Facts:

• Phase-I:

• The Petitioner (Urban Infrastructure Real Estate Fund) is a private equity fund based out of Mauritius, incorporated as a public company. Respondent No. 1 (Neelkanth Realty Private Limited) is a private limited company incorporated under the Companies Act, 2013.
• The Respondent No. 1 Company was established with the objective of developing an integrated township project spread over approximately 700 acres across certain villages of Pune, Maharashtra.
• Urban Infrastructure Real Estate Fund (“UIREF” or “Petitioner”) and Neeklanth Realty Pvt. Ltd. (“NRPL” or “Respondent No. 1”) entered into a Share Subscription Agreement (SSA) and a Shareholders Agreement (SHA) on 23.07.2008.
• Share Subscription Agreement (SSA): A contract where a company and an investor agree that the investor will buy a certain number of new shares from the company at a specific price. This contract sets out the details of the deal, making sure both sides understand and agree on what will happen during the transaction.
• Shareholders Agreement (SHA): A contract between a company and its shareholders that sets out the framework for company governance, including the specific rights and duties of the shareholders.

• As per Clause 5.3 of the SSA, if certain Conditions Precedent were not fulfilled within 90 days (or an extended period), the Petitioner had the option to demand a refund of the investment with interest.
• In furtherance of aforesaid SSA and SSH, UIREF paid a sum of Rs. 25 Crore to NRPL. On 22.10.2008, the stipulated period of 90 business days from the execution of the SSA for fulfilment of Conditions Precedent ended.
• Several letters were exchanged after this between the parties, and mediation talks took place, however, the same did not result in any conclusion.
• Resultantly, Section 11 petition followed and Hon’ble Mr. Justice S.N. Variava (Retd.) to act as the sole arbitrator to adjudicate the disputes between the parties.
• During the meeting dated 26.06.2019, the Ld. Arbitral Tribunal proceeded to frame issues and the Issue No. 1 read thus – “Whether all or any of the claims made by the Claimant are barred by the law of limitation?”.
• In the next meeting, the arbitrator informed the parties that if Issue No. 1 was to be tried as a preliminary one then it had to be decided on the basis of demurrer. NRPL was also told that, in such a scenario, they would afterwards not be able to contest any statement of fact stated by the claimant in the Statement of Claim or in their evidence or attempt to prove the contrary. The counsel for NRPL acceded and submitted that no evidence was required to be led on their behalf in order to arrive at a decision insofar as the Issue No. 1 was concerned and also that they would be willing to proceed on the basis of demurrer.
• The Ld. Arbitral Tribunal accepted the submission of UIREF and the issue No. 1 was decided on the basis of demurrer as a preliminary issue and decided in favour of the UIREF on 27.08.2019. However, it was observed that had evidence been recorded, the Tribunal may have considered few submissions of NRPL.
• Phase-II:

• Aggrieved by the said interim award, the Respondents challenged the same under Section 34 before the Ld. Single Judge, Bombay High Court.
• By its common judgment dated 04.12.2019, the Single Judge set aside the interim award, holding that the preliminary finding on limitation, having been decided on demurrer, could not attain finality. The Ld. Arbitral Tribunal would not be barred from re-examining the issue on the basis of the evidence that may be led by the parties before the Ld. Arbitral Tribunal and other materials on record.
• The reasoning assigned may be summarised as follows:

1. In Angelo Brothers Limited v. Bennett, Coleman and Co. Ltd. & Anr. 2017 SCC OnLine Cal 7682, the Calcutta HC examined various judicial pronouncements on the aspect of demurrer vis-à-vis Order VII Rule 11 and it was held that it is not the law in India that a motion for dismissal of a plaint or petition (in other words, a decision on demurrer) on a preliminary point would have the consequence of the respondent forfeiting the right to contest the case later. It would also not mean that adopting such a procedure would result in an automatic admission of the facts pleaded in such a plaint which was sought to be dismissed. Moreover, when the adjudication of such a preliminary question involves a mixed question of fact and law, then the adjudication of that question would stand deferred, and those points would be left to be determined in the course of the proceedings
2. Drawing analogy from Order VII Rule 11(d), even, on the basis of bare averments made in the plaint if the court comes to the conclusion that the suit cannot be said to be barred by any law still it cannot be said that the court would then be precluded from finally looking into the question as to whether the suit is barred by any law after all the evidence and the other materials on record are examined. Therefore, it was held that the finding of the arbitrator would remain a preliminary finding subject to the evidence that may be tendered in the course of the proceedings.
3. Upon a consideration of Section 3(1) of the Limitation Act, 1963, it was stated that the objection as to limitation is quite fundamental to any dispute. It is a substantive objection which goes to the root of the matter. Such an issue as regards limitation, being a mixed question of fact and law, it would not be proper for the same to be foreclosed especially upon a preliminary determination on maintainability which is made on the basis of demurrer. In other words, a decision on the basis of demurrer cannot preclude a final decision on merit.

