Delhi High Court Rules Section 43(3) Of Arbitration Act Cannot Save Void Arbitration Clause

The Delhi High Court has recently held that a provision empowering courts to extend the contractual time for commencing arbitration in cases of undue hardship cannot, by itself, validate a contractual clause that is otherwise void under the law.

Referring to Section 43(3) of the Arbitration and Conciliation Act, 1996, the court observed,

"The provision does not validate or positively enact the enforceability of contractual time-bar clauses. It addresses only the limited question of whether a court may grant an extension of time in cases of undue hardship where the contractual time limit has expired. The precondition for the exercise of this power is that there exists a valid time-bar clause; Section 43(3) does not, by its own force, render otherwise void clauses valid. Whether a particular clause is void under Section 28 of the Contract Act-a question antecedent to and independent of Section 43(3) - falls to be determined by the Contract Act itself."

The ruling was delivered by a division bench of Justice Anil Kshetrapal and Justice Amit Mahajan, which dismissed Mahanagar Telephone Nigam Limited's (MTNL) appeal against a Commercial Court order refusing to set aside an arbitral award.

The award directed the telecom company to pay about ₹25.23 lakh, along with interest, to Rukma Decor and Construction Co. in a dispute arising from the balance and left-out construction work relating to 240 Type-III staff quarters at Paschim Vihar, New Delhi.

The dispute arose after MTNL awarded the contract in November 2010. Although the work was to be completed by March 24, 2011, it was finished on May 3, 2012.

MTNL blamed the contractor for the delay. Rukma Decor, however, contended that the delay was caused by hindrances attributable to MTNL, including delays by its electrical agency.

MTNL informed the contractor on November 21, 2012 that the final bill was ready, and released payment on May 30, 2013. After its claims were rejected, Rukma Decor invoked arbitration in September 2015. MTNL refused to appoint an arbitrator, relying on Clause 53 of the contract, which required arbitration to be invoked within 90 days of intimation that the final bill was ready. The clause also stated that any claim made after that period would stand waived and MTNL would be discharged from liability.

The High Court held that Clause 53 did more than prescribe a time limit for invoking arbitration. Since it extinguished contractual rights and discharged MTNL from liability, it was void to that extent under Section 28(b) of the Indian Contract Act, 1872.

The bench observed, "By deeming the claims 'waived and absolutely barred' and by discharging MTNL from 'all liabilities under the contract', Clause 53 goes well beyond a mere procedural time-bar; it extinguishes substantive contractual rights and is therefore clearly and unambiguously struck down by the amended Section 28(b)."

Before the High Court, MTNL argued that Section 43(3) of the Arbitration and Conciliation Act recognised contractual time-bar clauses and supported the validity of Clause 53.

Rejecting the contention, the bench held that the validity of such clauses must first be determined under the Contract Act.

Only a clause that is otherwise valid can attract the court's power to extend time under Section 43(3). Finding no patent illegality, perversity or jurisdictional error in the arbitral award or the Commercial Court's judgment, the High Court dismissed the appeal.

For Mahanagar Telephone Nigam Limited (Appellant): Advocates Chandan Kumar and Vikram Sharma.

For M/s Rukma Decor and Construction Company (Respondent): Advocate O.P. Gupta.