Decision On Limitation Made On Demurrer Not Final; Party Autonomy In Arbitration Cannot Override Statute: Supreme Court

The Supreme Court has held that when an arbitral tribunal decides a preliminary issue such as limitation on the basis of demurrer, that decision cannot preclude the tribunal from revisiting the issue at a later stage if evidence warrants it.

A bench comprising Justice JB Pardiwala and Justice KV Viswanathan affirmed the Bombay High Court's view that a decision on demurrer is provisional and not an adjudication on merits.

The Court dismissed Special Leave Petitions filed by Urban Infrastructure Real Estate Fund (UIREF), a Mauritius-based private equity fund, which had questioned the Bombay High Court's order permitting the arbitral tribunal to reconsider the issue of limitation in its dispute with Neelkanth Realty Pvt. Ltd. The tribunal had earlier held, on demurrer, that UIREF's claims were within limitation. Both the Single Judge and the Division Bench of the High Court held that such a finding could not bar a later factual examination of limitation, since the question involved mixed issues of fact and law.

Background In Brief

UIREF had invested Rs. 25 crore in Neelkanth Realty for a township project in Pune through agreements signed in 2008. Disputes arose over alleged breaches of the Share Subscription Agreement, leading to arbitration proceedings initiated in 2017. At the request of the respondents, the arbitrator decided the issue of limitation as a preliminary question on demurrer, that is, assuming the facts pleaded by the claimant were true and without taking evidence. The award held that the claim was within limitation, prompting the respondents to challenge it under Section 34 of the Arbitration and Conciliation Act, 1996. The Bombay High Court modified the award, ruling that the issue could be reopened after evidence.

UIREF contended before the Supreme Court that the parties had agreed to have the limitation issue decided finally on demurrer and that the High Court had impermissibly interfered with party autonomy and the finality of an arbitral finding. The respondents argued that limitation being a mixed question of fact and law could not be finally determined on hypothetical assumptions.

Nature And Limits Of 'Demurrer'

The judgment authored by Justice Pardiwala devoted substantial discussion to explaining the concept of demurrer, tracing its origins in Anglo-American law and situating its limited role in Indian jurisprudence. The judgment described demurrer as a procedural device through which a party asks the adjudicating authority to test the sufficiency in law of the opposing party's pleading, assuming the facts stated therein are true.

"The plea of demurrer is an act of objecting or taking exception or a protest. It is a pleading made by one party which “assumes” the truth of the matter as alleged by the opposite party, but sets up that it is insufficient in law to sustain the claim, or that there is some other defect in the pleadings which constitutes a legal reason as to why the suit must not be allowed to proceed further. In other words, that even assuming those facts as pleaded are true, the court does not have jurisdiction as a matter of law. The party raising the plea challenges legal sufficiency of a complaint/plaint/action rather than its factual accuracy," the judgment explained.

A decision on demurrer has to be determined ex-facie the plaint.

Justice Pardiwala held that while demurrer may help eliminate untenable claims at the threshold, a decision on that basis cannot be equated with an adjudication on facts or merits.

"Only those objections which do not involve questions of facts nor the adducing of any further evidence, could be decided by way of demurrer," the judgment explained.

Referring to Indian Mineral & Chemical Co. and Others v. Deutsche Bank (2004) 12 SCC 376, it was held that "when a mixed question of law and fact is decided on the basis of a demurrer, the issue would not be permanently foreclosed."

Demurrer And The Law Of Limitation

The judgment emphasised that limitation is a substantive defence which goes to the root of a claim and is rarely a pure question of law. Whether a claim is time-barred often depends on factual elements such as acknowledgments, extensions, or continuing breaches. Therefore, an arbitral tribunal deciding limitation purely on demurrer cannot permanently shut out a later factual inquiry.

The judgment approved the High Court's following observation :

"Limitation being a mixed question of fact and law, a preliminary finding of maintainability on the point of limitation decided on demurrer would not preclude a final determination of the question based on facts which may come on record through adducing of evidence, because application of law is on facts and not in a vacuum. A decision on the basis of demurrer cannot foreclose a final decision on merit."

The Court explained that Section 3 of the Limitation Act, 1963 imposes a statutory duty on every adjudicating authority to reject a time-barred claim irrespective of the parties' stance. Since the section operates as a matter of law, the tribunal's procedural choices cannot override it.

“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'."

The petition was accordingly dismissed

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

 Case Title: Urban Infrastructure Real Estate Fund v. Neelkanth Realty Pvt. Ltd. & Ors.

Citation: 2025 LiveLaw (SC) 1028

Click here to read the judgment