Execution Court Declaring Arbitral Award Unenforceable Does Not Amount To Setting It Aside: Kerala High Court

The Court nevertheless allowed a fresh arbitration request after finding the applicant entitled to exclusion under Section 14 of the Limitation Act, 1963.

The Court was hearing an arbitration request seeking the appointment of a sole arbitrator in a loan dispute after an earlier award was held unenforceable because the arbitrator had been appointed unilaterally. An earlier request for fresh arbitration had been rejected as premature because no fresh notice under Section 21 of the Arbitration and Conciliation Act, 1996 had been issued after the execution proceedings ended.

A Single Judge Bench of Justice S. Manu observed: “I find merit in the contention of the learned counsel for the respondents that Parliament consciously refrained from employing broader expressions in Section 43(4) and the deliberate legislative choice of words cannot be disregarded or substituted by judicial interpretation. I hence hold 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 and an order of an execution court, holding that the arbitral award is unenforceable or is a nullity, cannot be equated with an order passed under Section 34 or Section 37 of the Act.”

Advocate G. Renjith appeared for the petitioner; Advocates V.M. Krishnakumar and Sanjana Jayakumar appeared for the respondents.

Background

The petitioner, a non-banking financial institution, had advanced a loan of ₹75 lakh to the first respondent under an agreement containing an arbitration clause. The second respondent stood as guarantor.

Following the alleged repayment default, the petitioner invoked arbitration and nominated the arbitrator identified in the agreement. The respondents did not participate in the proceedings, and an award was passed in the petitioner’s favour in 2018.

The petitioner sought execution of the award before an Additional District Court. Relying upon Hedge Finance Private Limited v. Bijish Joseph (2022), the execution court held that the unilateral appointment of the arbitrator was illegal and consequently declared the award unenforceable.

The petitioner thereafter approached the High Court for fresh arbitration. That request was rejected as premature because a fresh notice satisfying Section 21 of the Arbitration and Conciliation Act, 1996 had not been issued after the execution court’s decision. The petitioner issued fresh notices and filed the present request when the respondents did not reply.

The petitioner argued that the execution court’s declaration had the same practical effect as setting aside the award. It consequently claimed exclusion under Section 43(4) for the period between commencement of the earlier arbitration and the execution court’s order.

Alternatively, the petitioner invoked Section 14 of the Limitation Act, 1963, contending that it had diligently and bona fide pursued the earlier arbitration and execution proceedings. It submitted that approximately ₹2 crore had become due and that rejecting arbitration would leave it without a remedy.

The respondents argued that the claims were time-barred. They distinguished an order setting aside an award under Section 34 from a declaration in execution that an award was unenforceable or a nullity. They further contended that the petitioner could not claim good-faith prosecution under Section 14 after having unilaterally nominated the arbitrator.

Court’s Observations

The Court held that Parliament had deliberately confined Section 43(4) of the Arbitration and Conciliation Act, 1996 to cases where an arbitral award is set aside. It found no basis for judicially extending the provision to an execution court’s declaration that an award is unenforceable.

The Court considered India Cements Capital Limited v. William (2015), which distinguished setting aside an existing award from declaring that no executable award existed in law. The earlier decision had explained: “In other words, seeking a pronouncement that there is no executable decree or award at all. If the end result of an adjudication under S.47 of the Code is entering a finding that there is no decree or award at all, there cannot be a question of setting aside such a decree or award in that proceedings.”

The Court accordingly held that Section 43(4) applies only where an award is set aside under Section 34 or Section 37. The similar practical consequences of the two orders could not justify expanding the statutory language.

The Court accepted the petitioner’s alternative reliance on Section 14 of the Limitation Act, 1963. It noted that Section 43(1) of the Arbitration and Conciliation Act, 1996 applies the Limitation Act to arbitration in the same manner as proceedings before a court.

The Court referred to State of Goa v. Western Builders (2006), Gulbarga University v. Mallikarjun S. Kodagali (2008), Shakti Tubes Limited v. State of Bihar (2009) and Consolidated Engineering Enterprises v. Principal Secretary, Irrigation Department (2008), which recognised the applicability of Section 14 to arbitration-related proceedings.

Explaining the object of the provision, the Supreme Court had observed in Consolidated Engineering Enterprises (2008): “The policy of the section is to afford protection to a litigant against the bar of limitation when he institutes a proceeding which by reason of some technical defect cannot be decided on merits and is dismissed. While considering the provisions of Section 14 of the Limitation Act, proper approach will have to be adopted and the provisions will have to be interpreted so as to advance the cause of justice rather than abort the proceedings.”

The Court noted that Section 14 does not extend the prescribed limitation period. It excludes the time spent diligently and bona fide prosecuting earlier proceedings that failed because of a jurisdictional defect or another cause of a similar nature.

The Court found that the original arbitrator had been specifically identified in the parties’ arbitration agreement and that the respondents had accepted the clause when executing the agreement.

It further found that the petitioner had pursued the arbitration before the named arbitrator and subsequently attempted to execute the resulting award. The proceedings could not, therefore, be characterised as lacking diligence or good faith merely because the tribunal was later found incompetent.

The Court held: “Respondent had no quarrel about an arbitrator being nominated in the agreement while executing the agreement. Therefore, it cannot be said that the petitioner was not diligent. Proceedings before the arbitrator named in the agreement and also before the execution court cannot be held as pursued without bonafides by the petitioner. That being so, in my view, the petitioner is eligible for the benefit of Section 14 of the Limitation Act.”

The Court consequently held that the period spent completing the first arbitration and pursuing execution of the award was liable to be excluded while calculating limitation.

It clarified: “Section 14 of the Limitation Act would come to the rescue if the arbitral proceedings were prosecuted diligently and bonafidely before an arbitral tribunal, even though it was later held as incompetent by a competent court.”

The Court found that, after excluding the period covered by the earlier arbitration and execution proceedings, the petitioner’s contention that the fresh invocation was within limitation appeared prima facie acceptable.

Relying on Aslam Ismail Khan Deshmukh v. Asap Fluids Private Limited (2025), it held that a referral court should conduct only a limited inquiry into whether the application for appointment of an arbitrator was filed within three years. An evidentiary examination of whether the underlying claims were time-barred must ordinarily be left to the arbitral tribunal.

The Court observed: “Prima facie, it appears that the contention of the learned counsel for the petitioner deserves to be accepted. Moreover, no intricate inquiry into the issue of limitation is within the province of the referral court. It is entirely for the arbitral tribunal to consider the issue when an evidentiary analysis is essential to decide whether the claims are time-barred or not.”

The Court found that the basic requirements for appointing an arbitrator were satisfied and that the request should not be rejected at the referral stage.

Conclusion

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

The arbitrator was permitted to decide every issue arising from the loan agreement, including jurisdiction and limitation. All claims, counterclaims and contentions of the parties were left open.

The Registry was directed to communicate the order to the Arbitration Centre within ten days. The Centre was required to inform the nominated arbitrator within a further week and obtain the prescribed disclosure statement under the Kerala High Court (Arbitration Centre) Rules, 2025.

The arbitrator’s fees and costs would be governed by Rules 27 and 28 of the Kerala High Court (Arbitration Centre) Rules, 2025. The arbitrator was also permitted to seek expert assistance if required.

Cause Title: KLM Axiva Finvest Limited v. Bijitha Shajan & Ors. (Neutral Citation: 2026:KER:68650)

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