Arbitration Clause Does Not Sanction Unilateral Appointment Or Arbitrary Interim Orders: Supreme Court

"Arbitration, though rhymes with it, cannot result in an arbitrary measure, even in the appointment of an Arbitral Tribunal." Supreme Court of India, in a ruling dated September 17, 2026, held that the initiation of arbitral proceedings and the subsequent appointment of an arbitrator must strictly adhere to legal requirements, explicitly rejecting any unilateral appointment lacking consent.

A bench of Justice J.B. Pardiwala and Justice K. Vinod Chandran observed that when the appointment of an Arbitral Tribunal is fundamentally flawed, any interim orders passed by such a body are non est in law.

The dispute arose between the appellants, Arth Micro Finance Private Ltd., and the respondent, Shivalik Small Finance Bank Ltd., concerning an agreement containing an arbitration clause. The respondent unilaterally proceeded to appoint an Arbitral Tribunal, to which the appellants raised strong objections, specifically alleging bias and a lack of consent. Despite these challenges, the tribunal issued interim orders under Section 17 of the Arbitration and Conciliation Act, 1996, which were subsequently upheld by the High Court primarily on the grounds of limitation.

The core legal issues before the Supreme Court were whether the unilateral appointment of an Arbitral Tribunal without the express consent of the appellants rendered the proceedings non est in law and whether interim orders passed by such an improperly constituted tribunal could be sustained. The court also examined the necessity of adhering to procedural fairness in the face of allegations regarding a tribunal's lack of independence.

Court Asserts Procedural Integrity

The bench emphasized that the appointment of an arbitrator must be transparent and consensual, especially when allegations of bias are formally raised. Observing that the respondent had failed to provide any evidence of the appellants' consent to the specific tribunal appointed, the court characterized the entire initiation of the arbitration as legally unsustainable.

Tribunal Appointment Lacks Valid Consent

The court noted that the tribunal proceeded in the face of clear objections regarding its impartiality and links to the respondent. By ignoring these procedural red flags, the tribunal compromised the sanctity of the arbitral process, rendering its subsequent interim orders arbitrary in nature and invalid from their inception.

"If the interim orders have been given effect to, then any amount deposited from the account of the appellants to the account of the respondent herein, shall be remitted back within a period of one week."

Restoration Of Status Quo Ante

Finding the very initiation of arbitration to be non est, the court set aside the interim orders issued under Section 17 of the Arbitration and Conciliation Act, 1996, which had permitted the freezing of bank accounts and the seizure of movable and immovable properties. The court directed that if any funds had been transferred to the respondent, they must be remitted back to the appellants within one week.

Stringent Financial Liability Imposed

To ensure compliance with its order, the Supreme Court mandated that failure to remit the funds within the stipulated period would attract compound interest at the rate of 18 percent per annum, calculated with monthly rests. This liability would be subject to set-off against any future claims found in favour of the respondent during the upcoming arbitration.

Appointment Of Independent Arbitrator

The court concluded by appointing Ms. Mayuri Raghuwanshi, Advocate, as the new arbitrator to resolve the underlying disputes between the parties. The learned arbitrator has been granted the freedom to determine her own fees in consultation with the parties, while the court clarified that it expressed no opinion on the merits of the underlying dispute, leaving all contentions open.

Date of Decision: 17 September 2026