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Informist, Wednesday, May 6, 2026

 

MUMBAI – The High Court of Bombay has criticised what it called a growing practice among non-banking financial companies and banks of appointing arbitrators unilaterally to secure recovery orders, and warned that such conduct risked undermining the credibility of arbitration as a dispute-resolution mechanism. The court directed the chief compliance officer of IIFL Finance Ltd. to place the court's judgment before its board to make it aware that the practice adopted by them was contrary to law and to ensure that they frame appropriate policies.

 

The arbitration petitions by three separate entities – M/s D S Textiles, Madhuram Fabrics Pvt. Ltd., and P R Packing Services – against IIFL pertained to the unilateral appointment of arbitrators. After the unilateral appointment, the arbitrator would proceed to pass urgent interim orders without any description as to how the arbitral tribunal came to be constituted.

 

"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," Justice Somasekhar Sundaresan said, adding that, "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 high court observed that such a practice was an attempt to circumvent law laid down by the Supreme Court in a recent case, wherein it was held that the facet of unilateral appointment, even if contained in the agreement, was foundationally in conflict with the core requirements of the Arbitration and Conciliation Act, 1996. The apex court had upheld the equal treatment of parties in their right to appoint an arbitrator.

 

The Supreme Court had held that equal participation in the constitution of the arbitral tribunal was integral in ensuring impartiality and preserving the fairness of the arbitration process. It had held the unilateral appointment and unilateral reference – both to be illegal – except where the other party submitted to the jurisdiction of the arbitrator and waived the rights it had under the agreement.  

 

The high court took judicial notice of cases in which arbitration was carried out after the unilateral appointment of an arbitrator with the hope that the affected party might not challenge the arbitration and might instead come up with settlement terms, with the strategy resulting in recovery of amounts due.

 

Typically, arbitrators appointed unilaterally pass interim orders attaching bank accounts quickly. Such orders are devoid of any mention of the process of appointment of the arbitrators and material particulars about whether the arbitration was used appropriately, the high court said.

 

"While this itself would be a giveaway about the quality of the independence and impartiality brought to bear, even the citation of particulars of invocation can never cure what is fundamentally and substantially a unilateral appointment," the high court observed.

 

It also noted that the facet could be misused by miscreant parties that participated in the arbitration proceedings up to passing of the award, despite having full knowledge of the arbitrator's illegal appointment. The high court noted the Supreme Court's observation that in such cases, the financial institution's interest could be safeguarded by entering into express written agreements waiving the parties' right to challenge the appointment of the arbitrator.

 

Under Section 12 of the Arbitration and Conciliation Act, 1996, parties to an arbitration may challenge the appointment of an arbitrator where circumstances exist that give rise to justifiable doubts as to his independence or impartiality. However, such a right can be waived by parties under an express written agreement.

 

"...The manipulative device being resorted to is to simply surrender to the Court in those cases where the counterparty has the strength to approach the Court. By having the arbitration withdrawn, there would be no need to have a ruling on the resort to illegality. In all other cases where the parties do not have the wherewithal to come to Court, resort to such illegal means could still lead to recoveries of funds," the court said in parting and noted that IIFL should drop proceedings against the entities before the court in the matter.  End

 

Reported by Prateem Rohanekar

Edited by Avishek Dutta

 

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