Bombay High Court flags NBFCs, banks unilaterally appointing arbitrators through manipulative algorithm

The Bombay High Court has sharply criticised IIFL Finance Limited for engaging a manipulative algorithm to circumvent Supreme Court rulings on arbitration and unilaterally appoint arbitrators through third-party institutions [DS Textiles v. IIFL Finance Ltd].

The Court noted an increasing trend of non-banking financial companies (NBFCs) and banks unilaterally appointing arbitrators through an institution or an algorithm, hoping this cleanses the inherent illegality.

“An increasing trend is being seen in a number of matters, in particular by non-banking financial companies and even scheduled commercial banks that are themselves listed companies …where a unilateral arbitrator is appointed but purporting to appoint the arbitrator through an ‘institution’ or an algorithm-based selection of arbitrator, it is hoped that the inherent illegality in unilateral-appointment is magically cleansed,” the Court said.

Justice Somasekhar Sundaresan made the observations on April 30 while disposing of three arbitration petitions filed by DS Textiles, Madhuram Fabrics Pvt Ltd. and PR Packing Service against IIFL.

IIFL informed the Court that it had instructions to withdraw the proceedings. The judge noted that while IIFL sought to withdraw proceedings, this practice reveals a concerning pattern. 

“The modus operandi is to conduct arbitration in this process and hope that in most cases the affected party may not challenge the arbitration and may instead come up with settlement terms, with the strategy resulting in recoveries,” the Court said.

However, whenever the opposite party challenges the unilateral appointment, the appointing party simply comes to Court and volunteers to have the arbitration proceedings withdrawn, the judge noted.

The judge stressed that there are only two methods in law to appoint an arbitrator: (1) the consent of the parties; and (2) an appointment by the court having jurisdiction in the matter under section 11 of the Arbitration Act. 

He relied on the Supreme Court's recent decision in Bhadra International v. Airports Authority of India to reiterate the principle of equal treatment of parties. 

Justice Sundaresan warned such conduct is directly contrary to the law declared by the Supreme Court and lends arbitration a bad name and inflicts long-term damage to alternate dispute resolution as a mechanism.

He ordered this judgment be placed before IIFL's Board of Directors and audit committee to ensure that those in the governance are aware that the practice adopted by them is contrary to law.

Advocates Pratik Barot, Angel Pandey and Kruti Bhavsar appeared for the petitioning companies.

Mitali More, officer of IIFL, was present in court.

[Read Judgment]