'Arbitration Cannot Be Arbitrary' : Supreme Court Sets Aside Arbitral Tribunal Appointment For Lack Of Consent
The Court quashed the attachment orders passed by the Tribunal noting that the Tribunal's appointment was non-est.
The Supreme Court has held that while arbitration is a consensual dispute-resolution mechanism, the appointment of an arbitral tribunal cannot be made arbitrarily, particularly when the appointment itself has been specifically objected to on grounds of alleged bias.
A bench of Justice J.B. Pardiwala and Justice K. Vinod Chandran observed that while arbitration is intended to provide an effective mechanism for dispute resolution, the process itself cannot become arbitrary.
“Arbitration, though rhymes with it, cannot result in an arbitrary measure, even in the appointment of an Arbitral Tribunal.”, the Court said.
The dispute arose between the parties under an agreement containing an arbitration clause. Shivalik Small Finance Bank allegedly appointed an arbitral tribunal by consent in May 2024. However, Arth Micro Finance (Appellant) objected to the appointment, specifically alleging that the appointed tribunal had close links with the respondent bank.
The Appellant was aggrieved by the Allahabad High Court's decision to dismiss its appeal filed under Section 37 of the Arbitration and Conciliation Act, 1996 (“Act”), on limitation grounds, against the arbitral tribunal's interim order freezing the bank accounts of the Appellants at IDBI, Bank of Baroda, HDFC and ICICI linked to the specific PAN number of the appellants.
The arbitral tribunal also permitted the respondent's bank to take over possession of the movable and immovable properties of the appellants; and directed transfer of the amounts deposited by the appellants in the various bank accounts to be transferred and deposited in the respondent's bank.
The Appellant sought to challenge the arbitral tribunal's proceedings, primarily questioning its competence under Section 16 of the Act and raising allegations of bias against the arbitrator. The Appellant contended that the appointment of an arbitral tribunal was purportedly done on consent; however, nothing on record was brought to show that the consent was obtained from the Appellant before appointment of an arbitrator by the Respondent.
Finding force in the Appellant's submission, the Supreme Court underscored that the arbitration, being a consensual mode of dispute resolution mechanism, cannot be arbitrarily initiated at the end of one of the parties, without obtaining the consent of the other party.
Since the order appointing the arbitral tribunal, though allegedly based on the consent of the Appellant, was passed without any consent actually obtained from the Appellants, the Court found the entire arbitration exercise arbitrary.
“Though it was argued that, it is on consent that the Arbitral Tribunal was appointed, there is nothing to show the consent having been obtained from the appellants herein… We have to remind ourselves that this was done in the wake of the clear objection to the appointment of the Arbitral Tribunal and the allegation of bias raised against the said Arbitral Tribunal. The orders passed at the first instance, are also arbitrary in nature.”, the Court observed.
“We, hence, set aside the impugned order of the High Court finding the very initiation of arbitration to be non est in law.”, the Court held.
It also set aside all three interim orders passed by the arbitral tribunal.
The Court directed that if any of the interim orders had already been implemented and amounts had been transferred from the appellants' accounts to the respondent's account, the amounts must be returned within one week.
The question of interest on such amounts was left open to be considered by the arbitrator appointed by the Supreme Court.
However, the Court imposed a stringent consequence in case the amounts were not returned within the stipulated period. Such amounts would carry compound interest at 18% per annum with monthly rests, calculated from the date on which the amounts were debited from the appellants' accounts. The amount would be liable to be set off against any claim ultimately found in favour of the respondent in arbitration.
The Court also ordered that any attachment or takeover of the appellants' movable or immovable properties pursuant to the interim orders would stand set aside and the properties restored to the appellants.
To facilitate resolution of the disputes, the Court directed the appointment of Ms. Mayuri Raghuwanshi, Advocate as an Arbitrator.
The appeal was disposed of in the aforesaid terms.
Cause Title: Arth Micro Finance Private Ltd. And Ors. Versus Shivalik Small Finance Bank Ltd.
Citation : 2026 LiveLaw (SC) 963
Appearance:
For Appellant(s) : Mr. K. Parameshwar, Sr. Adv. Mr. Priyanshu Upadhyay, AOR Mr. Shivam Pandey, Adv. Mr. Abhishek Saxena, Adv. Mr. Ankit Ranjan Pandey, Adv. Mr. Srijan Kumar, Adv. Mr. N. Sai Kaushal, Adv. Mr. Adit Garg, Adv. Mr. Prasad Hegde, Adv. Mr. Vallari Kn, Adv.
For Respondent(s) : Mr. Bishwajit Bhattacharyya, Sr. Adv. Mr. Sahil Tagotra, AOR Ms. Shreya Kasera, Adv. Mr. Abhishek Pandey, Adv.