Apex Court Upholds Bombay High Court’s Interference, Clarifies Party Autonomy Limited by Limitation Act and Fair Trial Principles in Arbitration
In a landmark judgment delivered on September 15, 2025, the Supreme Court of India in the case of Urban Infrastructure Real Estate Fund v. Neeklanth Realty Private Limited has clarified that a preliminary issue relating to limitation decided on the basis of demurrer during arbitration cannot be considered final and binding without further examination on evidence, if warranted. The bench comprising Justices J.B. Pardiwala and K.V. Viswanathan upheld the Bombay High Court’s decision to interfere with an interim arbitral award that had prematurely foreclosed the limitation question.
The dispute arose from a Share Subscription Agreement and Shareholders Agreement executed in 2008 between the petitioner, a Mauritius-based private equity fund, and the respondent company involved in a large township project in Pune. The petitioner had invested Rs. 25 crore subject to certain conditions precedent to be fulfilled within 90 business days. Alleging non-fulfillment and breach, the petitioner invoked arbitration in 2017. The arbitral tribunal decided a preliminary issue on limitation in 2019 solely on the basis of demurrer - that is, without admitting any evidence from the respondents and treating the petitioner’s claim as within limitation based on pleadings alone. The tribunal also ruled that the limitation issue was foreclosed and could not be re-opened.
Respondents challenged this interim award under Section 34 of the Arbitration and Conciliation Act, 1996, contending that the limitation issue, being a mixed question of law and fact, could not be decided finally on demurrer alone. The Bombay High Court agreed, holding that the arbitral tribunal had erred in foreclosing the limitation issue without allowing evidence and further examination. The High Court emphasized that the issue of limitation is fundamental and cannot be decided without a judicial approach requiring evidence where necessary.
On appeal to the Supreme Court, the petitioner argued that the parties had mutually agreed to decide the limitation issue by demurrer without evidence, invoking the doctrine of party autonomy which allows parties to agree on arbitration procedures diverging from court rules. The petitioner also contended that interference on grounds of lack of ‘judicial approach’ was impermissible as it amounted to re-appraisal of merits contrary to settled law post the 2015 Amendment to the Arbitration Act.
The Supreme Court, after an exhaustive analysis, held that:
- The concept of demurrer in Indian law differs significantly from that in the US and England. In India, a demurrer (akin to an application for rejection of plaint under Order VII Rule 11(d) CPC) tests the legal sufficiency of the claim on the face of pleadings assuming facts to be true, but does not bind the party who demurs from disputing facts later by evidence.
- The limitation question is a mixed question of law and fact. Such issues can only be decided finally after evidence is led and examined. If decided on demurrer alone, the issue cannot be foreclosed permanently.
- The arbitral tribunal’s decision to treat the demurrer-based finding on limitation as final was fundamentally erroneous and violates the principles of justice.
- The doctrine of party autonomy under Section 19 of the Arbitration Act is subject to the provisions of Part I of the Act, including Section 43 which makes the Limitation Act applicable to arbitration. Party autonomy cannot be exercised to circumvent mandatory legal provisions such as the Limitation Act or to adopt procedures prejudicial to a fair resolution of dispute.
- The interim award was liable to be partially set aside to the extent it foreclosed the limitation issue, while the remainder of the award could be upheld. This is consistent with the doctrine of severability recognized by the Supreme Court.
- The grounds of ‘lack of judicial approach’ or ‘patent illegality’ are no longer valid bases for interference under Section 34 of the Act in international commercial arbitrations post 2015 Amendment. However, the procedural error in foreclosing the limitation issue without evidence shocks the conscience of the court and warrants interference under the ground of ‘most basic notions of justice’.
The Court accordingly dismissed the Special Leave Petitions filed by the petitioner and directed that the limitation issue may be re-examined by the arbitral tribunal on the basis of evidence and materials if tendered and warranted. The judgment reinforces the primacy of the Limitation Act in arbitration and circumscribes the exercise of party autonomy where it conflicts with statutory mandates and fundamental principles of justice.
This decision is expected to have wide ramifications in arbitration practice, particularly in how preliminary objections such as limitation are handled, ensuring parties cannot prematurely foreclose mixed questions of law and fact without evidence. It also reiterates the limited scope of court intervention under Section 34 and the importance of a fair trial even within arbitral proceedings.
Statutory provision(s): Arbitration and Conciliation Act, 1996 - Sections 3, 19, 34, 37, 43; Limitation Act, 1963 - Section 3; Code of Civil Procedure, 1908 - Order VII Rule 11(d), Order XIV Rule 2
