The Supreme Court of India recently made a notable observation regarding the nature of arbitration proceedings, highlighting that while ‘arbitration’ may linguistically echo ‘arbitrary,’ the process itself must not be conducted in an arbitrary or biased manner. This was emphasized in the case of Arth Micro Finance Private Ltd & Ors. v. Shivalik Small Finance Bank Ltd.
On September 17, a bench consisting of Justices JB Pardiwala and K Vinod Chandran underscored that bias and absence of mutual consent invalidate the legal grounds for initiating arbitration. The court stated, “Arbitration, though rhymes with it, cannot result in an arbitrary measure, even in the appointment of an Arbitral Tribunal.” Based on this principle, the Supreme Court overturned a previous High Court decision that had dismissed an appeal concerning three interim directives issued by an arbitral tribunal under Section 17 of the Arbitration and Conciliation Act, 1996.
Background of the Case
The appeal before the Supreme Court was brought by Arth Micro Finance, contesting interim orders made by an arbitral tribunal appointed on behalf of Shivalik Small Finance Bank. The tribunal had taken measures to freeze various bank accounts of Arth, authorize Shivalik to seize movable and immovable properties, and demanded the transfer of funds deposited into Shivalik’s bank accounts. Dissatisfied with these actions, Arth sought recourse through the High Court under Section 37 of the Arbitration and Conciliation Act. However, the High Court dismissed the appeal, citing a lack of a Section 5 application under the Limitation Act.
Supreme Court’s Decision
In the Supreme Court, Arth argued that the tribunal had been unilaterally appointed despite explicit objections and claims of bias due to the arbitrator’s alleged close association with Shivalik. The Court found no evidence of Arth’s consent in appointing the tribunal and declared the entire arbitration process as non est in law.
Justice Pardiwala and Justice Chandran remarked, “We must remind ourselves that this was done amidst clear objections to the appointment of the Arbitral Tribunal and allegations of bias against it. The orders initially passed are arbitrary in nature.” Consequently, the Supreme Court annulled all three interim orders and mandated Shivalik to return any transferred funds within one week, cautioning that non-compliance would result in compound interest at a rate of 18% per annum.
Future Proceedings
To facilitate a fair resolution, the Court appointed Advocate Mayuri Raghuwanshi as the sole arbitrator to reassess the disputes. It clarified that it was not commenting on the substantive merits of the case. Representing the parties were Senior Advocate K Parameshwar for Arth and Senior Advocate Bishwajit Bhattacharyya for Shivalik.
[Read Order]
