If Arbitral Tribunal Terminates Proceedings For Not Paying Fees, Remedy Is To Seek Recall & Then Invoke S.14(2) : Supreme Court

The Supreme Court has held that an arbitral tribunal is legally empowered to terminate proceedings under Section 38(2) of the Arbitration and Conciliation Act, 1996 when a party fails to pay its share of the arbitrator's fees.

Once such a termination occurs, the remedy available to the party is to seek the recall of the order before the Tribunal itself. If the recall application is dismissed, then the party has to approach the Court under Section 14(2).

A bench of Justice JB Pardiwala and Justice R Mahadevan heard the case where the sole arbitrator had terminated the proceedings under Section 38(2) of the Arbitration and Conciliation Act, 1996 ("Act"), after both parties failed to deposit their share of the arbitral fee. The Appellant had approached the Punjab & Haryana High Court seeking the appointment of a new arbitrator.

The High Court had dismissed a fresh petition for appointing a new arbitrator. It held that termination under Section 38 was final for those specific proceedings. The High Court distinguished it from the mere termination of an arbitrator's mandate (under Sections 14/15), ruling that the remedy for the aggrieved party was to seek recall of the termination order from the same tribunal or challenge it under Section 14(2), not to seek a fresh appointment under Section 11.

Aggrieved by the High Court's decision, the Appellant moved to the Supreme Court.

The Supreme Court framed three questions of law, such as :

First, what meaning should be ascribed to the words, termination of the arbitral proceedings, figuring in the different provisions of the 1996 Act? Is the phrase susceptible to only one meaning?

Two, what is the meaning and effect of the termination of arbitral proceedings contemplated under Section 38 of the Act 1996? Is it the same as the termination of arbitral proceedings contemplated under Section 32?

Three, what is the remedy available to a party aggrieved by an order passed by an arbitral tribunal terminating the proceedings?

Answering the first and second issues, the judgment authored by Justice Pardiwala in a detailed judgment held that the termination of proceedings under Section 38 (due to non-payment of an arbitrator's fees) would have the same effect of termination as the termination of arbitral proceedings contemplated under Section 32. 

"The common thread that runs across Sections 25, 30, 32, and 38 of the Act, 1996 respectively is that although the arbitral proceedings may get terminated for varied reasons, yet the consequence of such termination remains the same i.e., the arbitral reference stands concluded and the authority of the tribunal stands extinguished.", the court held.

With respect to the third question regarding the remedy available to an aggrieved party against the order passed by the arbitral tribunal terminating the proceedings under Section 38, the Court held that when an arbitral tribunal terminates proceedings under the Arbitration and Conciliation Act, 1996, the first remedy for the parties is to seek a recall of that order before the tribunal itself, which must then decide whether the termination should stand. If the tribunal recalls the order and revives the arbitration, an aggrieved party has no immediate recourse and must participate in the proceedings, challenging the final award only under Section 34. However, if the recall plea is rejected, the aggrieved party may approach the court under Section 14(2), where the court will examine whether the arbitrator's mandate was validly terminated. If the court finds the termination illegal, it may set aside the order and remand the case to the tribunal or, if necessary, appoint a substitute arbitrator under Section 15.

The following conclusion was made by the Court: - 

"(I) Section 32 of the Act, 1996 is exhaustive and covers all cases of termination of arbitral proceedings under the Act, 1996. The power of the arbitral tribunal to pass an order to terminate the proceedings under the scheme of the Act, 1996 lies only in Section 32(2).

(II) Sections 25, 30 and 38 of the Act, 1996 respectively, only denote the circumstances in which the tribunal would be empowered to take recourse to Section 32(2) and thereby, terminate the proceedings.

(III) The use of the expression “the mandate of the Arbitral Tribunal shall terminate” in Section 32 of the Act, 1996 and its omission in Section(s) 25, 30 and 38 of the said Act, cannot be construed to mean that the nature of termination under Section 32(2) is distinct from a termination under the other aforesaid provisions of the Act, 1996.

