NEW DELHI — India’s Supreme Court set aside an arbitral tribunal and three interim orders after finding that the tribunal had been appointed without the consent of one party and in the face of an express allegation of bias.
The dispute in Arth Micro Finance Private Ltd. v. Shivalik Small Finance Bank Ltd. concerned directions that froze bank accounts, permitted the takeover of property and transferred deposited funds.
No valid beginning
Arth Micro Finance challenged the interim measures, arguing that Shivalik had procured the tribunal’s appointment unilaterally despite its objections. A High Court dismissed Arth’s appeal on limitation grounds.
A Supreme Court bench of Justices J.B. Pardiwala and K. Vinod Chandran looked first at the tribunal’s authority. With no evidence that Arth had agreed to the appointment, the bench held that the arbitration had no valid legal foundation.
The court quashed the three interim orders and directed Shivalik to return transferred funds within one week. A failure to comply would attract compound interest at 18 percent a year. Advocate Mayuri Raghuwanshi was appointed as sole arbitrator to hear the dispute afresh.
Process before efficiency
Arbitration is designed to give parties a faster and more flexible alternative to litigation, but its legitimacy still rests on consent and impartial adjudication. Interim powers can be extensive, especially when they restrain accounts or transfer control of assets. A defective appointment therefore cannot be treated as a minor irregularity.
The Supreme Court emphasized that it was not deciding the merits of the underlying financial dispute.
Consent is the source of arbitral power
An arbitral tribunal does not possess the inherent authority of a constitutional court. Its jurisdiction comes from the parties’ agreement and from the statute that enforces that agreement. If the mechanism for appointment is ignored, the problem reaches the tribunal’s foundation rather than a minor step in procedure.
Indian arbitration law has moved steadily against clauses that allow one interested party to control the choice of adjudicator. Disclosure duties and the statutory standards of independence are meant to preserve both actual impartiality and public confidence in the process.
Why the interim orders could not survive
Section 17 permits a properly constituted tribunal to protect assets and preserve the effectiveness of a future award. Freezing accounts and transferring funds are powerful remedies. When the tribunal itself was not validly appointed, those powers could not be used to create facts on the ground before jurisdiction was resolved.
The direction to return money within a week and the threat of compound interest are restorative. They seek to place the parties as close as possible to the position before the defective orders, while deterring delay in compliance.
Limitation was not the whole case
The High Court had treated the appeal as out of time. The Supreme Court’s intervention shows that a procedural default cannot always be examined in isolation when the challenged orders were made by a body said to lack lawful authority from the outset.
That does not mean limitation periods are optional in arbitration. It means courts must identify the nature of the defect before deciding that delay ends the inquiry.
A fresh tribunal, not an end to the dispute
By appointing an independent sole arbitrator, the court preserved the parties’ choice to arbitrate while removing the tainted process. The financial institution may present its claims again, and Arth may raise every substantive defense. The new arbitrator is not bound by the merits of the quashed interim directions.
The decision sends a practical message to lenders and other repeat users of arbitration clauses — speed obtained through a one-sided appointment can cost more time than a neutral process established correctly at the beginning.
