Sanchayita Lahkar

The Division Bench of the Bombay High Court comprising Chief Justice Alok Aradhe and Justice M. S. Karnik dismissed appeals challenging the modification of an arbitral interim award. The Court held that the Arbitrator erred in deciding the issue of limitation solely on the basis of demurrer, without considering whether evidence was necessary. It recorded that such an approach did not meet the standard of a judicial determination and amounted to a violation of the fundamental policy of Indian law under Section 34(2)(b)(ii) of the Arbitration and Conciliation Act, 1996. The Court directed that the Arbitrator may re-examine the issue based on evidence if warranted.

The appellant, a private equity fund incorporated in Mauritius, had entered into share subscription and shareholder agreements with the respondent entities on July 23, 2008. The fund invested ₹25 crore into shares and debentures of one of the respondent companies with an expectation of project development across 700 acres in Pune district. Alleging non-compliance with the contractual terms and breaches by the respondents, the appellant approached the Supreme Court, which appointed a sole Arbitrator on January 15, 2018 to adjudicate the disputes.

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Subsequently, the appellant filed its statement of claim, to which respondent no. 5 filed its statement of defence, and respondent no. 1 filed a counterclaim. On June 26, 2019, the arbitral tribunal framed issues, including whether the claims were within the period of limitation.

Affidavit in lieu of examination-in-chief was submitted on August 14, 2019 by the claimant’s witness. The Arbitrator then decided to consider the limitation question as a preliminary issue, and issued an interim award on August 27, 2019 holding that the entire claim was within limitation. This decision was based solely on the pleadings and documents filed by the appellant, without permitting respondents to present their evidence.

This interim award was challenged under Section 34 of the 1996 Act. The Single Judge, by order dated December 4, 2019, held that such a determination of limitation based on demurrer could not preclude future examination if parties tendered further material. It was also recorded that the Arbitrator himself had stated that a different conclusion might have been reached had all evidence been recorded. Accordingly, the Single Judge modified the interim award to the extent that it would not preclude the Arbitrator from reconsidering the issue of limitation.

Challenging the modification, the appellant submitted that under Section 19 of the 1996 Act, the arbitral tribunal is not bound by the Code of Civil Procedure, 1908 or the Indian Evidence Act, 1872, and that parties were free to agree on the procedure. Citing Jagjeet Singh Lyallpuri v. Unitop Apartments, the appellant contended that the respondents had expressly agreed to the limitation issue being decided on demurrer. The appellant maintained that having agreed to this approach, respondents were estopped from seeking to revisit the issue. Further, it was argued that the Single Judge overstepped the limited jurisdiction under Section 34 by engaging in a merits-based review rather than assessing conflict with public policy.

The appellant also relied on Indian Farmers Fertilizer Cooperative Ltd. v. Bhadra Products, asserting that the interim award was final on the question it decided, and that its validity could not be questioned merely because the outcome was unfavourable to the respondents. It was argued that the decision of the Arbitrator, who had considered the matter under the agreed procedure, should have stood unless it contravened the fundamental policy of Indian law.

In contrast, respondents contended that the Arbitrator’s method of deciding the issue was flawed. It was argued that although the Arbitrator claimed to be proceeding on demurrer, no definitive consent to such procedure was provided. Rather, the respondents believed their defences would be considered and objected when the Arbitrator indicated that only the claimant’s pleadings would be considered. The respondents further argued that the limitation question was a mixed issue of fact and law, and resolving it without permitting their evidence contravened the fundamental policy of Indian law.

The respondents also asserted that the Arbitrator failed to determine whether evidence was necessary before deciding the matter. Citing decisions including Mohammed Yasin v. Abdul Kalam and relying on U.S. case law (Leibman v. Curtis), they maintained that the Arbitrator’s course of action was impermissible in law and contrary to procedural fairness.

By way of rejoinder, the appellant reiterated that the respondents agreed to the procedure adopted, and that decision on the limitation issue was based on pleadings and documents. The appellant argued that the Single Judge, in modifying the award, acted as an appellate court and re-evaluated facts contrary to the limited scope under Section 34. Reliance was placed on Associate Builders v. Delhi Development Authority, to assert that mere disagreement with the Arbitrator’s reasoning could not justify judicial interference unless the award contravened public policy.

The Division Bench considered Section 34, as amended by the Arbitration and Conciliation (Amendment) Act, 2015, and noted that interference with arbitral awards is permissible only on limited grounds such as incapacity, invalid arbitration agreement, improper notice, decision beyond scope of reference, or conflict with the public policy of India.

The Court noted that “an award shall be treated to be in conflict with public policy of India if it is in contravention of fundamental policy of Indian law or is in conflict with most basic notions of morality or justice.” The Court further observed that “fundamental policy of Indian law includes the obligation to adopt a judicial approach and to ensure decisions are not perverse or irrational.”

While examining whether a decision on limitation could be rendered without evidence, the Court recorded that although Section 19(1) of the 1996 Act permits flexibility in procedural rules, it does not override the obligation to adhere to fundamental procedural fairness.

Referring to the Arbitrator’s own remarks in paragraph 37 of the interim award, the Court noted: “Had this issue been answered after all evidence had been recorded, then this Tribunal may have been inclined to accept some of the submissions of the respondents.” The Court found that the Arbitrator failed to determine whether the limitation issue was purely legal or required evidence. Further, the Court noted that respondent no. 3 had objected to deciding the issue on demurrer and had argued for a procedure analogous to Order XIV Rule 2 CPC.

The Court concluded that “the Arbitrator, while passing the impugned award, has failed to adopt a judicial approach and has arrived at a decision which no reasonable person would have arrived at, especially in absence of any finding in the impugned award whether the issue of limitation is a mixed question of law and fact and whether the same can be decided without recording any evidence.”

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It held that the interim award, passed without the benefit of complete evidence and without resolving whether the limitation issue could be decided without it, amounted to a decision in violation of the fundamental policy of Indian law. Consequently, the requirement for intervention under Section 34(2)(b)(ii) was met.

While acknowledging that the Single Judge may have exceeded the limits of Section 34 review by venturing into factual assessment, the Division Bench upheld the result, stating: “yet for the reasons assigned by us in the preceding paragraphs, we agree with the conclusion arrived at by the learned Single Judge that the award passed by the Arbitrator was required to be modified.” Accordingly, the appeals were dismissed.

Advocates Representing the Parties

For the Appellants: Mr. Fredun Devitre, Senior Advocate, Mr. Aditya Bapat, Mr. Siddharth Joshi, Mr. Hamd Bhati i/b Junnarkar & Associates

For the Respondents: Mr. Venkatesh Dhond, Senior Advocate, Runali Samgiskar i/b Law Charter, Ms. Gulnar Mistry, Mr. Saket Mone, Mr. Subit Chakrabarti, Mr. Shrey Shah, Mr. Bhupen Garud i/b Vidhi Partners, Mr. Akshay Petkar

Case Title: Urban Infrastructure Real Estate Fund v. Neelkanth Realty Private Ltd. & Ors.

Neutral Citation: 2025:BHC-OS:5596-DB

Case Number: Commercial Appeal No. 37 of 2020 in Commercial Arbitration Petition No. 1278 of 2019

Bench: Chief Justice Alok Aradhe, and Justice M. S. Karnik

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