• In the factual matrix referred in two phases above, the Petitioner UIREF has preferred the Special Leave Petition before the Hon’ble Supreme Court.

Issues:

• Whether the preliminary issue on the question of limitation, decided on the basis of demurrer, could have been permanently foreclosed by the arbitrator?
• Whether the doctrine of Party Autonomy, which is the bedrock of arbitration, can be utilised to decide on a procedure which has the consequence of infringing Section 3 of the Limitation Act, 1963?
• Whether the interim award warranted interference by the court under Section 34 of the Act, 1996?

Contentions:

On Behalf of Petitioner –

• The respondents themselves elected and mutually agreed to have the limitation issue decided ‘finally’ and purely as a preliminary issue (demurrer) without evidence; they should be estopped from challenging the procedure now.
• Relying on Section 19 of the Arbitration and Conciliation Act 1996, the Petitioner contended that party autonomy is the foundation of arbitration, and since the parties have consciously chosen to deviate from the traditional procedure adopted in the courts, they cannot challenge their agreement to the same because they are dissatisfied with the result.
• The ground of non-adoption of a judicial approach to interfere with an arbitral award would tantamount to intervening in the merits of the matter, which cannot be sustained due to the position of law clarified by this Court in Ssangyong Engineering & Construction Co. Ltd v. NHAI (2019) 15 SCC 131.
• Further the impugned decision has sought to set aside the award on the basis that it was passed without evidence. The same, as per the decision in Ssangyong, can at most fall under the ambit of “patent illegality” which has been made unavailable as a ground for setting aside an award rendered in an International Commercial Arbitration.
• As regards the applicability of Section 3 of the Limitation Act, 1963, it could only be said that the parties had agreed to a specific procedure by which the issue of limitation would be decided, and the arbitrator had granted fair opportunity to both the parties to decide whether the claims raised by the petitioner fell within the prescribed period of limitation.

On Behalf of Respondents –

• The Respondents submissions are not expressly recorded, but since the Single Judge delivered a reasoned judgment now under challenge, their contentions can be inferred to align with the Single Judge’s reasoning.

Findings:

Issue No. 1: Whether the preliminary issue on the question of limitation, decided on the basis of demurrer, could have been permanently foreclosed by the arbitrator?

• The word “demurrer” is derived from the Latin word “demorari” or the French word “demorrer” which means to wait, stay, rest or pause.
• Generally, a demurrer is an issue upon a matter of law. It is a method to test the sufficiency of the plaintiff’s/claimant’s case at the threshold. In the absence of said sufficiency, the matter will collapse on its own strength.
• In other words, the defendant would be ‘bound to answer’ only if a prima facie satisfaction of the Court is there that a valid legal claim exists is achieved. If the pleading of the plaintiff is insufficient in law, then the matter would come to an end at the threshold.
• Demurrers are either general i.e., where no particular cause is assigned and the insufficiency of the pleading is stated in general terms, or it is special i.e., where some particular defects are pointed out. The demurrer is general when it is to a matter of substance, and it is special when made to a matter of form. When it is special, the specific defect must be pointed out.
• When the decision on demurrer goes against the defendant/respondent, he could not be said to be foreclosed from tendering further evidence, in the course of the proceedings, which dispute the truthfulness of the facts which were merely hypothetically ‘assumed’ as right while raising an issue in law.
• The question of law, as decided during the plea of demurrer must not be foreclosed permanently. This is especially so because, while deciding on the basis of demurrer, the court is mandated to only look at the averments in the plaint or claim and the documents annexed thereto. It would be entirely futile for the defendant to lead any evidence at that stage because the court would not be allowed to examine them or even taken the defendants version of the case into consideration while rendering a decision on demurrer.
• The defendant, however, must convince the court that an interference may be warranted and also tender evidence which the court did not have the benefit of looking into. If unable to do so, it is obvious that the arbitrator will be compelled to arrive at a conclusion similar to the one arrived at during his adjudication on demurrer.
• Various precedents such as O.N. Bhatnagar v. Rukibai Narsindas and Others, 1982 2 SCC 244, Indian Mineral Chemical Co. & Others v. Deutsche Bank, 2004 12 SCC 376, J.P. Srivastava & Sons (P) Ltd. and Others v. Gwalior Sugar Co. Ltd. and Others (2005) 1 SCC 172 were examined to signify that when an objection as that of limitation or jurisdiction is decided at a preliminary stage by way of demurrer (assuming the facts pleaded by the claimant are true), this decision is not final or permanently binding if facts are disputed or evidence may later affect the outcome.
• A preliminary issue can be decided in two ways, (a) by way of demurrer, or (b) after the parties have lead evidence confined to the preliminary issue. With regard to Ramesh B. Desai and Others v. Bipin Vadilal Mehta and Others (2006) 5 SCC 638, the following observations were made:

