Introduction:

In a significant ruling that reinforces the sanctity of procedural fairness in arbitration proceedings, the Bombay High Court Bench comprising Chief Justice Alok Aradhe and Justice M.S. Karnik delivered a verdict in Urban Infrastructure Real Estate Fund versus Neelkanth Realty Private Ltd. & Ors., case number 2025:BHC-OS:5596-DB, on 2nd April 2025. The judgment was rendered in a set of appeals challenging the order of a Single Judge dated 4th December 2019, which had modified an interim arbitral award dated 27th August 2019. The appellant, Urban Infrastructure Real Estate Fund, had invested Rs. 25 crores in shares and debentures of Neelkanth Realty Pvt. Ltd., the fifth respondent, for the development of a project in the Pune district over 700 acres. Alleging breach of agreement terms by the respondents, the appellant referred the dispute to arbitration. The Arbitrator held that the claim was within limitation via an interim award, but the respondents challenged the finding under Section 34 of the Arbitration and Conciliation Act, 1996, because the Arbitrator had treated the limitation issue as a preliminary one without examining whether it was a mixed question of law and fact requiring evidence. The Single Judge permitted the Arbitrator to re-examine the limitation issue based on the full evidentiary record. Appeals were filed challenging this order, prompting the Division Bench to address whether an Arbitrator can preliminarily determine the issue of limitation without assessing its evidentiary nature.

Arguments of the Appellant:

The appellant, represented by Mr. Fredun Devitre, Senior Advocate, along with a team of legal professionals, vehemently argued that both parties had consented to the Arbitrator deciding the issue of limitation as a preliminary issue. This, according to the appellant, barred the respondents from turning around and challenging the arbitrator’s jurisdiction or the procedure adopted. They emphasized the doctrine of estoppel by approbation and reprobation, contending that the respondents could not first acquiesce to the procedure and later challenge it merely because it did not go in their favor. They further asserted that the Arbitrator had sufficiently reviewed the pleadings, specifically the statement of claim, and rightly arrived at the conclusion that the claim was within the period of limitation. It was also their contention that the Single Judge erred in modifying the interim award without first determining whether the award violated the public policy of India. By venturing into the merits of the Arbitrator’s reasoning and finding the decision erroneous, the Single Judge supposedly overstepped the permissible scope of judicial intervention under Section 34 of the Arbitration Act. The appellant cautioned against converting Section 34 proceedings into a full-blown appellate review on merits, which is contrary to the scheme and purpose of arbitration. Lastly, the appellant maintained that the Arbitrator was empowered to decide issues of limitation even at a preliminary stage if the facts were clear on the face of the record.

Arguments of the Respondents:

The respondents, represented by Mr. Venkatesh Dhond, Senior Advocate and other learned counsel, offered a contrasting view. They asserted that while they had consented to the Arbitrator deciding the limitation issue as a preliminary issue, this consent was conditional upon the Arbitrator also considering their defence and possibly their affidavit of evidence. They emphasized that the Arbitrator adopted a “demurrer” approach similar to Order VII Rule 11 of the CPC, deciding the issue purely on the appellant’s pleadings and without considering their evidence. This, according to them, denied them the opportunity to substantiate their position that the claims were time-barred. It was highlighted that limitation is often a mixed question of law and fact, and unless it is a purely legal issue with no factual contest, it cannot be decided without a full trial. The respondents relied heavily on the principle that issues involving factual analysis require examination of evidence and cannot be disposed of solely based on pleadings. They further contended that the Arbitrator’s approach was not only premature but also perverse, resulting in a flawed finding that prejudiced their right to a fair hearing. Therefore, they supported the Single Judge’s order that remitted the matter for reconsideration, emphasizing that justice demanded a full factual hearing before deciding limitation.

Court’s Judgment:

The Division Bench of the Bombay High Court began its analysis by examining the scope of judicial review under Section 34 of the Arbitration and Conciliation Act, 1996, particularly Section 34(2)(b)(ii), which permits a court to set aside an award if it conflicts with the public policy of India. Relying on the landmark decision of the Supreme Court in ONGC Ltd. v. Saw Pipes Ltd. (2003), the Bench reiterated that any arbitral award that contradicts the fundamental policy of Indian law or basic notions of justice and morality is liable to be interfered with. The Court held that a fundamental policy breach includes a failure to adopt a judicial approach in deciding core issues. It was underlined that arbitrators, although not bound by the CPC or the Indian Evidence Act per Section 19 of the Arbitration Act, are still required to adhere to the fundamental principles embedded within those statutes—principles such as fair hearing, reasoned decision-making, and procedural justice.

The Court pointed out that issues like limitation are traditionally mixed questions of law and fact unless the pleadings conclusively show the claim is time-barred. Therefore, when there is a possibility that the issue of limitation might depend on facts to be proved by evidence, it cannot be summarily adjudicated as a preliminary issue without hearing both parties. In the instant case, the Arbitrator had acknowledged in the award itself that evidence could potentially alter the limitation finding. Despite this acknowledgment, the Arbitrator proceeded to decide the issue without examining any evidence, thus breaching the fundamental tenet of judicial fairness.

The Court clarified that an Arbitrator can indeed try a preliminary issue, such as jurisdiction, if it is purely legal. However, limitations do not always fall within that category, and deciding it prematurely without confirming whether it is purely legal or requires evidence amounts to a miscarriage of justice. Consequently, the Arbitrator’s approach of adopting a demurrer-like stance and deciding limitation purely on the pleadings of the claimant, without factoring in the defence or evidence from the respondents, was fundamentally flawed. The Court emphasized that even the consent of parties to decide the issue as a preliminary matter does not authorize the Arbitrator to bypass basic procedural fairness. The judicial approach must be maintained throughout the process.

Referring again to Saw Pipes, the Bench observed that any decision which no reasonable person would make under the given circumstances could be considered perverse and contrary to public policy. Here, the Arbitrator’s conduct of deciding the issue without a proper inquiry and without first establishing whether it could be so decided was held to be irrational and perverse. Therefore, the interim award was found to violate the fundamental policy of Indian law, justifying its interference under Section 34(2)(b)(ii).

Accordingly, the Division Bench upheld the Single Judge’s order which had set aside the interim award and allowed the Arbitrator to re-examine the issue of limitation after considering all pleadings and evidence from both parties. The Court dismissed the appeals, thereby reinforcing the principle that even in arbitration, procedural fairness and a judicial approach must not be sacrificed for efficiency.