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ARBITRAL AWARDS AFFECTED BY FRAUD – THE NEED FOR A DISTINCT LIMITATION PERIOD

Nabeel Wasim Malik, Graduate, Symbiosis Law School, Pune


Introduction

§34(3) of the Arbitration and Conciliation Act 1996 (“ABC Act”) provides that an application for setting aside an arbitral award (“§34 application”) may not be filed after three months from the receipt of the award by the applicant. It may also be filed after an additional period of thirty days if sufficient cause is demonstrated by the applicant, “but not thereafter”. The words “but not thereafter” have been interpreted by the courts to signify the mandatory nature of the time limit provided under this provision.[1]


One particular ground for setting aside of an arbitral award is when the award has been induced or affected by fraud or corruption. This may include suppression of material documents, perjury, falsification of evidence, etc. The very nature of this ground is such that the factum of the fraud might not be discoverable even after reasonable diligence, for months or even years after the passing of the award.[2] The question that naturally arises is whether a §34 application can be filed in cases where the fraud becomes reasonably discoverable only after the expiry of the prescribed time limit.


Effect of fraud on limitation

§4 to §24 of the Limitation Act 1963 (“Limitation Act”) deal with condonation of delay and postponement of limitation. These provisions are only applicable to special statutes such as the ABC Act if not expressly excluded.[3] §17 of Limitation Act inter-alia provides that, in case the right of an applicant to file an application is concealed from him due to fraudulent conduct, the period of limitation for such application will commence only once the fraud is discovered or has become reasonably discoverable.


It was stated in Pallav Sheth v. Custodian (Pallav Seth) that §17 of the Limitation Act is based on two fundamental principles of equity and justice, that: a) no person should be penalised for failing to commence legal proceedings when the material or facts forming the basis for such legal proceedings are fraudulently concealed from the applicant, and that b) no person should gain the benefit of his fraudulent conduct and of the limitation period running in his favour by way of such fraudulent conduct.


The question as to whether §17 of the Limitation Act was expressly excluded by the ABC Act was discussed in P. Radha Bai v. P. Ashok Kumar by the Supreme Court. The Supreme Court therein held that the words “but not thereafter” demonstrate an outer boundary of 120 days for filing a §34 application, and if §17 of the Limitation Act is applied to §34(3) of the ABC Act, the limitation period would extend beyond the statutorily mandated period of 120 days, rendering the words “but not thereafter” nugatory and run contrary to the object of the ABC Act, namely, the speedy resolution of disputes and finality of arbitral awards.


This policy of favouring finality over equity, however, could lead to a scenario where a party could be robbed of its only recourse against the award, even though the fraud was not reasonably discoverable within the prescribed time limit. The fraudulent party, would therefore reap the benefits of its own fraud. This would violate the fundamental principles of equity as explained in Pallav Seth. The resultant question thus, is whether the aforementioned principles of equity and the principle of finality, as enshrined under the ABC Act, can be reconciled.


Time limit under UNCITRAL Model Law

The ABC Act is based on the UNCITRAL Model Law on International Commercial Arbitration (“Model Law”), which provides a pattern that legislators in different States can adopt as part of their domestic arbitration regimes. Article 34(3) of the Model Law [“Art 34(3)”] provides that a setting aside application may not be made after three months from the date on which the applicant had received the award. The extensibility of this time limit has been a matter of controversy.


The UNCITRAL Model Law Working Party had considered allowing a longer limitation period than the one provided under Art 34(3) for cases like fraud, but ultimately, the drafters decided that such a course of action would be contrary to the need for speedy resolution of disputes in international commercial relationships.[4] However, the use of the word “may” indicates that there is some discretion provided to courts to entertain an application after expiration of the time limit.[5]


The Hong Kong Court of First Instance in Sun Tian Gang v. Hong Kong & China Gas (JILIN) Ltd has held that the use of the words “may not” demonstrate that the national law of a state may contain provisions for extending the time limit under Art 34(3) in particular circumstances. Additionally, the court in the aforementioned judgment also observed that even though the primary of aim of the Model Law was effective and speedy resolution of disputes, that shall not undermine the importance of due and fair process, and no injustice shall arise out of the arbitral process or the award.


