Arbitration cannot result in arbitrary measures: SC

Arbitration may sound like “arbitrary,” but it cannot result in an arbitrary measure, the Supreme Court has said, scrapping an arbitral proceeding after the tribunal went ahead with sweeping interim orders despite a clear objection to its appointment and allegations of links with one of the parties.

A bench of justices JB Pardiwala and K Vinod Chandran held the very initiation of arbitration “non est in law” (was not) after finding that there was nothing to show that the appellants had consented to the appointment of the tribunal, as the respondent bank claimed.

The court also termed the interim orders passed by the tribunal—which included freezing multiple bank accounts, permitting the respondent bank to take possession of the appellants’ movable and immovable properties and directing the transfer of their bank deposits to the respondent— “arbitrary in nature”.

“Arbitration, though rhymes with it, cannot result in an arbitrary measure, even in the appointment of an Arbitral Tribunal,” said the bench in a September 17 judgment.

The ruling came on an appeal by Arth Micro Finance Pvt Ltd and others against Shivalik Small Finance Bank Ltd in a dispute arising from an agreement containing an arbitration clause.

The respondent claimed that the tribunal had been appointed with the consent of the parties. However, the Supreme Court noted that the record contained nothing to establish that the appellants had given such consent.

The petitioner had, in fact, objected to the tribunal’s appointment after receiving its communication, specifically alleging that the tribunal members had close links with the respondent. Despite the objection, the court noted, the tribunal proceeded to pass three interim orders under Section 17 of the Arbitration and Conciliation Act, 1996.

The orders froze bank accounts maintained with IDBI Bank, Bank of Baroda, HDFC Bank and ICICI Bank and linked to the appellants’ PAN. Another order permitted the respondent bank to take possession of their movable and immovable properties, while a third directed the transfer of money lying in the appellants’ various bank accounts to the respondent bank.

Arth’s challenge in the high court was dismissed on limitation, noting that no application had been filed seeking condonation of delay under Section 5 of the Limitation Act.

The Supreme Court, however, found that the problem went to the root of the arbitral proceedings. “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,” it noted.

The court consequently set aside the high court’s order and declared the initiation of the arbitration proceedings non est in law. It also quashed all three interim orders.

The bench directed that any money already transferred from the appellants’ accounts to the respondent’s account pursuant to the interim orders must be returned within one week. The question of interest on such amounts was left to be considered by the fresh arbitrator appointed by the Supreme Court.