A Blunt Sword: On Exemplary Costs and Section 33

[Prabhat is a student at National Law School of India University.]

The rule under Section 34(3) of the Arbitration and Conciliation Act 1996 (Act), that suspends the limitation clock until a Section 33 application is disposed of, is meant to protect a bona fide applicant from procedural failure. The Supreme Court in NHAI v. T Younis (NHAI), dealt with this question of the commencement of the limitation period under Section 34(3) of the Act.

Though the fundamental question in this case, at the time of disposal, no longer remained res integra considering the judgement in Geojit Financial Services v. Sandeep Gurav, the thrust of this post’s argument comes from the clarification given by the Court accompanying its reasoning. It held that where Section 33 applications are “found to be sham, frivolous, or mala fide or solely filed for the purpose of defeating limitation under Section 34(3) of the Act, the courts would be justified in imposing exemplary and punitive costs” (emphasis supplied), in the interest of effective administration of justice by preserving legitimate remedies and preventing abuse of process. 

This post argues that the court’s clarification creates an asymmetrical safeguard which is a weak deterrent against strategic litigants seeking to prolong a Section 34 application. The piece proceeds by first, elaborating on how the imposition of ex post costs ends up allowing parties to weaponise Section 33 to prolong litigation; and secondly, demonstrates the ambiguity created by the lack of clear standards accompanying the clarification.

An Insufficient Safeguard Against Strategic Delays

The caveat of this clarification may be conceptualised as a sword and a shield. As a shield, it protects genuine, bona fide requests under Section 33 invoked by parties for its intended purpose, ensuring that limitation under Section 34 begins only after disposal of the Section 33 application, and parties are not forced to file cautionary Section 34 applications. However, while the shield is effective and encompasses the essence of Section 34(3), the clarification ends up being insufficient as a sword. 

The Court seemingly assumes that imposing exemplary and punitive costs will deter the abuse of Section 33, whereby parties frivolously and vexatiously invoke Section 33 with the sole purpose of delaying limitation to file a Section 34 application or to delay the finality of an award (following a Section 34 application). However, parties may be inclined to strategically delay the commencement of limitation for as long as possible, in order to prevent execution, or being bound by payment obligations.

Growing jurisprudence has often seen attempts to delay limitation in post-arbitration proceedings. In fact, the growing concerns of the courts with non-est filings (particularly at the Delhi High Court) under Section 34 of the Act, has been to address increasing instances where parties make a “sheer futile attempt to pause the limitation period from running out.” These applications, as devices to stop-the-clock of limitation periods, contemplate the same strategy as a frivolous application under Section 33. 

For sophisticated commercial parties, particularly government entities, public corporations and large conglomerates, the economic value in delaying the finality and enforcement of an arbitral award may actually outweigh the prospect of uncertain exemplary and punitive costs. In fact, a recent empirical study found that government entities have involvement in more than 62% of Section 34 cases at the Delhi High Court. Interestingly, the NHAI itself was involved in 116 out of these 1258 cases. 

On exemplary and punitive costs itself, the payment of costs may not be significant enough to deter a party from delaying proceedings under Section 33. For instance, in Vijay Karia v. Prysmian Cavi (Vijay Karia), a case where the respondent had to pay a primary amount of more than INR 65 crores to the appellants, the court imposed ‘exemplary costs’ of 50 lakhs on the appellant (amounting to about 0.7% of the primary amount). The clarification in NHAI does not prescribe a standard or limit for exemplary or punitive costs, and if the order in Vijay Karia is any quantitative indication for the imposition of costs, it may just be seen as a necessary sunk-cost in a party’s strategic delaying of a case. Though arising from a different context, Vijay Karia affirms that even where the Supreme Court considers exemplary costs appropriate, they may be modest in comparison to the underlying value of the award. The safeguard may fail to achieve its intended purpose by merely penalising the party’s conduct after the limitation is already prolonged. As a sword, therefore, the ex post sanction of exemplary costs falls short of deterring the ex ante incentive of a party with a mala fide strategy. 

Court-Created Confusion: The Lack of a Standard

In laying down its clarification, the court held that exemplary and punitive costs could be justifiably imposed where Section 33 applications were “sham, frivolous, or mala fide or solely filed for the purpose of defeating limitation”. The court, however, did not go on to clarify how this assessment is to be made, and what would amount to a sham or frivolous Section 33 application. 

The judgement leaves unanswered whether a weak claim itself would be classified as frivolous or a subjective finding of bad faith would be necessary. These are questions that will end up being left to the discretion of individual judges faced with differing facts and circumstances, which will further increase the ambiguity in the position of the law, through inconsistent (but equally persuasive) judicial approaches. Mala fide intent, bad faith and abuse are by themselves difficult to prove, especially with a provision like Section 33, which would allow a party to veil an application as one for correction of ambiguity, or clerical errors, or requesting for an interpretation of a portion of the award. Any number of frivolous applications could be reframed to seem legitimate, and an attempt to sieve them will end up impacting legitimate bona fide claims as well. 

This uncertainty is also particularly significant in light of the recent decision of a division bench of the Supreme Court, My Preferred Transformation v. Faridabad Implements. The court, in deciding on the application of the Limitation Act to Section 34, laid emphasis that the remedy under Section 34 is ‘precious’ and limitation should be interpreted liberally. It went on to say that denying the limited remedy on limitation would have the effect of being against public policy. 

When courts have decisively laid down such jurisprudence, it indicates a necessary tendency to interpret limitation periods liberally. If courts approach limitation questions with this judicial philosophy, they would naturally hesitate before classifying a Section 33 application as an abuse of process. Consequently, this may result in a liberal pro-applicant stance in dealing with applications under Section 33 of the Act, further diluting the effect of the clarification laid down here in NHAI. Practically, this would result in an extremely high threshold for the imposition of exemplary costs. 

Conclusion

The clarification given alongside the court’s decision in NHAI appears, on the face of it, as a precautionary measure given by the court to prevent a rampant tactic to extend and delay limitation periods. However, when such a clarification attempts to positively expand jurisprudence, a lack of guiding principles and clear standards can end up increasing ambiguity in the position of the law rather than resolving it. 

The clarification ends up asymmetrically benefitting the Section 33 applicant, a safeguard that ultimately benefits the conduct it seeks to deter. A litigant has little to lose by filing an empty Section 33 application. If it is a weak application and dismissed, it will still delay limitation until disposal. If it is a mala fide or vexatious application, the applicant faces a potential monetary penalty, a fractional value, which itself comes with the benefit of extended delay. 

While the law on Section 34(3) in light of a Section 33 application has been decisively reaffirmed, the clarification has introduced a layer of interpretative uncertainty, creating another unresolved question of law at the periphery it sought to clarify. 

The court’s safeguard against abuse remains decisively underdeveloped. A more robust approach might require a clear articulation of objectives and factors that go behind the imposition and quantum of exemplary costs and punitive measures. Future courts may also need to consider the extent to which the tribunal’s assessment of the bona fides of a Section 33 application should inform their assessment of abuse and imposition of exemplary costs.