On the other hand, the High Court of Singapore in Bloomberry Resorts v Global Gaming Philippines LLC, held that the words “may not” have to be interpreted as “cannot”, and that the time limit under Art 34(3) is strict, favoring finality and legal certainty. However, it was also observed that it is left to national laws to adopt separate time limits for setting aside fraudulently induced awards.


Non-application of the limitation period

Some States have opted not to apply the time limit in Art 34(3) to applications for vacating arbitral awards obtained by fraud.


§34(3) of New Zealand’s Arbitration Act 1996 provides that the three months’ limitation for filing a setting aside application is not applicable to applications based on the ground that the award was affected by fraud or corruption.


§37(5) of the Malaysian Arbitration Act 2005 almost identically provides for the non-application of the three months’ limitation for applications against fraudulently affected arbitral awards.


Postponement of limitation

Some States, instead of applying no limitation period to fraudulently obtained awards, have adopted a middle path. The limitation period in these States commences from the date on which the factum of the fraud is discovered or has become reasonably discoverable.


The Federal Arbitration Act of the United States mandates that a motion to vacate an arbitral award must compulsorily be filed within ninety days of receipt of the award. However, under the Uniform Arbitration Act, a model arbitration statute devised for U.S. states, §23(b) provides that in case the movant alleges that the award was procured by fraud, the motion must be filed within ninety days of the grounds being known or becoming capable of being known with reasonable care.


The arbitration regime of Ireland makes the departure from the time limit under Art 34(3) explicit. §12 of Ireland’s Arbitration Act 2010 provides that notwithstanding Art 34(3), a setting aside application on the grounds that the award is in conflict with the public policy of the State (which includes fraud) shall be made within 56 days from the date on which the circumstances giving rise to the application became known or ought to have reasonably become known to the applicant.


Article 34(3) of South Africa’s International Arbitration Act 2017 provides that in cases of fraudulently induced awards, the three months limitation period commences as against the applicant when knowledge of such fraudulent conduct is acquired or has become acquirable by the applicant.


Article 1068(2) of the Dutch Code of Civil Procedure provides that an application for revocation of an arbitral award obtained by fraud, forgery or suppression of documents, shall be brought within three months after the fraud or forgery has become known or the suppressed documents have been obtained by the applicant.


Element of fault

The arbitration regime of the United Kingdom also provides for an extension of the 28 days’ time limit to challenge an arbitral award, if the reason for the delay in filing is attributable to the award-holder. §80(5) of the Arbitration Act 1996 provides that the calculation, extension or reduction of limitation periods set by this Act are governed by the rules of the court. In Kalmneft v. Glencore, the court inter-alia held that any conduct of the Respondent or arbitrator which contributed to the delay in filing of the setting aside application, will be taken into account for determining the condonation of such delay.


Conclusion

Therefore, the various practices in the aforementioned States demonstrate that it is possible to adopt an approach which harmonizes the objective of ensuring finality of arbitral awards and the policy need for preventing a party to benefit from its own fraud. Such an approach will not be contrary to the scheme of the Model Law either. Therefore, the author is of the opinion that it would be desirable to amend §34 of the ABC Act to allow for a separate limitation period for fraudulently affected awards.


Any of the following approaches can be taken:


a) The non-application of the 120 days’ time limit to applications challenging fraudulently affected awards;


b) The limitation period as against the applicant to commence only when the factum of the fraud is either discovered or has become reasonably discoverable;

c) The setting of a distinct and possibly shorter time limit (e.g. 30 days) for challenging the award once the factum of the fraud is either discovered or has become reasonably discoverable.









[1] Assam Urban Water Supply & Seweage Board v. Subhash Projects & Marketing Ltd, (2012) 2 SCC 624 at [627]. [2] Nathalie Voser and Anya George, Revision of Arbitral Awards, Post Award Issues (ASA Special Series No. 38, 2012) Ch. 3, at [47]. [3] Vidyacharan Shukla v. Khubchand Baghel, [1964] 6 SCR 129 at ¶27. [4] Howard M. Holtzmann and Joseph Neuhaus, A Guide to the UNCITRAL Model Law on International Commercial Arbitration: Legislative History and Commentary, (© Kluwer Law International; Kluwer Law International 1989) pp. 1002 – 1003. [5] Julian David Mathew Lew, Loukas A. Mistelis, Stefan Michael Kroll, Comparative International Commercial Arbitration, (© Kluwer Law International; Kluwer Law International 2003) pp. 671 – 672.

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