Supreme Court Limits Section 11 Jurisdiction to Existence of Arbitration Agreement in Shareholder Dispute; Appoints Arbitrator to Decide Timeliness and Entitlement of Claims

Court’s Decision: The Supreme Court allowed the petitioner’s application for arbitration under Section 11(6) of the Arbitration and Conciliation Act, 1996, concerning disputes over share entitlements in a shareholder agreement. The Court held that whether the petitioner’s claims are time-barred should be determined by the arbitral tribunal. It constituted a sole arbitrator to adjudicate these claims, in alignment with another ongoing arbitration between the same parties.

Facts: The petitioner, a Non-Resident Indian, held a shareholding in the respondent company under a shareholder agreement dated 25.07.2011. Issues arose regarding the issuance of share certificates for 4,00,000 shares and an additional 2,00,010 shares, as stipulated in the agreement. The petitioner alleged non-issuance of these certificates, which hindered his ability to exercise a “Right of First Refusal” to sell his shares. After several attempts to resolve the issue, the petitioner issued an arbitration notice in 2017, which was ignored by the respondents. Subsequently, two petitions for arbitration were filed before the High Court, which dismissed them, leading the petitioner to approach the Supreme Court.

Issues: The main issue was whether the petitioner’s claims, filed under the shareholder agreement’s arbitration clause, were time-barred, thus precluding them from arbitration.

Petitioner’s Arguments: The petitioner contended that the respondent companies failed to issue share certificates for his entitled shares and sought either their issuance or compensation. He argued that the non-issuance of share certificates constitutes a continuing breach, allowing the limitation period to extend. He further maintained that his claims should be examined on merits by the arbitral tribunal, not dismissed prematurely on limitation grounds.

Respondent’s Arguments: The respondents contended that the petitioner violated the lock-in period of three years, as his resignation from the company occurred before the stipulated period. This breach, they argued, rendered the petitioner ineligible for the shares. They asserted that the petitioner’s arbitration claims were ex-facie time-barred, as he invoked arbitration in 2017—several years after the agreement date.

Analysis of the Law: Section 11(6) of the Arbitration and Conciliation Act provides the court discretion to appoint arbitrators if there is a prima facie case of a valid arbitration agreement. However, recent jurisprudence limits judicial interference to only a prima facie examination of the arbitration agreement’s existence, deferring substantive claims, including limitations, to the arbitrator. Notably, the court emphasized that an intricate inquiry into the merits or evidentiary analysis should be reserved for the arbitrator.

Precedent Analysis: The Court referenced key judgments such as Vidya Drolia v. Durga Trading Corporation and Bharat Sanchar Nigam Limited v. Nortel Networks India Private Limited, which underscored the restricted judicial role at the arbitration referral stage and confirmed that only in exceptional cases, where claims are evidently time-barred, should referral courts deny arbitration. In alignment with this approach, the Court cited SBI General Insurance Co. Ltd. v. Krish Spinning, reinforcing the doctrine that arbitrability issues and claim timelines should primarily be assessed by the arbitral tribunal.

Court’s Reasoning: The Court reiterated that Section 11(6) jurisdiction should be limited to assessing the prima facie existence of an arbitration agreement. Detailed assessments of whether claims are time-barred require a fact-specific examination best suited for arbitration. The Court highlighted the legislative intention to uphold the arbitration process by restricting preliminary judicial scrutiny and leaving complex claim assessments to the arbitrator.

Conclusion: The Court allowed the arbitration petitions, appointing a sole arbitrator to adjudicate the dispute, with instructions that if the tribunal determines the claims to be time-barred, the petitioner would bear the arbitration costs. It directed that any contention about entitlement or time-bar issues be adjudicated by the tribunal.

Implications: This decision reinforces the policy favoring arbitration by limiting judicial interference at the referral stage, ensuring that arbitration tribunals primarily handle disputes, including time-bar questions. The judgment supports parties’ autonomy in arbitration agreements and underscores the arbitrator’s role in determining claim validity and limitations.