2024 (11) TMI 339 - SC - Indian Laws

Supreme Court appoints arbitrator under Section 11(6) despite time-bar objections in shareholders agreement dispute

SC allowed petition seeking arbitrator appointment under Section 11(6) of Arbitration Conciliation Act, 1996 for disputes arising from Shareholders ... Seeking appointment of an arbitrator for the adjudication of disputes and claims in terms of Clause 13.10 of the Shareholders Agreement dated 25.07.2011 entered into between the petitioner and the respondents - Section 11(6) read with Section 11(12)(a) of the Arbitration & Conciliation Act, 1996 - whether a reference under Section 11(6) of the Act, 1996 to be declined by examining whether the substantive claims of the petitioner are ex facie and hopelessly time barred? HELD THAT:- A three-judge bench of this Court in Vidya Drolia & Ors v. Durga Trading Corporation [2020 (12) TMI 1227 - SUPREME COURT] while dealing with the scope of powers of the referral court under Sections 8 and 11 respectively, 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. In Bharat Sanchar Nigam Limited and Another v. Nortel Networks India Private Limited [2021 (3) TMI 447 - SUPREME COURT], the notice invoking arbitration was issued 5 ½ years after the cause of action arose, i.e., rejection of the claims of Nortel by BSNL and the claim was therefore held to be ex facie time-barred. This Court clarified that the period of limitation for filing a petition seeking appointment of an arbitrator(s) cannot be confused or conflated with the period of limitation applicable to substantive claims made in the underlying commercial contract. The substantive claims of the petitioner are ex-facie time barred and therefore, incapable of being referred to arbitration. The respondents contend that, with respect to the issue relating to the 2,00,010 equity shares, the petitioner has sought enforcement of the letter dated 22.09.2011 but has however, served a notice invoking arbitration 6 years later on 23.01.2017. Further, with respect to the 4,00,000 equity shares, it was contended that the claim can only arise upon the date of resignation i.e., 18.07.2013 and the claim would, therefore, again be time-barred. It is now well settled law that, at the stage of Section 11 application, the referral Courts need only to examine whether the arbitration agreement exists – nothing more, nothing less. This approach upholds the intention of the parties, at the time of entering into the agreement, to refer all disputes arising between themselves to arbitration. However, some parties might take undue advantage of such a limited scope of judicial interference of the referral courts and force other parties to the agreement into participating in a time- consuming and costly arbitration process. The existence of the arbitration agreement as contained in Clause 13.10 of the Shareholders Agreement is not disputed by either of the parties. The submissions as regard the claim of the petitioner being ex-facie time barred may be adjudicated upon by the arbitral tribunal as a preliminary issue - Petition allowed. Issues Involved:1. Appointment of an arbitrator under Section 11(6) of the Arbitration & Conciliation Act, 1996.2. Whether the substantive claims of the petitioner are ex-facie time-barred.3. Applicability of the Limitation Act, 1963 to the arbitration proceedings.4. The existence and validity of the arbitration agreement under the Shareholders Agreement.Detailed Analysis:1. Appointment of an Arbitrator:The petitioner sought the appointment of an arbitrator under Section 11(6) of the Arbitration & Conciliation Act, 1996, for disputes arising from a Shareholders Agreement. The arbitration clause (Clause 13.10) was acknowledged by both parties. The Supreme Court emphasized that at the Section 11 stage, the court's role is limited to examining the existence of an arbitration agreement and not delving into the merits of the disputes or the claims being time-barred. The court decided to appoint an arbitrator, considering the arbitration agreement's existence was undisputed.2. Substantive Claims and Limitation:The respondents argued that the claims were ex-facie time-barred, citing the petitioner's delay in invoking arbitration. The petitioner countered by asserting continuous breach and no specific cause of action date. The court reiterated the principle from Vidya Drolia & Ors v. Durga Trading Corporation, stating that the referral court should only interfere in rare cases where claims are manifestly time-barred. The court decided that the arbitral tribunal should determine the issue of limitation, as it involves factual disputes requiring detailed examination.3. Applicability of the Limitation Act:The court referred to Bharat Sanchar Nigam Limited v. Nortel Networks India Private Limited, emphasizing that the Limitation Act, 1963 applies to arbitration proceedings. The court clarified that the limitation period for filing a petition under Section 11(6) starts from the date of failure or refusal to comply with the arbitration notice, not from when the substantive claim arose. The court found the petitions filed by the petitioner were within the limitation period when considering the time spent in proceedings before the Bombay High Court.4. Existence and Validity of the Arbitration Agreement:The court noted that the arbitration agreement's existence was not disputed by either party. The court highlighted that the primary role at the Section 11 stage is to ascertain the existence of an arbitration agreement, not to resolve disputes regarding the claims' merits or their time-barred nature. The court appointed a sole arbitrator, Mr. Mayur Khandeparkar, for the disputes under the Shareholders Agreement, aligning with the tribunal constituted for related disputes under the Service Agreement.Conclusion:The court allowed the petitions, appointing a sole arbitrator to adjudicate the disputes, emphasizing that issues of limitation and merits should be left to the arbitral tribunal. The court also noted that if the tribunal finds the claims time-barred, it may direct the petitioner to bear the arbitration costs. All other rights and contentions were left open for the arbitrator's adjudication. Pending applications were disposed of, and the court maintained a focus on minimizing judicial interference in arbitration proceedings, preserving the arbitration agreement's integrity and the parties' intentions.