Bombay High Court Flags Rising Trend Of NBFCs Unilaterally Appointing Arbitrators, Deprecates Practice

The Bombay High Court recently flagged the disturbing trend in arbitration matters, wherein non-banking finance companies (NBFCs) resort to appointing 'unilateral' arbitrators through 'institution' or 'algorithm-based' selection, which the court held to be illegal and against the settled law laid down by the Supreme Court. 

Single-judge Justice Somasekhar Sundaresan in an order passed on April 30, noted that the IIFL had unilaterally appointed an arbitrator, a decision which was challenged before the court. The judge said that the NBFCs think that appointing an arbitrator unilaterally through an institution etc, would 'clean' the illegality.

"An increasing trend is being seen in a number of matters, in particular by non-banking financial companies and even scheduled commercial banks that are themselves listed companies, requiring them to be mindful of having greater intensity of promise to be compliant with the law, where a unilateral arbitrator is appointed but purporting to appoint the arbitrator through an 'institution' or an 'algorithm-based' selection of arbitrator, it is hoped that the inherent illegality in unilateral-appointment is magically cleansed," the judge observed. 

The judge took judicial notice from the trend of such cases. He explained the 'modus operandi' of such NBFCs.

"What is evident is that the modus operandi is to conduct arbitration in this process and hope that in most cases the affected party may not challenge the arbitration and may instead come up with settlement terms, with the strategy resulting in recoveries. However, whenever a counterparty challenges the unilateral appointment, the unilaterally-appointing party simply comes to Court and volunteers to have the arbitration proceedings withdrawn. In this manner, it is apparent that such parties are hoping to circumvent the law declared by the Supreme Court with impunity," the judge explained. 

The judge made it clear that such an attempt merely presents a veneer or a fig-leaf to contend that the arbitrator is “independent” but such an arbitrator would still be a unilaterally-appointed arbitrator. As is typical in such cases, the judge said, an order under Section 17 of the Arbitration and Conciliation Act, attaching various bank accounts gets passed rapidly by such arbitrators.

"In these orders, there is invariably no mention at all about the process of appointment of the arbitrator. In most cases, such orders are also devoid of material particulars of compliant invocation of arbitration. While this itself would be a giveaway about the quality of the independence and impartiality brought to bear, even the citation of particulars of invocation can never cure what is fundamentally and substantially a unilateral appointment," Justice Sundaresan observed. 

There are only two known methods in law to appoint an arbitrator – (i) the consent of the parties; and (ii) appointment by a Section 11 Court having jurisdiction in the matter. Any third appointment cannot be whitewashed as being a compliant appointment, the judge said.

"Therefore, it is abundantly clear now that merely by contending that an institution is being appointed by one of the parties unilaterally, the party making a unilateral appointment cannot cleanse what is essentially a foundational defect in the constitution of the arbitral tribunal. Therefore, the attempt by finance companies and banks to pretend to have cleansed the arbitrator-appointment process by getting an 'institution' of their choice to make a purportedly 'independent' appointment is wholly untenable and completely illegal, and indeed a colourable and manipulative device to circumvent the law declared by the Supreme Court," Justice Sundaresan observed. 

It would be a completely different matter if the parties had agreed that the appointment of the arbitrator would be by a named institution. If the parties have not applied their mind to consent to such an appointment being made by an agreed institution of their choice, it would only follow that one of the parties getting an institution of its choice to make the appointment cannot bless what is essentially a tainted approach to appointment of the arbitrator, the judge said. 

"Therefore, I have no doubt in my mind that the practice of attempting to transpose a semblance of impartiality and independence by contending that the appointment is being made by an institution is untenable and is worthy of deprecation," the judge remarked. 

The market practice in the arbitration matters, Justice Sundaresan pointed out, is that the manipulative device being resorted to is to simply surrender to the Court in those cases where the counterparty has the strength to approach the Court. "By having the arbitration withdrawn, there would be no need to have a ruling on the resort to illegality. In all other cases where the parties do not have the wherewithal to come to Court, resort to such illegal means could still lead to recoveries of funds. This is precisely the approach that lends arbitration a bad name and inflicts long-term damage to alternate dispute resolution as a mechanism," he said. 

Therefore, in view of such conduct being directly contrary to the law declared by the Supreme Court, Justice Sundaresan while quashing the appointment, ordered sending the a copy of the instant Order to the Board of Directors at its next meeting to alert them that, under their watch, an approach that is directly contrary to the law declared by the Supreme Court is being adopted.

With these observations, the bench disposed of. 

Appearance:

Advocates Pratik Barot, Angel Pandey and Kruti Bhavsar appeared for the Petitioners.

Case Title: D S Textiles vs IIFL Finance Limited [Arbitration Petition (Lodging) 12097 of 2026]

Citation: 2026 LiveLaw (Bom) 236

Click Here To Read/Download Judgment