The Supreme Court recently quipped that though the word "arbitration" rhymes with "arbitrary", arbitral proceedings cannot be conducted in an arbitrary or biased manner [Arth Micro Finance Private Ltd & Ors. v. Shivalik Small Finance Bank Ltd.].

In an order passed on September 17, a Bench of Justices JB Pardiwala and K Vinod Chandran emphasised that bias and lack of consent render the initiation of arbitration invalid in law.

"Arbitration, though rhymes with it, cannot result in an arbitrary measure, even in the appointment of an Arbitral Tribunal," the Court said.

Hence, it set aside a High Court order that had dismissed an appeal against three interim directions passed by an arbitral tribunal under Section 17 of the Arbitration and Conciliation Act, 1996.

The Court was hearing an appeal filed by Arth Micro Finance challenging interim orders passed by an arbitral tribunal appointed at the instance of Shivalik Small Finance Bank.

The tribunal had issued directions freezing several bank accounts of Arth, permitting Shivalik to take over movable and immovable properties and ordering the transfer of deposited funds into Shivalik's bank accounts.

Aggrieved by these directions, Arth approached the High Court under Section 37 of the Act. However, the High Court dismissed the appeal on grounds of limitation as no application under Section 5 of the Limitation Act had been filed.

Before the top court, Arth contended that the tribunal was appointed unilaterally despite explicit objections raising allegations of bias and close links between the arbitrator and Shivalik.

Finding no evidence of consent from Arth for the appointment, the Supreme Court held the entire initiation of arbitration to be non est in law.

"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 Court said.

Consequently, the top court quashed all three interim orders and directed Shivalik to remit any transferred funds within one week, warning that failure to comply would attract compound interest at 18% per annum.

To ensure proper resolution, the court appointed advocate Mayuri Raghuwanshi as the sole arbitrator to adjudicate the disputes afresh.

The Court clarified that it was not expressing any opinion on the merits of the case.

Senior Advocate K Parameshwar appeared for Arth while Senior Advocate Bishwajit Bhattacharyya represented Shivalik.

[Read Order]