1. A plea of demurrer is a pleading in which a party assumes the truth of the opponent’s allegations but contends that, even if true, they are legally insufficient to sustain the claim or that some defect in the pleadings prevents the suit from proceeding. In essence, it asserts that, accepting the pleaded facts, the court still lacks jurisdiction in law.
2. The Court equated a plea of demurrer with the principle underlying Order VII Rule 11(d) CPC, which provides for rejection of a plaint if it is barred by law. While considering an application under Rule 11(d), disputed facts cannot be examined; the court must only determine, on the face of the plaint and assuming its averments to be correct, whether the suit is barred by limitation or any other law. Reliance on the written statement or deciding a preliminary issue at that stage would distort the trial, as courts are ordinarily required to adjudicate all issues.
3. Where issues of law and fact are so intertwined that the legal question depends upon factual determination, treating such mixed issues as preliminary issues would lead to an imbalanced trial. In the present case, the limitation question depended on when the petitioners discovered the alleged fraud and whether the fraud was adequately pleaded or established. Thus, limitation itself was a mixed question of law and fact, linked to other factual and legal issues. In such circumstances, courts should not decide limitation as a preliminary issue. However, if a mixed question of law and fact is nevertheless severable, i.e., not entangled with other issues, it may still be decided as a preliminary issue.

• To conclude, the legal position is that while rendering a decision on demurrer, all that the Court does is declare that, if the facts be as such, then the question of law would remain answered as such. However, the decision on demurrer is not an adjudication on merits, there arises no question of foreclosing any issue against the party taking the plea of demurrer.

Position in the US:

• The Civil Procedure Code in those States of the U.S. which still employ demurrer as a concept have detailed instructions on how such a plea or objection may be raised by one party. It is a legislatively sanctioned method of replying to the averments and raising objections to the pleadings of another party.
• The State of Virginia, for example, requires that all demurrers be made in writing and specifically state the grounds through which the demurring party alleges that the pleading is insufficient in law. No other grounds other than those that are written in the demurrer would be considered by the Court. If a party seeks to raise an objection that the action is not commenced within the limitation period prescribed by law, the same must only be raised as an affirmative defence specifically set forth in a responsive pleading and not by way of demurrer.
• In California, as well, the Civil Code requires that the demurrer filed, distinctly specify the grounds upon which any of the objections to the complaint, cross-complaint, or answer are taken. The party filing the demurrer also files a notice of hearing and after the decision on demurrer is taken at the hearing, the court may, in its discretion, also allow the party in fault to plead anew or amend on such terms, as may be just.
• A party raising a plea of demurrer has the opportunity to meet with every averment made by the plaintiff in the plaint/claim specifically and either deny or agree with them as they file a demurrer. This is simply because it’s a recognised method of pleading just like the filing of a written statement in India.
• On facts that the parties disagree on, a decision on demurrer can never be rendered. Only on the facts agreed upon, if a pure issue of law arises, the situation can be directed for a decision on demurrer. It is only in this background that it is stated that a decision taken on demurrer has the consequence of the party raising the plea of demurrer admitting to the facts as stated in the plaint or original claim. Therefore, it can be seen that procedurally, the concept is wholly different.
• When a plea of demurrer to evidence is raised, again, things are slightly different. To elaborate further, in such a scenario, when a demurrer is offered by one party, the adverse party has to “join” with him in demurrer, and the answer which he makes is called a “joinder in demurrer”. In a joinder in demurrer, the adverse party essentially agrees with the legal challenge posed by the demurrer and joins in arguing only the point of law raised in demurrer. In other words, both parties clearly agree that there is only an issue of law which remains to be adjudicated. Without such a joinder in demurrer entered on the record, the court would not proceed to give judgment upon the demurrer. Such a joinder in demurrer ought not to be required or permitted by the court if there was “any matter of fact in controversy between the parties”.
• In Slocum v. New York Life Ins. Co. 228 U.S. 364, it was agreed that when the demurring party refuses to admit the facts which the other side attempted to prove and more so, when the demurring party offered contradictory evidence or attempted to establish inconsistent propositions, this cannot be considered to be a valid demurrer.
• Another aspect pointed out in Aurora City v. W. 74 U.S. 82 is that, in the U.S., the party has an “option” to plead or demur. In other words, one can demur even while the matter is to be decided on merits
• Therefore, in choosing to adopt the latter alternative, one shall be considered to have admitted or conceded that he had no ground for denial by way of a proper pleading, even on merits. In such a situation, a demurrer is merely a shortcut to admit the facts which the party would anyway not seek to dispute at trial; in that sense, there is no difference whether the facts upon which the court proceeded with, in its adjudication on merits, were proved by competent evidence, or whether they were admitted by the parties by way of demurrer.
• Hence, it is only when the ‘merits’ of the matter are decided upon the overruling of a demurrer, could it be said that every material matter of fact which was sufficiently pleaded, was admitted.
• To summarize, a key distinction as regards the consequences of demurrer could also be said to lie depending on the stage at which such a plea of demurrer is raised, and also the nature of the finding on demurrer i.e., whether it is on the merits of the matter or not.
• The decision in Alley v. Nott reported in 111 U.S. 472 pointed out that the party who is unsuccessful in the decision on demurrer, may also be granted leave by the court to amend or plead over afresh. Seldom will such a leave be refused, if the party states that he can controvert the facts, which he initially demurred to, by evidence which he can produce. In other words, there remains some scope for manoeuvring before the decision on demurrer could bind the demurring party in the form of a final determination of the lis.

