Can One Party Choose the Arbitrator?

The Supreme Court recently considered an important question under the Arbitration and Conciliation Act, 1996: Can an Arbitral Tribunal be appointed without the other party’s consent?

In Arth Micro Finance Private Ltd. & Ors. v. Shivalik Small Finance Bank Ltd., the Court held that arbitration cannot become arbitrary, particularly when it comes to the appointment of an Arbitral Tribunal.

The Facts

The parties had an agreement containing an arbitration clause. The respondent claimed that the Arbitral Tribunal had been appointed with the consent of the appellants.

The appellants, however, objected to the appointment after receiving communication from the Tribunal. They specifically pointed out that the appointed Tribunal had close links with the respondent.

Despite the objection, the Tribunal proceeded to pass 3 interim orders under Section 17 of the Arbitration and Conciliation Act, 1996. These included orders freezing the appellants’ bank accounts, taking possession of their movable and immovable properties and transferring certain amounts to the respondent.

The Issue

The question before the Supreme Court was whether the arbitration proceedings and the interim orders could stand when there was nothing on record to show that the appellants had actually consented to the appointment of the Tribunal, particularly when they had also raised an objection regarding the Tribunal’s links with the respondent.

What Did the Court Hold?

The Supreme Court found that there was nothing to establish that the appellants had consented to the appointment. The Court also noted that the Tribunal proceeded despite the objection to its appointment and the allegation of bias.

The Court therefore held that the initiation of the arbitration itself was “non est in law” and set aside the interim orders passed by the Tribunal. The Court also directed that any amounts transferred pursuant to those orders be returned.

To facilitate the resolution of the dispute, the Supreme Court appointed an independent arbitrator.

Why Does This Matter?

The decision highlights that an arbitration clause does not, by itself, give one party an unrestricted right to constitute the Arbitral Tribunal.

Where consent to the appointment is disputed and there are specific concerns regarding the Tribunal’s independence, the constitution of the Tribunal itself can come under challenge.

For businesses, this is particularly relevant when drafting arbitration clauses. The appointment mechanism should be clear, balanced and capable of ensuring an independent and impartial Tribunal.

Key Takeaway

The Supreme Court’s decision is a reminder that arbitration is based on consent and fairness. The process of appointing an arbitrator must be as carefully structured as the arbitration clause itself. Where an appointment is made without established consent and a serious objection to the Tribunal’s independence is raised, the resulting proceedings may not be legally sustainable.