Arbitration Cannot Be Arbitrary: Supreme Court Sets Aside Tribunal Appointment Over Lack of Consent

Arbitration and Arbitrariness: The Core Principle

In a robust reminder that arbitration is a consensual process, the Supreme Court of India has declared that no part of arbitral proceedings—least of all the appointment of the tribunal—can be arbitrary. A bench of Justices J.B. Pardiwala and K. Vinod Chandran set aside the appointment of an arbitral tribunal that was made without the consent of the appellant, quashing all interim orders passed by the tribunal.

Dispute Without Consent: How the Tribunal Was Appointed

The dispute arose between Arth Micro Finance Private Ltd. and Shivalik Small Finance Bank Ltd. under an agreement containing an arbitration clause. In May 2024, the bank allegedly appointed an arbitral tribunal “on consent.” However, the appellants immediately objected, pointing out that the appointed tribunal had close links with the bank. Despite this clear objection, the tribunal proceeded to function.

Drastic Orders Frozen: The Interim Measures Under Fire

The tribunal passed three sweeping interim orders under Section 17 of the Arbitration and Conciliation Act, 1996. These orders froze the appellants’ bank accounts at IDBI, Bank of Baroda, HDFC, and ICICI, permitted the bank to take over possession of movable and immovable properties, and directed the transfer of deposited amounts to the respondent’s account. The appellants challenged these orders before the Allahabad High Court under Section 37 of the Act, but the appeal was dismissed on limitation grounds for want of a delay condonation application.

Supreme Court's Scrutiny: No Consent, No Validity

The Supreme Court found the entire initiation of arbitration to be void. “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,” the Court observed. The Court further noted that the tribunal passed orders “in the wake of the clear objection to the appointment and the allegation of bias,” describing the orders themselves as “arbitrary in nature.”

Key Observations

“Arbitration, though rhymes with it, cannot result in an arbitrary measure, even in the appointment of an Arbitral Tribunal.”

“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.”

Restoring Status Quo: Orders Set Aside, Assets to Be Returned

The Court set aside the High Court’s order and declared the initiation of arbitration “non est in law.” All three interim orders were quashed. The Court directed that if any amounts had been transferred from the appellants’ accounts to the respondent, they must be returned within one week. If not returned, the amounts would carry compound interest at 18% per annum with monthly rests from the date of debit, set off against any claim in favor of the respondent in arbitration. All attachments and takeovers of properties were set aside.

A Fresh Start: New Arbitrator Appointed

To facilitate resolution of the underlying disputes, the Court appointed Ms. Mayuri Raghuwanshi, Advocate, as a new arbitrator. The arbitrator was directed to issue notices and determine fees in consultation with the parties. The Court clarified it expressed no opinion on the merits of the case, leaving all issues open for the arbitrator.

The appeal was disposed of with these directions, reinforcing the principle that consent is the bedrock of arbitration and arbitrariness has no place in the process.