Supreme Court: While considering the instant arbitration petition seeking appointment of arbitrator for adjudication of disputes and claims in terms of the Shareholders Agreement dated 25-07-2011 entered into between the petitioner and the respondents; the 3-Judge Bench of DY Chandrachud, CJ., JB Pardiwala* and Manoj Misra, JJ., reiterated that while determining the issue of limitation in the exercise of powers under Section 11(6) of the Arbitration and Conciliation Act, 1996, the referral court must only conduct a limited enquiry for the purpose of examining whether the Section 11(6) application has been filed within the limitation period of three years or not. At this stage, it would not be proper for the referral court to indulge in an intricate evidentiary enquiry into the question of whether the claims raised by the petitioner are time barred. Such a determination must be left to the decision of the arbitrator.
Background:
The petitioner and respondents entered into a Shareholders Agreement, in whose terms, the petitioner was to hold 4,00,000 equity shares and participate in the management of respondent company. Thereafter the petitioner also entered into a Commercial Expertise Agreement with the respondents as well.
Upon certain other issues arising between the parties, the petitioner tendered his resignation as the Director in respondent no. 1 and its Dubai subsidiary. The resignation was accepted by the Dubai subsidiary vide Director’s Resolution dated 18-07-2013.
The petitioner alleged that he had requested respondent no.1 on several occasions to either issue the share certificates evidencing allotment of 4,00,000 equity shares or in the alternate, return the amount equivalent to such shares. Since the respondents were not paying heed to his repeated requests for issuance of share certificates, the petitioner sent an arbitration notice to the respondents.
Upon receiving no response, the petitioner then filed separate applications under Section 11(6), A&C Act, before the Bombay High Court for constituting an arbitral tribunal. 10 months after the date of issuance of arbitration notice, the respondents disputed the claims and appointed 2 arbitrators and called upon the petitioner to nominate the third arbitrator.
However, Bombay High Court held that the petitioner being an NRI who habitually resides and works in Dubai, the proceedings would constitute an “international commercial arbitration” and therefore, the Section 11 applications filed before it were not maintainable.
In the light of the afore-said dismissal, the petitioner filed the instant petition.
Court’s Assessment:
Perusing the matter, the Court had to consider whether it should decline to make a reference under Section 11(6) of A&C Act, 1996 by examining whether the substantive claims of the petitioner are ex facie and hopelessly time barred.
The Court took note of Vidya Drolia v. Durga Trading Corporation, (2021) 2 SCC 1, wherein the Court endorsed the prima facie test and opined that Courts at the referral stage can interfere only in rare cases where it is manifest that the claims are ex facie time-barred and dead, or there is no subsisting dispute. Such a restricted and limited review was considered necessary to check and protect parties from being forced to arbitrate when the matter is demonstrably “non-arbitrable” and to cut off the deadwood.
It was noted that in Arif Azim Company Limited v. Aptech Ltd., (2024) 5 SCC 313, the Court had observed that Section 11(6) would be covered by Article 137 of the Limitation Act, 1963 which prescribes a limitation period of 3 years from the date when the right to apply accrues. Furthermore, on the identical issue as in the instant petition, Arif Azim (supra) stated that although, limitation is an admissibility issue, yet it is the duty of the Courts to prima facie examine and reject non-arbitrable or dead claims, so as to protect the other party from being drawn into a time-consuming and costly arbitration process.
Subsequently in Interplay Between Arbitration Agreements under A&C Act, 1996 & Stamp Act, 1899, In re, (2024) 6 SCC 1, the Court opined that the referral courts shall “examine the existence of a prima facie arbitration agreement and not other issues” at the stage of appointment of an arbitrator. These “other issues” would include the examination of any other issue which has the consequence of unnecessary judicial interference in the arbitral proceedings.
The ratio of Arif Azim (supra) was reconsidered in SBI General Insurance Co. Ltd. v. Krish Spinning, 2024 SCC OnLine SC 1754, wherein the Court clarified that while determining the issue of limitation in exercise of the powers under Section 11(6) of the Act, 1996, the referral court should limit its enquiry to examining whether Section 11(6) application has been filed within the period of limitation of three years or not. The date of commencement of limitation period for this purpose shall have to be construed as per the decision in Arif Azim (supra). It was further clarified that the referral courts, at the stage of deciding an application for appointment of arbitrator, must not conduct an intricate evidentiary enquiry into the question whether the claims raised by the applicant are time barred and should leave that question for determination by the arbitrator. Such an approach gives true meaning to the legislative intention underlying Section 11(6-A) of the Act, and to the view taken in In Re : Interplay (supra).
“In a scenario where the referral court is able to discern the frivolity in the litigation on the basis of bare minimum pleadings, it would be incorrect to assume or doubt that the arbitral tribunal would not be able to arrive at the same inference, especially when they are equipped with the power to undertake an extensive examination of the pleadings and evidence adduced before them”.
Henceforth, in light of Krish Spinning (supra), the Court pointed out that the power of the referral court under Section 11 must essentially be seen in light of the fact that the parties do not have the right of appeal against any order passed by the referral court under Section 11, be it for either appointing or refusing to appoint an arbitrator. “Therefore, if the referral court delves into the domain of the arbitral tribunal at the Section 11 stage and rejects the application of the claimant, we run a serious risk of leaving the claimant remediless for the adjudication of their claims”.
The Court further pointed out that the Courts are vested with the power of subsequent review in which the award passed by the arbitrator may be subjected to challenge by any party to the arbitration. Therefore, the Courts may take a second look at the adjudication done by the arbitral tribunal at a later stage, if considered necessary and appropriate in the circumstances.
Therefore, restricting their assessment to whether instant petitions under Section 11(6) are within the limitation period, the Court noted that petitioner issued a notice invoking arbitration on 23-1-2-17 and the same was delivered to both the respondents in 24-1-2017. However, the respondents failed to reply to the said notice within a period of 30 days. Therefore, the period of limitation of three years, for the purposes of a Section 11(6) petition, would begin to run from 23-02-2017. The present petitions under Section 11(6) were filed on 09-04-2019. Even including the period during which the parties proceeded before the Bombay High Court which ultimately held that the applications before it were not maintainable i.e., 03-03-2017 to 22-02-2019, these petitions are well within the bounds of limitation.
[Aslam Ismail Khan Deshmukh v. ASAP Fluids Pvt. Ltd., 2024 SCC OnLine SC 3191, decided on 7-11-2024]
Advocates who appeared in this case :
For petitioner: Mr. Kunal Cheema, counsel
For respondents: Ms. Jasmine Damkewala, counsel
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