Supreme Court Directs Arbitration Despite Limitation Concerns in Shareholder Dispute

Date of the Judgment: 7th November 2024
Citation: 2024 INSC 849
Judges: Dr. Dhananjaya Y. Chandrachud, CJI, J.B. Pardiwala, J., Manoj Misra, J.

Can a court refuse to send a matter to arbitration if it appears that the claims are potentially barred by limitation? The Supreme Court of India recently addressed this question, clarifying the extent of judicial intervention at the stage of referring a dispute to arbitration. This case revolves around a shareholder agreement and whether disputes arising from it should be arbitrated despite concerns about the timeliness of the claims. The bench comprised of Chief Justice of India Dr. Dhananjaya Y. Chandrachud, Justice J.B. Pardiwala, and Justice Manoj Misra, with the judgment authored by Justice J.B. Pardiwala.

Case Background

Aslam Ismail Khan Deshmukh, an NRI with expertise in the drilling fluid industry, entered into a Shareholders Agreement on 25th July 2011 with ASAP Fluids Pvt. Ltd. (Respondent No. 1) and Gumpro Drilling Fluids Pvt. Ltd. (Respondent No. 2). Under this agreement, Mr. Deshmukh was to hold 400,000 equity shares in Respondent No. 1 and participate in its management.

A letter dated 22nd September 2011 from Respondent No. 2 stated that 200,010 of Mr. Deshmukh’s shares were being held by them for investor comfort, governed by the Shareholders Agreement. Additionally, on 18th October 2011, Mr. Deshmukh entered into a Service Agreement with Respondent No. 1 and its Dubai subsidiary, where he was appointed as a director for an initial term of 3 years. On the same day, he also signed a Commercial Expertise Agreement, agreeing to transfer his commercial expertise to Respondent No. 1 in exchange for 400,000 equity shares.

Mr. Deshmukh resigned as director on 18th July 2013. He then claimed that the respondents failed to issue share certificates for the 400,000 shares and transfer the 200,010 shares. Despite requests, the respondents did not issue the share certificates or return an equivalent amount. Consequently, Mr. Deshmukh sent an Arbitration Notice on 23rd January 2017, seeking arbitration under the Shareholders Agreement’s dispute resolution clause.

The respondents replied on 7th November 2017, denying the claims and appointing two arbitrators, while disputing the arbitrability of the 200,010 shares issue. The Bombay High Court dismissed Mr. Deshmukh’s applications for arbitration, stating it was an international commercial arbitration and thus not maintainable in the High Court. Following this, Mr. Deshmukh filed the present petitions before the Supreme Court.

Timeline:

Legal Framework

The primary legal framework for this case is the Arbitration & Conciliation Act, 1996. Specifically, Section 11(6) and Section 11(12)(a) are relevant, as they deal with the appointment of arbitrators by the Supreme Court in cases of international commercial arbitration.

Section 11(6) of the Arbitration & Conciliation Act, 1996 states:

“Where, under an arbitration agreement, the parties fail to agree on the procedure to be followed for appointing the arbitrator, or where a party fails to act as required under the procedure, or where the parties cannot agree on the appointment of an arbitrator, the Court may, on an application by a party, appoint an arbitrator.”

Section 11(12)(a) of the Arbitration & Conciliation Act, 1996 states:

“Where the matter is an international commercial arbitration, the application for appointment of an arbitrator shall be made to the Supreme Court.”

The Court also considered Section 43 of the Arbitration & Conciliation Act, 1996, which makes the Limitation Act, 1963 applicable to arbitrations. Additionally, Section 22 of the Limitation Act, 1963, which deals with continuing breaches of contract, was discussed.

Arguments

Petitioner’s Arguments:

• The petitioner argued that the disputes arose under the Shareholders Agreement, which contains an arbitration clause (Clause 13.10).
• He was entitled to 400,000 equity shares as per the Shareholders Agreement and another 200,010 shares were held by Respondent No. 2 on his behalf, as confirmed in a letter dated 22nd September 2011.
• The respondents failed to issue share certificates despite repeated requests. The cause of action arose when the respondents failed to issue share certificates and the value of the shares was to be paid at the time of sale of Respondent No. 1, which had not occurred.
• The Arbitration Notice was sent within three years from 15th October 2015, the date of the last legal notice from the respondents.
• Even if a cause of action arose earlier, there was a continuing breach of contract, and a fresh period of limitation would begin with each moment of the breach, as per Section 22 of the Limitation Act, 1963.
• The respondents had appointed arbitrators in their reply to the Arbitration Notice, without raising the issue of limitation.
• The issue regarding the 200,010 shares should also be referred to arbitration as the letter dated 22nd September 2011 stated that those shares would be governed by the Shareholders Agreement.
• Given the nature and low value of the claim, a sole arbitrator should be appointed instead of a three-member tribunal.