(IV) The expression “mandate of the Arbitral Tribunal” is merely descriptive of the function entrusted to the tribunal, namely, the authority and duty to adjudicate the disputes before it. It refers to the obligation of the arbitral tribunal to administer the arbitration by conducting the proceedings in order to adjudicate upon the disputes referred to it.

(V) Irrespective of whether the proceedings are terminated on account of the passing of a final award, or by the withdrawal of claims, or on account of default by the claimant, or the intervention of any impossibility in the continuation of the proceedings, the legal effect remains the same, inasmuch as the arbitral tribunal thereafter stands divested of its authority to act in the reference.

(VI) The common thread that runs across Sections 25, 30 32 and 38 of the Act, 1996 respectively is that although the arbitral proceedings may get terminated for varied reasons, yet the consequence of such termination remains the same i.e., the arbitral reference stands concluded and the authority of the tribunal stands extinguished.

(VII) There is a clear distinction between a procedural review and a review on merits. The arbitral tribunal possesses the inherent procedural power to recall an order terminating the proceedings as such power is merely to correct an error apparent on the face of the record or to address a material fact that was overlooked. It does not tantamount to revisiting the findings of law or reappreciating the substantive issues already decided.

(VIII) Where an arbitral tribunal passes an order for terminating the proceedings under the Act, 1996, the appropriate remedy available to the parties would be to first file an application for recall of such order before the arbitral tribunal itself. The arbitral tribunal would then in turn be required to examine whether the order does or does not deserve to be recalled.

(IX) If a favourable order is passed for recommencing arbitration proceedings, the only option available to a party aggrieved therefrom, would be to participate in the proceedings and thereafter, challenge the final award under Section 34 of the Act, 1996.

(X) If, however, the recall application is dismissed, the party aggrieved therefrom, would be empowered to approach the court under Section 14(2) of the Act, 1996. The court would then in turn examine whether the mandate of the arbitrator stood legally terminated or not. If it finds that the proceedings were not terminated in accordance with the law, it would be empowered to either set-aside the order of termination of proceedings and remand the matter to the arbitral tribunal, or, if the circumstances so require, proceed to appoint a substitute arbitrator in terms of Section 15 of the Act, 1996."

Even Arbitration & Conciliation Bill, 2024, Doesn't Provide Remedy For Termination Of Arbitration Proceedings

The Court criticized the Union Government for not taking any steps whatsoever to ameliorate the position of law as regards the termination of proceedings by the arbitral tribunal in the new Bill.

"It is indeed very sad to note that even after these many years, procedural issues such as the one involved in the case at hand, have continued to plague the arbitration regime of India. 398. The Department of Legal Affairs has now, once again proposed to replace the existing legislation on arbitration with the Arbitration and Conciliation Bill, 2024.", the court said, recommending that "the Arbitration and Conciliation Bill, 2024 should explicitly provide the nature and effect of the termination of proceedings insofar as the authority of the arbitral tribunal is concerned to entertain a recall application. A proper remedy against an order terminating the proceedings is the need of the hour."

The Court clarified that this framework for challenging an order terminating arbitration proceedings will apply unless the arbitration agreement itself provides a specific remedy for such termination.

The appeal was partly allowed, while accepting the High Court's reasoning for filing a recall application or an application under Section 14(2) to decide on the arbitrator's termination; however, noting that "it has been more than three-years, that the order for termination of the proceedings came to be passed by the Sole Arbitrator....the court found the present case to be a fit case for the appointment of a substitute arbitrator to look into both the claims and the counter-claims filed by the appellants and the respondent, respectively."

Cause Title: HARSHBIR SINGH PANNU AND ANR. Versus JASWINDER SINGH

Citation : 2025 LiveLaw (SC) 1183

Click Here To Read/Download Judgment