Issue No. 2: Whether the doctrine of Party Autonomy, which is the bedrock of arbitration, can be utilised to decide on a procedure which has the consequence of infringing Section 3 of the Limitation Act, 1963?

• Section 3 of the Limitation Act imposes a positive duty on the court or tribunal to first determine limitation and dismiss a claim if it is time-barred, even without a limitation defence. This duty must be reasonably discharged based on the facts of each case.
• In case the peculiar facts of the case are such that the issue of limitation cannot be decided without further evidence, then the mandate of Section 3 of the Act, 1963, must be understood to also empower the forum to require further evidence in order to adjudicate the issue.
• By virtue of Section 43 of the Arbitration and Conciliation Act 1996, which imposes another positive mandate that the Limitation Act shall apply to arbitrations, the Ld. Arbitral Tribunal would also be bound by the statutory mandate underlying Section 3 of the Act, 1963 which requires the arbitrator to decide the issue of limitation in a proper and reasonable manner.

• The insertion of the phrase “Subject to this Part”, at the beginning of Section 19(2) of the Arbitration and Conciliation Act 1996, indicates that the legislature in its wisdom wanted to circumscribe, to an extent, the undoubtedly expansive scope which has been afforded to the doctrine of party autonomy under the framework of arbitration. Having a look at it from this angle, Part I of Arbitration and Conciliation Act 1996, includes Section 43 and the phrase “Subject to this Part” would cover Section 43 as well, which makes the Limitation Act applicable to arbitrations. Hence, the doctrine of party autonomy cannot operate in silos.
• Parties do have the right to agree to procedures that differ from standard court processes, such as agreeing to an award without reasons, agreeing to a custom-made procedure for challenging the appointment of an arbitrator and determination of bias, or agreeing to a proceeding without oral hearings. However, what must be noticed is all the aforesaid instances in which party autonomy can be freely exercised are specifically laid out or delineated under some provision falling under Part I of the Act, 1996.
• In Lombardi Engineering Ltd. v. Uttarakhand Jal Vidyut Nigam Ltd., 2024 4 SCC 341, the SC observed that the concept of party autonomy cannot be stretched to an extent that it violates the fundamental rights under the Constitution of India. It is the rule of law which is supreme and forms parts of the basic structure.
• Doctrine of Party Autonomy is the bedrock of arbitration. The general rule is always that arbitrations are to be conducted on the basis of what the parties have agreed upon and consented to. However, when parties wish to adopt procedures that strike at the root of very adjudication of the dispute and have the potential to upend any established principle of fairness which our legal system has created and nurtured over the years, one has to see whether such an exercise of party autonomy is within the confines of the Act, 1996 and within the confines of the doctrine of party autonomy envisaged by the Act, 1996.
• Any procedure agreed upon by parties cannot and must not have the consequence of the matter being decided in ignorance of settled principles of law, which includes the principles of limitation, or have the effect of the matter being decided in a lopsided manner.
• The doctrine of Party Autonomy is expansive; however, it is not expansive enough to strike at the most basic principles of limitation law, in particular Section 3 of the Limitation Act.

Issue No. III: Whether the interim award warranted interference by the court under Section 34 of the Act, 1996?