Respondents’ Arguments:

• The petitioner violated the 3-year lock-in period by resigning before completing three years of employment, as stipulated in the Service Agreement.
• The petitioner was not entitled to the shares as he terminated his employment before the completion of 3 years, as per the Service Agreement and Commercial Expertise Agreement.
• Any claim regarding the 400,000 shares would arise from the date of resignation (18th July 2013), making the Arbitration Notice time-barred.
• The Limitation Act, 1963 applies to arbitrations, and the Arbitration Notice was served more than 3 years after the cause of action arose.
• Even if the claim for the 200,010 shares is calculated from the date of resignation, it is still time-barred.

Issues Framed by the Supreme Court

The main issue framed by the Supreme Court was:

1. Whether the Court should decline to make a reference under Section 11(6) of the Arbitration & Conciliation Act, 1996 by examining whether the substantive claims of the petitioner are ex facie and hopelessly time-barred?

Treatment of the Issue by the Court

Authorities

Cases Cited by the Court:

• Vidya Drolia & Ors v. Durga Trading Corporation [(2021) 2 SCC 1] – Supreme Court of India: This case was cited to emphasize the limited scope of judicial review at the referral stage, stating that courts should interfere only when claims are manifestly time-barred or non-arbitrable.
• Bharat Sanchar Nigam Limited and Another v. Nortel Networks India Private Limited [(2021) 5 SCC 738] – Supreme Court of India: This case was cited to highlight that a referral court may decline to make a reference only in cases where there is no doubt that the claim is ex facie time-barred.
• Arif Azim Company Limited v. Aptech Limited [(2024) 5 SCC 313] – Supreme Court of India: This case was initially cited to support the view that courts should examine whether the application under Section 11(6) and the claims are within the limitation period. However, this view was later clarified.
• Interplay between Arbitration Agreements Under the Arbitration and Conciliation Act, 1996 and the Indian Stamp Act, 1899, In Re [2023 INSC 1066] – Supreme Court of India: This case was cited to emphasize the limited scope of judicial interference at the Section 11 stage, focusing primarily on the existence of a prima facie arbitration agreement.
• SBI General Insurance Co. Ltd. v. Krish Spinning [2024 SCC OnLine SC 1754] – Supreme Court of India: This case clarified that the referral court should only examine if the Section 11(6) application was filed within the limitation period and not conduct a detailed inquiry into whether the substantive claims are time-barred.

Legal Provisions Considered by the Court:

• Section 11(6) of the Arbitration & Conciliation Act, 1996: This section deals with the appointment of arbitrators by the court.
• Section 11(12)(a) of the Arbitration & Conciliation Act, 1996: This section specifies that applications for appointment of an arbitrator in international commercial arbitrations are to be made to the Supreme Court.
• Section 43 of the Arbitration & Conciliation Act, 1996: This section states that the Limitation Act, 1963 applies to arbitrations.
• Section 22 of the Limitation Act, 1963: This section deals with continuing breaches of contract.

Judgment

How each authority was viewed by the Court:

✓ Vidya Drolia & Ors v. Durga Trading Corporation [(2021) 2 SCC 1]*: The Court used this case to reiterate that the referral court should only intervene when the claims are manifestly and ex facie time-barred or non-arbitrable.

✓ Bharat Sanchar Nigam Limited and Another v. Nortel Networks India Private Limited [(2021) 5 SCC 738]*: The Court relied on this case to emphasize that the referral court may decline to make a reference only in cases where there is no doubt that the claim is ex facie time-barred.

✓ Arif Azim Company Limited v. Aptech Limited [(2024) 5 SCC 313]*: The Court clarified its earlier view in this case, stating that while the Limitation Act, 1963 applies to applications under Section 11(6), the referral court should not delve into the merits of whether the substantive claims are time-barred.

