. The provision allows time spent pursuing an earlier proceeding in good faith and with due diligence to be excluded from the limitation period in certain circumstances.

KLM Axiva argued that this should cover the time spent in the earlier arbitration and execution proceedings. The borrower and guarantor disputed that the company had acted bona fide and with due diligence.

KLM Axiva, however, pointed out that the arbitrator was specifically named in the arbitration agreement. It also submitted that there had been no objection to that arrangement when the loan agreement was executed.

The High Court accepted this submission. It found that KLM Axiva had pursued the earlier arbitral proceedings before the arbitrator specifically mentioned in the agreement and could not be said to have acted without diligence or bona fides.

The court therefore held that the finance company was entitled to the benefit of Section 14. The time spent completing the earlier arbitral proceedings and pursuing execution of the award was liable to be excluded while calculating limitation.

The High Court nevertheless did not finally decide whether the underlying claims were within limitation.

It found that KLM Axiva's contention on limitation prima facie deserved acceptance after applying the benefit of Section 14. However, the court held that deciding the issue conclusively would require an intricate evidentiary inquiry, which was not appropriate at the stage of considering the request for appointment of an arbitrator.

The issue was therefore left open for the arbitral tribunal to decide.

The arbitration request was accordingly allowed. The Kerala High Court Arbitration Centre was directed to nominate a sole arbitrator from Panel II.

The arbitrator was permitted to consider all issues arising in the dispute, including questions of jurisdiction and limitation.

For Petitioner (KLM Axiva Finvest Limited): Advocate G. Renjith.

For Respondents 1-4: Advocate Sanjana Jayakumar.