• The law as it has evolved as regards the scope of interference with an arbitral award under Section 34 of the Act, 1996, has been very succinctly explained by this Court in Ssangyong (supra). The words “public policy of India”, which had gradually adopted a wide import was circumscribed by the 2015 Amendment Act to the Act, 1996. It was necessarily clarified that an award would be in conflict with the “public policy of India” only if, the making of the award was induced or affected by fraud or corruption or was in violation of Section 75 or 81 of the Act, 1996 respectively; it is in contravention with the fundamental policy of Indian law; or it is in conflict with the most basic notions of morality or justice.
• From Ssangyong (supra), Associate Builders v. DDA reported in (2015) 3 SCC 49, and Renusagar Power Co. Ltd. v. General Electric Co., 1994 Supp (1) SCC 644, to comprehend the scope of the second and third grounds of “fundamental policy of Indian law” and the “most basic notions of justice and morality” respectively subsumed within the phrase “public policy of India”, the following observations emerge:

1. First, that the import of the words “public policy of India” as explained by this Court in Renusagar (supra) would include an award that is contrary to (a) the fundamental policy of Indian law, (b) the interest of India and (c) justice or morality. Option (b) relating to the “interest of India” has now been consciously excluded by the 2015Amendment Act.
2. Secondly, the Court clarified that not every statutory violation amounts to a breach of the “fundamental policy of Indian law.” For instance, recovery of compound interest on interest would not fall within this category. However, contravention of the Foreign Exchange Regulation Act, 1973 would, as the statute was enacted to protect national economic interests and preserve foreign exchange crucial for the country’s economic stability.
3. Thirdly,that even disregarding orders passed by the superior courts in India would fall within the ambit of “fundamental policy of Indian law” for the purpose of setting aside an award under Section 34 or refusing enforcement under Section 48 of the Act, 1996.
4. Fourthly, an award is contrary to “justice” only when it shocks the conscience of the court. By way of illustration, if a claimant limits his claim to an amount X and never indicates seeking more, yet the award grants X+Y without any justification, such an award would shock the court’s conscience and be deemed contrary to justice.
5. Lastly, the Court interpreted “morality” with reference to Section 23 of the Indian Contract Act, 1872, where it has traditionally been confined to sexual morality. While allowing limited expansion of the concept for setting aside an award, the Court noted that it may extend to agreements not illegal per se but unenforceable in light of contemporary societal mores; though such mores, being dynamic, cannot be rigidly defined. Even so, an award can be set aside on the ground of morality only where the conduct or outcome shocks the conscience of the court.

• Non-adoption of a “judicial approach” cannot form a valid ground for the purpose of justifying an interference to the present interim award under Section 34 of the Act, 1996. However, what must be noted is that, the decision of the Single Judge was rendered before this Court had the opportunity to clarify the scope of the 2015 Amendment Act in relation to Section 34 of the Act, 1996, in Ssangyong (supra).
• Recently, in Gayatri Balasamy v. M/s ISG Novasoft Technologies Limited (2025) 7 SCC 1, a Constitutional Bench (by 4:1) held that power to set aside would encompass the power to also set aside the award in part, rather than in its entirety. Relying upon this, the Hon’ble Court was of the opinion that the award was liable to be partially set-aside.
• While undertaking the exercise of severing an award, it must be ascertained whether the illegality is such that it affects the award as a whole. If not, then that portion of the award which does not suffer from any infirmity could be upheld. While severing, the courts must be vigilant to ensure that the good or viable part(s) of the award is not rendered vulnerable or unsustainable as a direct consequence of the severing. Therefore, while employing the doctrine of severance, one must walk the tight rope of not dislodging the good part of the award.
• In the present case, there are two aspects:

1. Although his decision on the issue of limitation would be rendered by way of demurrer, yet the same would be final and binding;
2. After a perusal of the facts as averred in the statement of claim along with the materials annexed thereto, the claims are within limitation.

With the second aspect, the SC expressed no disagreement with the arbitrator. However, observation as regards the finality of the decision rendered on demurrer is capable of being severed from the rest of the interim award such that the viable part is not made unsustainable or vulnerable.

Decision:

Following the elaborate and in-depth discussion on the aforementioned issues, the Hon’ble Supreme Court reached the conclusion that the interim award dated 27.08.2019 warranted interference under Section 34 of the Act, 1996 and it was rightly held that the preliminary issue of limitation decided on the basis of demurrer could be further examined by the Ld. Arbitral Tribunal on the basis of evidence and other materials on record, if tendered and if so warranted.

Analysis by: Saksham Singh (Associate)