Order By Arbitral Tribunal Appointed Without Consent Arbitrary: Supreme Court

The Supreme Court has held that an arbitral tribunal appointed without the consent of a party, despite a clear objection to its appointment and allegations of bias, cannot pass interim orders against that party.

A Bench of Justices J B Pardiwala and K Vinod Chandran made the observation while dealing with a dispute between Arth Micro Finance Private Ltd and others, the appellants, and Shivalik Small Finance Bank Ltd, the respondent.

The dispute arose after the respondent appointed an arbitral tribunal in connection with differences between the parties. While the agreement between them contained an arbitration clause, the appellants disputed the manner in which the tribunal had been appointed and specifically objected to its constitution.

The Supreme Court found that there was nothing on record to show that the appellants had consented to the appointment of the arbitral tribunal. It consequently held that the initial appointment of the tribunal was non est in law and set aside the interim orders passed by it under Section 17 of the Arbitration and Conciliation Act, 1996.

"Arbitration, though rhymes with it, cannot result in an arbitrary measure, even in the appointment of an arbitral tribunal," the Bench said.

Section 17 of the Arbitration and Conciliation Act, 1996 empowers an arbitral tribunal to grant interim measures of protection to parties during the course of arbitration proceedings.

Why did Arth Micro Finance object to the arbitral tribunal?

A notice was issued on May 2, 2024, following which the arbitral tribunal appointed by the respondent communicated with the appellants.

The appellants replied, objecting to the appointment and specifically pointing out that the appointed tribunal had close links with the respondent. They also raised allegations of bias against the tribunal.

Despite the objection, the arbitral tribunal proceeded with the matter and passed three interim orders under Section 17 of the Arbitration and Conciliation Act.

The orders directed the freezing of the appellants' bank accounts with IDBI, Bank of Baroda, HDFC and ICICI linked to their specific PAN number.

The tribunal also permitted the respondent's bank to take over possession of the appellants' movable and immovable properties. A third order directed that amounts deposited by the appellants in various banks be transferred and deposited in the respondent's bank.

The appellants challenged these interim orders before the high court under Section 37 of the Arbitration and Conciliation Act.

The high court dismissed the appeal on the ground of limitation, particularly noting that the appellants had not filed an application seeking condonation of delay under Section 5 of the Limitation Act, 1963.

Tribunal not validly constituted

Before the Supreme Court, it was argued that the arbitral tribunal had been appointed with the consent of the parties.

The Bench, however, noted that there was nothing to show that the appellants had given such consent.

Court also took note of the fact that the appellants had clearly objected to the appointment and had raised allegations of bias against the 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," the Bench said.

The Supreme Court consequently set aside the high court's order and held that the very initiation of the arbitration was non est in law. It also set aside the three interim orders passed by the arbitral tribunal.

What happens to the money and properties affected by the orders?

The Supreme Court directed that if the interim orders had already been given effect to, any amount transferred from the appellants' accounts to the respondent's account must be remitted back within one week.

Court said that the issue of interest on such amounts would be considered by the arbitrator appointed by it.

If the amounts were not remitted back, they would carry compound interest at 18% from the date on which they were debited from the appellants' accounts, with monthly rests. The amount would be set off against any claim eventually found in favour of the respondent in arbitration.

Court also directed that any attachment or takeover of the appellants' movable or immovable properties would be set at naught and the properties restored to the appellants.

Supreme Court appoints fresh arbitrator

To facilitate resolution of the dispute, the Supreme Court appointed advocate Mayuri Raghuwanshi as the arbitrator.

Court directed her to issue notices to the parties in connection with the arbitral proceedings. She was also left free to determine her fee in consultation with the parties.

The Bench clarified that it had not expressed any opinion on the merits of the dispute, leaving all such issues open for the parties to raise before the newly appointed arbitrator.

"We make it clear that we have expressed no opinion on the merits of the case, which aspect is left open for the parties to urge before the arbitrator," Court said.

The appeal was accordingly disposed of.

Case Title: Arth Micro Finance Private Ltd And Ors Vs Shivalik Small Finance Bank Ltd

Bench: Justices J B Pardiwala and K Vinod Chandran 

Date of Judgment: September 18, 2026