When Arbitration Sounds Like ‘Arbitrary’ But Isn’t
The Supreme Court recently made a sharp observation about commercial dispute resolution. The Bench remarked that even though the word "arbitration" rhymes with "arbitrary", the actual proceedings can never be conducted in an arbitrary or biased manner.
This oral observation came in the case of Arth Micro Finance Private Ltd & Ors. v. Shivalik Small Finance Bank Ltd. Justices JB Pardiwala and K Vinod Chandran heard the matter involving a financial dispute.
The top court made it clear that bias and a complete lack of consent will make the initiation of any arbitration invalid in the eyes of the law.
What Sparked the Legal Battle?
The dispute arose between Arth Micro Finance and Shivalik Small Finance Bank. Shivalik had initiated arbitration and the tribunal passed harsh interim directions against Arth.
These directions included freezing multiple bank accounts belonging to Arth Micro Finance. The tribunal also permitted Shivalik to take over movable and immovable properties, and ordered the transfer of deposited funds directly into the bank’s accounts.
Aggrieved by these aggressive steps, Arth approached the High Court. However, the High Court dismissed their appeal on technical grounds related to limitation delays, forcing Arth to knock on the doors of the Supreme Court.
What The Law Says
The case heavily revolves around the Arbitration and Conciliation Act, 1996, which governs how private disputes are resolved outside traditional courts in India.
Under the Act, both parties must mutually agree on how an arbitral tribunal is formed. Unilateral appointments—where one party forces an arbitrator of their choice without the other’s consent—frequently run foul of legal fairness and neutrality norms.
Furthermore, Section 17 of the Act grants arbitral tribunals the power to issue interim measures of protection, while Section 37 allows parties to appeal certain orders passed by these tribunals.
The Supreme Court found that Arth had raised explicit objections and pointed out clear links of bias regarding the unilaterally appointed arbitrator. Because Arth never consented to this tribunal, the top court ruled that the entire initiation of the arbitration was non est (meaning legally invalid from the very beginning).
What Happens Next?
Finding the initial proceedings deeply flawed, the Supreme Court took strict corrective actions. The Bench quashed all three interim orders passed against Arth Micro Finance.
The Court ordered Shivalik Small Finance Bank to remit any funds that had been transferred out within one week. It warned that a failure to comply would invite a heavy compound interest of 18 percent per annum.
To ensure a fair and clean dispute resolution process moving forward, the apex court appointed Advocate Mayuri Raghuwanshi as the sole independent arbitrator to adjudicate the underlying disputes afresh.
Why This Matters For You
For law students, young advocates, and business owners, this ruling acts as a strong reminder of procedural fairness. Private arbitration is meant to be a faster alternative to regular courts, but it cannot trample upon basic principles of natural justice, neutrality, and consent.
Unilateral appointment tactics and biased tribunals will face strict judicial scrutiny and immediate cancellation by India’s top court.
Story reported by Barandbench. This article is BareLaw’s independent explanation and analysis.
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