Arbitration cannot become arbitrary: Supreme court sets aside tribunal appointed without consent

Supreme Court Upholds Fairness: Sets Aside Tribunal Appointed Without Consent, Emphasizing Non-Arbitrary Arbitration Practices.

A Look at Arth Micro Finance Private Ltd. and Ors. v. Shivalik Small Finance Bank Ltd.

In a recent order dated September 17, 2026, the Supreme Court of India delivered a sharp reminder that the process of appointing an Arbitral Tribunal must rest on genuine consent, and that any interim orders passed by a tribunal whose very constitution is doubtful cannot be allowed to stand. The bench of Justices J. B. Pardiwala and K. Vinod Chandran, hearing Civil Appeal No. 13015 of 2026, opened the order with a memorable observation, that arbitration, though it rhymes with the word, cannot result in an arbitrary measure, even at the stage of appointing the Arbitral Tribunal itself.

Background of the Dispute

The dispute arose between Arth Micro Finance Private Ltd. and its co appellants on one side, and Shivalik Small Finance Bank Ltd. on the other, under an agreement that contained an arbitration clause. The respondent bank claimed that an Arbitral Tribunal had been appointed with the consent of the parties and issued a notice to that effect on May 2, 2024. When the Tribunal communicated with the appellants, they promptly objected, pointing out that the Tribunal appeared to have close links with the respondent bank itself, raising a clear question of bias.

Despite this objection, the Tribunal proceeded to pass three interim orders under Section 17 of the Arbitration and Conciliation Act, 1996. These orders directed the freezing of the appellants' bank accounts across IDBI Bank, Bank of Baroda, HDFC Bank and ICICI Bank, permitted the respondent's bank to take possession of the appellants' movable and immovable properties, and directed that funds held by the appellants in various banks be transferred and deposited into the respondent's own bank account.

The appellants challenged these interim orders before the High Court under Section 37 of the Act, but the appeal was dismissed on the technical ground of limitation, since no application had been filed seeking condonation of delay under Section 5 of the Limitation Act, 1963.

What the Supreme Court Found

Before the Supreme Court, senior counsel Sri K. Parameshwar appeared for the appellants and senior counsel Sri Bishwajit Bhattacharyya appeared for the respondent. The respondent maintained that the Tribunal had been appointed with consent. However, the Court found nothing on record to show that such consent had been obtained from the appellants. This finding was central to the outcome of the case.

The Court also took note that all of this had happened after the appellants had clearly objected to the appointment of the Tribunal and had specifically alleged bias. Proceeding to pass far reaching interim orders in the face of such objections, the Court observed, made those very orders arbitrary in nature.

The Directions Passed

Holding that the very initiation of arbitration was non est in law, the Supreme Court set aside the High Court's order along with all three interim orders passed by the Tribunal. Any amount already transferred from the appellants' accounts to the respondent's account was directed to be remitted back within one week. Failure to do so would attract compound interest at eighteen percent per annum, calculated at monthly rests from the date the amount was debited, which could later be set off against any claim the respondent might succeed in before the new Arbitrator. Any properties taken over or attached under the earlier orders were directed to be restored to the appellants.

To take the matter forward on a clean slate, the Court appointed Ms. Mayuri Raghuwanshi, Advocate, as the sole Arbitrator, leaving her free to fix her fee in consultation with the parties and to issue notices for the fresh arbitral proceedings. The Court was careful to clarify that it had expressed no opinion on the merits of the underlying dispute, leaving all such questions, including the issue of interest on the earlier transferred amounts, open for the parties to argue before the newly appointed Arbitrator.

Significance of the Order

This order is a useful reminder that consent lies at the very heart of arbitration. A party cannot be bound by a Tribunal it never agreed to, and an objection of raising bias cannot simply be brushed aside once it has been squarely raised. Where the appointment of a Tribunal itself is legally unsound, everything that follows from it, however procedurally correct it may look, cannot survive. The Supreme Court's decision to appoint a fresh, independent Arbitrator, while leaving all merits open, restores fairness to a process that had gone off track from its very first step.