Findings On Limitation, During Section 16 Proceedings, Can't Be Challenged Under Sec. 34 Of A&C Act: Gujarat High Court

The bench of Justices Sonia Gokani and Nisha M. Thakore held that the Arbitrator's findings on limitation, while dealing with the Section 16 application, cannot be held as giving finality to the issue of limitation so as to permit its challenge under Section 34 of the A&C Act.

The Court noted that there may be certain challenges to be made by the parties against the findings and observations arrived at by the Arbitrator on the issue of limitation.

The Court reiterated that only when an issue of limitation is decided by the Arbitrator finally, can it be said to be an interim award and only then such an interim award can be set aside under Section 34 of the A&C Act.

The petitioner- M/s Karan Paper Mills, supplied certain goods to the respondent- M/s Shah Paper Pack Industries, who allegedly failed to make payment for the same. The petitioner filed an application before the Micro and Small Enterprise Facilitation Council under the Micro, Small and Medium Enterprise Development Act, 2006 (MSMED Act). Subsequently, the Facilitation Council referred the matter for arbitration under Section 18(3) of the MSMED Act.

Before the Sole Arbitrator, the respondent filed an application under Section 16 of the A&C Act, challenging the jurisdiction of the Sole Arbitrator on the ground that the claims of the petitioner were barred by limitation, which was rejected by the Arbitrator.

The Arbitrator ruled that though the claims raised by the petitioner were barred by limitation, however, since the arbitration proceeding were initiated under the MSMED Act, it was a statutory arbitration. Thus, the Arbitrator concluded that in view of Section 2(4) read with Section 43 of the A&C Act, the period of limitation was inapplicable to the statutory arbitration and therefore, it rejected the respondent's application under Section 16.

Against this, the respondent filed an application under Section 34 of the A&C Act before the Commercial Court, who granted an ex-parte interim stay on the arbitral proceedings initiated by the petitioner. The petitioner challenged the said order by filing a petition under Article 226 of the Constitution of India before the Gujarat High Court.

The petitioner- M/s Karan Paper Mills, submitted before the High Court that jurisdiction under Section 34 of the A&C Act cannot be invoked to challenge the rejection of an application filed under Section 16. It contended that the only remedy available to the respondent was to challenge the final arbitral award under Section 34 of the A&C Act.

The Court noted that the question regarding the applicability of law of limitation to statutory arbitration under the MSMED Act needs to be adjudicate between the parties by the Arbitrator.

When questioned by the bench as to whether there was any scope to adjudicate on the issue of limitation which also related to the jurisdiction of arbitrator, the petitioner/ claimant submitted that the findings on the issue of limitation were arrived at by the Arbitrator without either side adducing any evidence and that it sought to challenge the reasoning of the Arbitrator.

Thus, the Court reckoned that there may be certain challenges to be made by the parties against the findings and observations arrived at by the Arbitrator on the issue of limitation.

"What can be deciphered, therefore, at this juncture is that there may require certain challenges to the findings and observations on the issue of limitation by the parties to the Arbitration and that initiative would need to come from the claimant/petitioner and yet, no challenge before the Appellate Court would be permissible much less any interference on the part of the Appellate forum as the finality is yet be attached to the issue of limitation linked with the jurisdiction of the learned Arbitrator.", the Court said.

Referring to the judgment of the Apex Court in Indian Farmers Fertilizer Co-operative Limited versus Bhadra Products (2018), the bench reiterated that only when an issue of limitation is decided by the Arbitrator finally, can it be said to be an interim award and only then such an interim award can be set aside under Section 34 of the A&C Act.

The Supreme Court in Indian Farmers Fertilizer Co-operative Limited (2018) had ruled that an interim final award which does not relate to the Arbitral Tribunal's own jurisdiction under Section 16, need not follow the drill of Sections 16(5) and 16(6) of the A&C Act. The Supreme Court had held that such final interim award could be challenged separately and independently under Section 34.

However, the bench further took into account that as per the scheme of the A&C Act, so long as the Arbitral Tribunal holds that it has jurisdiction, the drill of Sections 16(5) and 16 (6) would have to be followed. That is, once an arbitral tribunal takes a decision rejecting the plea challenging its jurisdiction, the arbitral proceedings shall continue. The party can thereafter challenge the arbitral award on the grounds available under Section 34. It is only when the Tribunal has held that it has no jurisdiction, the challenge under Section 37(2) of the A&C Act can be made.

The Court noted that the Arbitrator had concluded that the claim of the petitioner/ claimant, as contended in the statement of claims, was barred by limitation, however, it was subject to the findings on other issues. The Arbitrator had opined that since the arbitration under the MSMED Act was a statutory arbitration, the provisions of Limitation Act did not apply. Therefore, after rejecting the respondent's application under Section 16, the Arbitrator had directed the parties to produce documentary and oral evidences so that the Arbitrator could adjudicate on the claims of the petitioner.

The bench ruled that though the parties had not challenged the findings of the Arbitrator relating to the issue of limitation, arrived at while dealing with the Section 16 application, it cannot be held as giving finality to the issue of limitation so as to permit its challenge under Section 34.

Therefore, it concluded that finality was yet be attached to the issue of limitation linked with the jurisdiction of the Arbitrator.

"…this is a case where the Arbitral Tribunal has held on its own jurisdiction holding that it has a jurisdiction and therefore, the challenge here ordinarily is not to be entertained by the Court and the respondent is required to wait till the making of the arbitral award and thereafter to make an application for setting aside the said award on the grounds available in accordance with the provision of Section 34 of the Act", the Court said.

The Court thus allowed the petition and set aside the interim order of the Commercial Court. It issued a writ of prohibition, directing the Commercial Court not to proceed further with the application filed by the respondent.

The Court directed the arbitral tribunal to decide the issue of limitation as a preliminary issue, if such a request is made by the parties, on an urgent basis.

Case Title: M/s Karan Paper Mills versus M/s Shah Paper Pack Industries

Citation: 2022 LiveLaw (Guj) 405

Counsel for the Petitioner: Mr. Ansin Desai with Mr. Parth Contractor

Counsel for the Respondent: Mr Nirav Thakkar with Mr Digant M Popat