The Supreme Court of India has emphasized a key procedural limitation in arbitration cases, stating that referral courts should strictly limit their review to determining the existence of an arbitration agreement, leaving substantive disputes for the arbitral tribunal to decide. The ruling came in the case of Aslam Ismail Khan Deshmukh v. ASAP Fluids Pvt. Ltd. & Anr., with the judgment delivered by Chief Justice Dr. D.Y. Chandrachud, Justice J.B. Pardiwala, and Justice Manoj Misra.
The Court’s decision, based on arbitration petitions from disputes over shareholdings, reinforces the minimalistic role that courts should play in cases involving arbitration agreements, avoiding substantive inquiry into the claims’ merits, including issues of limitation.
Case Background
The dispute originated from a Shareholders Agreement signed in July 2011 between the petitioner, Aslam Ismail Khan Deshmukh, and the respondents, ASAP Fluids Pvt. Ltd. and Gumpro Drilling Fluids Pvt. Ltd., both engaged in oil and gas industry services. The agreement granted Deshmukh, a Dubai-based Non-Resident Indian, a stake of 4,00,000 shares in ASAP Fluids, with additional stipulations on shareholding, transfer rights, and arbitration.
Deshmukh alleged that the Respondents failed to issue share certificates for his stake, which prevented him from exercising his rights as a shareholder or selling the shares under the terms of the agreement. After multiple attempts to resolve the matter, Deshmukh invoked the arbitration clause in 2017, leading to the petitions seeking the Supreme Court’s intervention for arbitral tribunal appointment.
Legal Issues Examined
1. Existence of Arbitration Agreement – The Court examined whether a valid arbitration agreement existed under Clause 13.10 of the Shareholders Agreement.
2. Scope of Judicial Review at Referral Stage – The primary focus was the extent of judicial review by referral courts, particularly on whether they should engage with claims’ substantive issues, such as whether they are time-barred.
3. Question of Limitation – The Respondents argued that Deshmukh’s claim was time-barred, given that he invoked arbitration nearly six years after his entitlement to shares was confirmed in 2011.
Arguments from the Parties
– Petitioner’s Counsel, Mr. Kunal Cheema, argued that there was a continuous breach of contract due to the Respondents’ failure to issue share certificates, warranting arbitral examination of the merits. He emphasized that the referral court’s role was to confirm the arbitration agreement’s existence without delving into substantive issues.
– Respondents’ Counsel, Ms. Jasmine Damkewala, contended that Deshmukh had violated a three-year lock-in period stipulated in the agreement. She asserted that the petitioner’s claim was time-barred, as the cause of action began with his resignation in 2013, thereby precluding arbitral consideration.
Supreme Court’s Observations and Decision
The Supreme Court upheld a limited approach for referral courts, underscoring that their role is confined to verifying an arbitration agreement’s existence. Citing Vidya Drolia v. Durga Trading Corporation, the Court reiterated that courts should only interfere in rare cases where claims are clearly time-barred or non-arbitrable.
In its judgment, the Court remarked:
“Referral courts need only to examine whether the arbitration agreement exists – nothing more, nothing less.”
The Court clarified that questions of limitation and claim merits fall under the purview of the arbitral tribunal. Observing that any deeper inquiry could lead to unnecessary judicial interference, the Court emphasized the importance of respecting the arbitration mechanism as intended by the parties.
Accordingly, the Court appointed Mr. Mayur Khandeparkar, a sole arbitrator, to adjudicate the disputes related to the Shareholders Agreement, aligning this arbitration with an existing tribunal concerning a related Service Agreement. However, the Court cautioned that if the arbitrator eventually found Deshmukh’s claims time-barred, he might bear the entire cost of arbitration, a warning intended to deter abuse of the arbitration process through stale claims.