✓ Interplay between Arbitration Agreements Under the Arbitration and Conciliation Act, 1996 and the Indian Stamp Act, 1899, In Re [2023 INSC 1066]*: The Court used this case to emphasize the limited scope of judicial interference at the Section 11 stage, focusing primarily on the existence of a prima facie arbitration agreement.

✓ SBI General Insurance Co. Ltd. v. Krish Spinning [2024 SCC OnLine SC 1754]*: The Court relied on this case to clarify that the referral court should only examine if the Section 11(6) application was filed within the limitation period and not conduct a detailed inquiry into whether the substantive claims are time-barred.

What weighed in the mind of the Court?

The Supreme Court’s decision was heavily influenced by the principle of minimal judicial interference at the stage of referring a dispute to arbitration. The Court emphasized that the primary role of the referral court is to ensure that a valid arbitration agreement exists and that the application for appointment of an arbitrator is within the limitation period. The Court was keen to avoid a situation where the referral court would delve into the merits of the case, including whether the substantive claims are time-barred, as such an exercise would usurp the jurisdiction of the arbitral tribunal. The Court underscored that the arbitral tribunal is well-equipped to handle the complexities of the dispute, including the issue of limitation. The Court also highlighted that if the referral court were to reject an application for appointment of arbitrator on the ground that the substantive claims are time-barred, the claimant would be left remediless.

Fact:Law Ratio Analysis: The ratio of fact to law in the Supreme Court’s decision is 20:80. This indicates that the Court’s reasoning was primarily driven by legal considerations and principles, rather than the specific factual details of the case. The Court focused on the interpretation and application of the Arbitration & Conciliation Act, 1996 and the Limitation Act, 1963, and the precedents set by previous judgments. The factual aspects of the case, such as the details of the agreements and the timeline of events, were considered, but only to the extent necessary to apply the legal principles.

Key Takeaways

• The Supreme Court has clarified that at the stage of referring a dispute to arbitration under Section 11(6) of the Arbitration & Conciliation Act, 1996, the referral court should primarily focus on whether the application for appointment of an arbitrator is within the limitation period and whether a valid arbitration agreement exists.
• The referral court should not delve into the merits of the case, including whether the substantive claims are time-barred. This issue is to be decided by the arbitral tribunal.
• The Court emphasized that the arbitral tribunal is well-equipped to handle the complexities of the dispute, including the issue of limitation.
• The Court highlighted that if the referral court were to reject an application for appointment of arbitrator on the ground that the substantive claims are time-barred, the claimant would be left remediless.
• The arbitral tribunal can direct that the costs of the arbitration be borne by the party that has abused the process of law and caused unnecessary harassment to the other party.

Directions

The Supreme Court allowed the petitions and appointed Mr. Mayur Khandeparkar as the sole arbitrator for the disputes pertaining to the Shareholders Agreement dated 25th July 2011. The same arbitrator was already constituted for disputes between the same parties in relation to the Service Agreement dated 18th October 2011. The Court also directed that if the arbitral tribunal ultimately finds the claims of the petitioner to be time-barred, it may direct that the costs of the arbitration be borne solely by the petitioner.

Specific Amendments Analysis

There is no specific amendment analysis in this judgment.

Development of Law

The ratio decidendi of this case is that at the stage of Section 11(6) application, the referral court should only examine whether the application itself is within the limitation period and whether a valid arbitration agreement exists. The issue of whether the substantive claims are time-barred should be left for the arbitral tribunal to decide. This judgment clarifies the limited scope of judicial intervention at the referral stage, reinforcing the pro-arbitration stance of the Supreme Court. This decision further solidifies the principle that the arbitral tribunal is the appropriate forum to decide all issues related to the dispute, including the issue of limitation, and that the referral courts should not usurp the jurisdiction of the arbitral tribunal by delving into the merits of the case.

Conclusion

The Supreme Court allowed the petitions, directing the disputes to be resolved through arbitration. The Court clarified that at the referral stage, it would not delve into the merits of whether the substantive claims were time-barred. The Court emphasized its limited role in only ensuring that a valid arbitration agreement exists and that the application for appointment of an arbitrator is within the limitation period, leaving the issue of limitation of the substantive claims for the arbitral tribunal to decide.