Out-Law Analysis 5 min. read

Limitation periods in international arbitration

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Parties to international arbitration should pay close attention to the applicable limitation periods, particularly where the project involves a potential mix of applicable sources of law.

Limitation periods for enforcing an arbitral award can have a significant impact on the enforcement process. Parties must seek to enforce the award before the limitation period expires or it will become time-barred, giving the counterparty a cast-iron defence to enforcement.

However, there is no clear guidance on limitation periods in international arbitration. Indeed, many jurisdictions have no clear rules on limitation periods for enforcing foreign arbitral awards, making this area of law controversial and uncertain.

A limitation period is a legal concept that governs the time limit within which a party must raise a claim against a counterparty. Limitation periods include time limits for raising claims under construction contracts and in the context of arbitral awards, time limits for enforcing an arbitral award.

Limitation periods are important as they provide certainty and finality to parties who may then be confident that they will not be subject to an indefinite period of potential liability - thereby promoting stability in commercial relationships and allowing parties to make business plans with a greater level of certainty.

For more on limitation periods in construction contracts more generally, see our separate Out-Law guide.

Limitation periods under the New York Convention

The Convention on the Recognition and Enforcement of Foreign Arbitral Awards, known as the New York Convention, is a United Nations treaty that provides a framework for the enforcement of foreign arbitral awards in international commercial disputes. Applicable in over 172 contracting states as of July 2023, it is the primary mechanism by which international arbitration awards are recognised and enforced around the world. The Convention aims to enhance the stability of international trade and investment by providing some certainty and predictability in the enforcement of foreign arbitral awards.

Article I (1) of the Convention sets out the broad scope of the Convention that applies to awards “made in the territory of a State other than the State where the recognition and enforcement of such awards are sought”. However, it does not provide a specific limitation period for enforcement proceedings and is silent on whether contracting states may refuse to enforce foreign arbitral awards on the grounds of the expiration of limitation periods. Consequently, limitation periods remain a controversial issue during the process of enforcing foreign arbitral awards under the Convention.

Article III of the Convention has been interpreted to allow the contracting states to exercise their discretion by providing that “each Contracting State shall recognise arbitral awards as binding and enforce them in accordance with the rules of procedure of the territory where the award is relied upon”.

It is this ‘discretion’ that has paved the way for diversified laws and practices in evaluating time limitations on seeking enforcement of foreign arbitral awards between different contracting states. These divergencies exist in three main aspects: the applicable law; the duration and commencement of the limitation period; and factors that would interrupt, suspend and extend the limitation period. Some jurisdictions fail to provide any express limitation period for the enforcement of foreign arbitral awards at all, making determination of the applicable limitation period a highly controversial issue.

The lack of consensus on the approach to limitation periods for foreign arbitral awards requires extra due diligence by parties to ensure enforceability of their awards in international arbitration. Obtaining a favourable award is only the first step: parties must then also succeed in the enforcement of that award within the requisite time period.

However, the lack of clear guidance on the issue can lead to uncertainty regarding the appropriate limitation period regime and contradicting interpretations. It is suggested that this uncertainty of outcome may potentially compromise international arbitration’s status as an effective dispute resolution mechanism.

Different approaches to limitation periods

In theory, the successful party should apply for the enforcement of an arbitral award as soon as practicable. However, in practice, it is often the case that the award creditor will waive immediate enforcement of the award as a result of the behaviour of the award debtor or wishful thinking that the award debtor would voluntarily perform its obligations. There may also be business considerations, such that the award creditor fears the business relationship between parties would be undermined if enforcement proceedings are commenced. Political concerns may also affect the approach taken by the award creditor.

To avoid inadvertently coming up against a limitation period, parties must carefully plan their approach to enforcement right at the outset of the arbitration process, including carefully reviewing the relevant laws and regulations, monitoring deadlines and timelines, and working with experienced legal counsel to develop a comprehensive enforcement strategy.

In addition, the prescribed period may be altered by way of interruption, suspension or extension - which varies among contracting states. Depending on the state, valid interruptions can include the award debtor’s acknowledgement or declaration of bankruptcy and the award creditor’s application for enforcement proceedings or withdrawal of the application by reason of evidence gathering. The doctrine of equitable tolling may also play a role in determining the exhaustion of the limitation period. If the acts of the award debtor or any extraordinary circumstances are found to have hampered the award creditor’s ability to seek enforcement, the court may have the discretion to amend the limitation period as it thinks just.

Award creditors must carefully consider where they need to enforce the award – where the debtor’s assets lie – as the different approaches taken in different states could derive wholly different and possibly unwanted outcomes.

‘Lex causae’ approach

A ‘lex causae’ approach is one based on the substantive law or law applicable to the merits of the dispute, which is usually the law of the underlying contract. Contracting states that adopt the lex causae approach include countries such as Portugal, Czech Republic, Hungary, Poland, Slovenia and Uruguay.

Under this approach, the courts of the enforcing state will need to first determine the lex causae based on the laws of the relevant jurisdiction. If the lex causae is the same as the law of the enforcing state, the courts will proceed to apply their own substantive rules on limitation periods such as the civil codes and limitation acts. If the lex causae is held to be a foreign law, the courts will adhere to the relevant limitation period regime under that foreign law, as evidenced in the parties’ submissions.

The lex causae approach can create a procedural hurdle for contracting parties as the enforcing court must go through a separate step to ascertain the relevant limitation period. This procedural hurdle gives rise to additional time, cost and uncertainty.

Accordingly, award creditors must give due consideration to this hurdle when seeking to enforce an award in a jurisdiction that adopts this approach.

‘Lex arbitri’ approach

Other contracting states determine the limitation period as per the law of the place where the arbitral award was made. Where this principle, known as ‘lex arbitri’, applies, an arbitral award is unenforceable if the limitation period has expired under the law of the place of arbitration, as the origin of the award.

The lex arbitri approach faces the same problem as the lex causae approach, in that it gives rise to an additional procedural hurdle as courts must first establish the applicable limitation period under the applicable foreign law.

Parties should always be prudent and investigate the applicable limitation period in the jurisdiction they are likely to want to enforce the arbitral award, and the location of the award debtor’s assets; seek appropriate legal advice; seek enforcement in more than one jurisdiction where possible; and most importantly, do all of the above well ahead of time.

Co-written by Henry Lau of Pinsent Masons.

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