Doctrine Of Party Autonomy Is Bedrock Of Arbitration; But It Is Not Limitless: Supreme Court

The Supreme Court held that the Doctrine of Party Autonomy is not limitless and the same is the bedrock of arbitration.

The Court held thus in Special Leave Petitions (SLPs) arising from the common Judgment and Order of the Bombay High Court, which dismissed an Appeal under Section 37 of the Arbitration and Conciliation Act, 1996 (A&C Act).

The two-Judge Bench comprising Justice J.B. Pardiwala and Justice K.V. Viswanathan observed, “The question which then arises is whether parties can adopt a procedure which may have a direct impact on this positive obligation which is cast upon the Arbitral Tribunal? In other words, can party autonomy be exercised in a manner such that the issue of limitation comes to be decided inadequately or superficially? The answer would, again, be an emphatic ‘No’. To elaborate on why the answer to the aforesaid must necessarily be in the negative, one has to first understand the contours of the doctrine of party autonomy itself and the breadth of its expanse. That the doctrine of party autonomy is not limitless, although an unpopular premise, is a premise that finds backing from an apparent reading of Section 19 of the Act, 1996 which embodies the core of doctrine of party autonomy insofar as the determination of procedural rules are concerned.”

The Bench said that when the exercise of party autonomy is in teeth with any mandatory provision of the A&C Act, the same could not be said to be proper.

Senior Advocate Neeraj Kishan Kaul appeared on behalf of the Petitioner.

Facts of the Case

The Urban Infrastructure Real Estate Fund or UIREF (Petitioner) was a private equity fund based in Mauritius and incorporated as a public company. The Neelkanth Realty Private Limited i.e., the Respondent was a private limited company which was set up for the purpose of undertaking an integrated township/resort/bungalow scheme spanning an area of about 700 acres in villages Bhukum, Bhugaon and Ahire/Mokarwadi respectively of Taluka Malushi and Taluka Haveli respectively in Pune, Maharashtra. The parties entered into two agreements i.e., a Share Subscription Agreement (SSA) and Shareholders Agreement (SHA). In 2009, the Petitioner addressed a letter to the Respondent highlighting that no equity had been allotted against the investment of Rs. 25 crores and called upon to remit the said amount.

Several other breaches were alleged, including the non-fulfilment of the Conditions Precedent, at the end of the Respondents. Settlement discussions with a Mediator were ongoing in 2011, however, those remained inconclusive. Subsequently, a Petition under Section 11 of A&C Act was filed by the Petitioner for the appointment of an Arbitrator. The Arbitral Tribunal accepted the submission of the Petitioner. The Respondents then filed Arbitration Petitions and the High Court’s Single Judge observed that the 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 it and other materials on record. This was challenged and the Division Bench dismissed the Appeals. Hence, the case was before the Apex Court.

Court’s Observations

The Supreme Court after hearing the contentions of the counsel, noted, “… the arbitrator, while passing the interim award could not have decided the issue of limitation, on the basis of demurrer, owing to the fact that it was a mixed question of law and fact. Even if he had chosen to do so, he could not have foreclosed the issue permanently.”

The Court remarked that the Respondents must satisfy the Arbitral Tribunal that the issue warrants re-visiting through cogent evidence, in the absence of which, the Arbitrator would be compelled to arrive at the same conclusion, similar to the one arrived at while adjudicating on demurrer.

“To put it simply, the respondent must successfully discharge their burden of proof on this aspect in the course of the proceedings. If not, any decision finally rendered on merits could not be assailed on the basis that the respondents did not concede to the truth of the assertions made in the statement of claim”, it added.

Whether the Doctrine of Party Autonomy can be utilised to adopt a procedure which has the consequence of infringing Section 3 of the Limitation Act, 1963?

The Court said that the parties are empowered to agree on certain procedures which is to be followed by the Arbitral Tribunal during the conduct of its proceedings and such a procedure may also be at variance compared with those traditionally adopted in the Court proceedings.

“We are not in any way trying the dilute the sanctity of the doctrine of Party Autonomy. It is undoubtedly, 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, all that we are trying to convey is that, when parties wish to adopt procedures which 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”, it observed.

The Court was of the view that the doctrine is quite expansive, but is it expansive enough to strike at the most basic principles of limitation law, more particularly Section 3 of the Act, 1963? - is the question that it is concerned with and the Court said that it isn’t.

“While we are in complete agreement with the afore-stated, one must be able to distinguish when this procedural autonomy is used to dispense with mere “technical” formalities and procedures, and when it is wielded to dispense with certain core principles which any method of dispute resolution must abide by. 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 an unfair and lopsided manner. One must be able to distinguish between instances when party autonomy is used to dispense with mere technicalities in the pursuit of a fair and speedy resolution of the dispute, and instances when the doctrine is being disguised to shorthand fairness and justice itself”, it enunciated.

The Court clarified that party autonomy cannot be wielded as an unbridled and limitless doctrine and the same is also subject to certain restrictions, however limited those restrictions may be.

“To put it simply, the elasticity of the doctrine of party autonomy cannot be tested and pushed to the extent that it has the consequence of being at loggerheads with the duty of the Arbitral Tribunal which is manifest in Section 3 of the Act, 1963”, it further said.

The Court emphasised that 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 and, therefore, while employing the doctrine of severance, one must walk the tight rope of not dislodging the good part of the award.

“What the respondents were aggrieved with, was the decision on the first aspect i.e., that the decision on demurrer would have the consequence of altogether foreclosing the issue of limitation forever”, it also noted.

Conclusion

Moreover, the Court held that the interim award is capable of being partially set-aside, provided the grounds for interference under Section 34 are made out.

“The question of limitation cannot be decided in such a manner, especially if there exists some disputed questions of fact. … There is no gainsaying that the Arbitral Tribunal is neither required to conduct arbitration proceedings strictly like a civil court nor that the provisions of the CPC and Evidence Act respectively do not apply stricto sensu to arbitral proceedings. However, it cannot be denied that any procedure adopted in the arbitral proceedings must subscribe to and not be at variance with the underlying principles of justice”, it said.

The Court, therefore, concluded that the interim award warranted interference under Section 34 A&C Act and it was rightly held that the preliminary issue of limitation decided on the basis of demurrer could be further examined by the Arbitral Tribunal on the basis of evidence and other materials on record, if tendered and if so warranted.

Accordingly, the Apex Court directed the Registry to forward one copy each of its Judgment to all the High Courts.

Cause Title- Urban Infrastructure Real Estate Fund v. The Neeklanth Realty Private Limited & Ors. (Neutral Citation: 2025 INSC 1255)

Appearance:

Senior Advocate Neeraj Kishan Kaul, Advocates Amarjit Singh Bedi, Aditya Bapat, Surekha Raman, Shreyash Kumar, Sidharth Nair, Harshit Singh, Yashwant Sanjenbam, and Ira Mahajan.

Click here to read/download the Judgment