In a significant judgment that reinforces the principle of minimal judicial interference in arbitration, the Supreme Court of India has ruled that High Courts do not have the authority to "nullify" or cancel ongoing arbitral proceedings while exercising their power to appoint a substitute arbitrator.
A Bench comprising Justice J.B. Pardiwala and Justice K.V. Viswanathan clarified that when a High Court acts under Section 15(2) of the Arbitration and Conciliation Act, 1996, its primary role is to ensure the continuity of the process, not to sit in judgment over the validity of past proceedings or interim orders.
The dispute traces back to a partnership agreement involving a Slum Rehabilitation Authority (SRA) project. When differences arose between the partners, arbitration was initiated in 2019. With the mutual consent of both parties, the Bombay High Court appointed a former Chief Justice as the sole arbitrator.
However, the legal journey became complicated due to the intervention of the Insolvency and Bankruptcy Code (IBC). Shortly after the arbitration began, the respondent company entered corporate insolvency resolution process (CIRP), triggering a moratorium under Section 14 of the IBC.
The arbitration saw various phases:
- Initial Stay: Proceedings were affected by the NCLT moratorium.
- Resumption: In 2022, after certain developments in the insolvency case, the High Court allowed the arbitration to resume, noting that the Interim Resolution Professional (IRP) was no longer in charge.
- Interim Orders: During this resumed period (March to August 2022), the arbitrator passed interim orders under Section 17, including permissions related to the sale of flats in the project.
- Liquidation: In August 2022, the respondent company was ordered into liquidation, leading to a fresh moratorium.
Eventually, the original arbitrator's mandate terminated in 2023. The appellants then moved the Bombay High Court under Section 15(2) of the Arbitration Act to appoint a "substitute arbitrator" to carry the case forward.
While the Bombay High Court agreed to appoint a new arbitrator, it went a step further. It declared that the proceedings conducted between March and August 2022 were a "nullity" (invalid) because they took place while a moratorium was technically in force. By doing this, the High Court effectively wiped out the interim orders and the progress made during those five months.
Aggrieved by this "overreach," the appellants approached the Supreme Court.
Supreme Court’s Observations: Respecting the Arbitral Process
The Supreme Court disagreed with the High Court’s approach, emphasizing that the Arbitration Act is designed to keep court interference to a bare minimum.
1. Limited Power under Section 15(2) The Bench noted that Section 15(2) is a procedural provision meant for the "substitution" of an arbitrator. The Court held that the High Court’s duty was simply to replace the arbitrator so that the case could continue "from the stage it was at." It was not the appropriate stage or forum to decide whether previous orders were legal or whether the moratorium had been breached.
2. Jurisdictional Error The Apex Court pointed out that if a party is unhappy with an arbitrator’s interim order, the law provides a specific remedy under Section 37 of the Act (Appeals). The High Court, while merely appointing a substitute, cannot "indirectly" set aside interim orders or declare proceedings void without a proper appeal being filed.
3. Minimal Judicial Intervention Citing the landmark "Interplay" judgment, the Court reiterated that courts must not adopt procedures that allow them to exercise jurisdiction specifically barred by the 1996 Act. By nullifying the proceedings, the High Court had frustrated the very objective of speedy and efficient dispute resolution.
The Supreme Court partly allowed the appeal. While it upheld the appointment of the new arbitrator, it set aside the portion of the High Court’s order that declared the 2022 proceedings a nullity.
The Court concluded:
"The proper and legal course for the High Court acting under Section 15(2) should have been to appoint a substitute arbitrator to continue from the existing stage of the proceedings, and not to assume and exercise power which has clearly not been conferred by the Act."
This judgment serves as a vital reminder to litigants and lower courts that the appointment of an arbitrator is a "facilitative" step, not an "adjudicatory" one. By preventing High Courts from self-authorizing the power to nullify proceedings mid-way, the Supreme Court has protected the sanctity of the arbitral process and ensured that technical objections regarding the IBC or moratoriums are dealt with by the appropriate forum at the right time.
For developers and legal practitioners, this provides much-needed clarity: the transition from one arbitrator to another should be a bridge, not a barrier that resets the clock on years of litigation.
Case Title: Ankhim Holdings Pvt. Ltd. & Anr. vs. Zaveri Construction Pvt. Ltd.