The Supreme Court has set aside the appointment of an arbitral tribunal after finding that the tribunal was constituted without obtaining the consent of one of the parties, despite a specific objection alleging bias.
A bench of Justice J.B. Pardiwala and Justice K. Vinod Chandran stressed that arbitration rests on consent and that the process cannot be initiated or conducted arbitrarily by one side.
“Arbitration, though rhymes with it, cannot result in an arbitrary measure, even in the appointment of an Arbitral Tribunal,” the Court observed.
The dispute arose from an agreement between Shivalik Small Finance Bank and Arth Micro Finance containing an arbitration clause. An arbitral tribunal was subsequently appointed in May 2024, with the respondent claiming that the appointment had been made with the parties’ consent.
Arth Micro Finance disputed this assertion. It maintained that it had never consented to the appointment and had, in fact, objected to the proposed tribunal while raising concerns about the arbitrator’s alleged links with the respondent bank.
The tribunal proceeded to pass interim orders affecting the appellants’ assets. These included directions freezing bank accounts maintained with IDBI Bank, Bank of Baroda, HDFC Bank and ICICI Bank and linked to the appellants’ PAN.
The tribunal also permitted the respondent bank to take possession of the appellants’ movable and immovable properties. Amounts lying in various bank accounts were further directed to be transferred to the respondent bank.
The appellants challenged the proceedings, including the tribunal’s jurisdiction under Section 16 of the Arbitration and Conciliation Act, 1996, as well as the allegations of bias.
Before the Supreme Court, they argued that the tribunal could not have been constituted on the supposed basis of consent when no document or other material demonstrated that such consent had actually been obtained.
The Supreme Court accepted the substance of this argument.
The bench noted that arbitration is fundamentally a consensual mechanism and cannot simply be imposed by one party upon another. The absence of consent became particularly significant because the appellants had already expressly objected to the tribunal’s appointment and had raised allegations of bias.
The Court found that the very foundation of the arbitral proceedings was therefore defective.
“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 noted.
It added that the appointment had taken place despite the clear objection raised by the appellants and that the orders passed at the initial stage were arbitrary.
The Supreme Court consequently set aside the Allahabad High Court’s order and held that the initiation of the arbitration itself was non-est in law.
The three interim orders passed by the arbitral tribunal were also quashed.
The Court directed that any money already transferred from the appellants’ bank accounts pursuant to those orders must be returned within one week. The issue of interest on those amounts was left open for determination by the arbitrator to be appointed by the Supreme Court.
The Court, however, attached a significant consequence to any failure to comply with the repayment direction. If the amounts were not returned within the prescribed period, they would carry compound interest at 18% per annum with monthly rests, calculated from the date on which the money was debited from the appellants’ accounts.
The amount carrying such interest would remain subject to adjustment against any sum that the respondent might ultimately be found entitled to in the arbitration proceedings.
The Court also ordered that any attachment or takeover of the appellants’ movable or immovable properties carried out under the tribunal’s interim orders would stand undone, with the properties to be restored to the appellants.
The ruling underlines a basic principle of arbitration: the speed and flexibility associated with the process cannot come at the cost of the parties’ consent. Where the very constitution of the tribunal is disputed and consent is absent, subsequent proceedings cannot simply be allowed to rest on an appointment that had no valid foundation.
