The Court underscores the illegality of arbitrator appointments made through institutions or algorithms without mutual consent.
In a significant judgment delivered on April 30, 2026, the Bombay High Court, presided over by Justice Somasekhar Sundaresan, firmly addressed the pervasive issue of unilateral arbitrator appointments by non-banking financial companies and banks. In the case of D S Textiles v. IIFL Finance Limited, the Court invalidated the practice of appointing arbitrators through institutions or algorithm-based selections when done unilaterally, declaring it illegal and contrary to the principles of independence and impartiality as mandated by law.
The judgment arose from a series of petitions challenging the actions of financial institutions that unilaterally appointed arbitrators, often leading to interlocutory orders without due consideration of how the arbitral tribunal was constituted. Justice Sundaresan emphasized the principle of equal treatment in arbitration, which requires mutual consent or appointment through judicial intervention under Section 11 of the Arbitration and Conciliation Act, 1996.
The Court reiterated established legal principles, citing Supreme Court judgments such as Perkins Eastman Architects DPC v. HSCC (India) Ltd., which underscore that unilateral appointments violate statutory requirements and compromise the neutrality of arbitral proceedings. The judgment noted that mere participation in arbitration does not imply consent to an arbitrator's appointment unless there is an express written agreement.
Justice Sundaresan criticized the manipulative practices of financial institutions, where arbitration proceedings are withdrawn when challenged, thereby circumventing the law declared by the Supreme Court. The Court directed that the judgment be presented to the Board of Directors and Audit Committees of such institutions to ensure compliance with legal standards, preserving the integrity of arbitration as a dispute resolution mechanism.
This ruling serves as a stern reminder to financial institutions about adherence to legal principles in arbitral appointments and underscores the judicial commitment to uphold fairness and impartiality in arbitration processes.
Bottom line:-
Arbitration - Unilateral appointment of arbitrator by one party, even if routed through an institution or algorithm-based selection, is fundamentally flawed and illegal. The principle of equal treatment of parties is integral to ensuring impartiality and fairness in arbitration proceedings.
Statutory provision(s): Arbitration and Conciliation Act, 1996 Sections 11, 12(5), 21, 29A, 34
D S Textiles v. IIFL Finance Limited, (Bombay) : Law Finder Doc id # 2893891
