Introduction:
The Bombay High Court, in D S Textiles v. IIFL Finance Limited [Arbitration Petition (Lodging) 12097 of 2026], delivered a sharp and timely critique of an emerging trend in arbitration practice, particularly among non-banking financial companies (NBFCs). The judgment, authored by Justice Somasekhar Sundaresan, addresses the growing misuse of institutional and algorithm-based mechanisms to mask what are fundamentally unilateral appointments of arbitrators.
The dispute arose when the petitioner, D S Textiles, challenged the appointment of an arbitrator by IIFL Finance Limited. The respondent had purportedly appointed the arbitrator through an institutional or algorithm-driven process, seeking to project neutrality and independence. However, the petitioner contended that such an appointment was, in substance, unilateral and therefore contrary to settled legal principles governing arbitration.
The controversy must be understood against the backdrop of the Arbitration and Conciliation Act, 1996, which emphasizes party autonomy, fairness, and impartiality in the constitution of arbitral tribunals. Over the years, the Supreme Court of India has repeatedly held that unilateral appointment of arbitrators by one party, especially in cases involving unequal bargaining power, is impermissible and strikes at the root of arbitral independence.
Despite this clear jurisprudence, the High Court observed that financial institutions have increasingly resorted to creative mechanisms to circumvent the law. By routing the appointment through institutions or algorithm-based systems, such entities attempt to create a façade of neutrality while retaining effective control over the selection process. The present case thus provided an opportunity for the Court to address this troubling trend and reaffirm the foundational principles of arbitration law.
Arguments of the Parties:
On behalf of the petitioner, it was argued that the appointment of the arbitrator by the respondent was fundamentally flawed, as it amounted to a unilateral appointment disguised as an institutional process. The petitioner contended that merely involving an institution or using an algorithm to select an arbitrator does not alter the underlying reality that the appointment was initiated and controlled by one party.
The petitioner further submitted that such practices are directly contrary to the law laid down by the Supreme Court, which has consistently invalidated unilateral appointments on the ground that they compromise the independence and impartiality of the arbitral tribunal. It was argued that the respondent’s attempt to “cleanse” the appointment by invoking institutional involvement was a colourable exercise designed to evade judicial scrutiny.
Additionally, the petitioner highlighted the practical consequences of such appointments. It was submitted that arbitrators appointed through these mechanisms often pass interim orders, including those under Section 17 of the Arbitration and Conciliation Act, with undue haste and without adequate scrutiny. These orders frequently involve the attachment of bank accounts and other coercive measures, placing the affected party under significant pressure to settle.
On the other hand, the respondent sought to defend the appointment by emphasizing that the arbitrator had been selected through an institutional or algorithm-based process, which ensured objectivity and independence. It was argued that such mechanisms are designed to eliminate human bias and promote fairness in the selection of arbitrators.
The respondent further contended that the involvement of an institution distinguishes the present case from instances of direct unilateral appointment, and therefore the appointment should be considered valid. It was suggested that modern arbitration practices increasingly rely on institutional frameworks, and the Court should adopt a progressive approach in recognizing such developments.
However, the respondent’s position faced significant challenges in light of established legal principles. The petitioner countered that the crucial question is not the method of selection but the source of authority for the appointment. If the institution itself is chosen unilaterally by one party without the consent of the other, the process remains tainted by the same defect as a direct unilateral appointment.
Court’s Judgment:
The Bombay High Court unequivocally rejected the respondent’s arguments and held that the appointment of the arbitrator was illegal. Justice Somasekhar Sundaresan delivered a strongly worded judgment, condemning the practice of using institutional or algorithm-based mechanisms as a façade to legitimize unilateral appointments.
The Court observed that the law recognizes only two valid methods for the appointment of arbitrators: appointment by mutual consent of the parties, and appointment by a court under Section 11 of the Arbitration and Conciliation Act. Any attempt to introduce a third method, particularly one controlled by a single party, is fundamentally inconsistent with the statutory framework and judicial precedent.
In a critical observation, the Court noted that the increasing reliance on institutions or algorithms does not alter the essential nature of the appointment. If one party unilaterally selects the institution or dictates the process, the resulting appointment remains unilateral and therefore invalid. The Court described such attempts as a “colourable and manipulative device” aimed at circumventing the law declared by the Supreme Court.
Justice Sundaresan also took judicial notice of a broader pattern in arbitration practice, particularly among NBFCs and banks. The Court described a “modus operandi” whereby such entities initiate arbitration through questionable appointments, secure interim orders, and rely on the likelihood that many affected parties will not challenge the proceedings due to lack of resources or awareness. In cases where the appointment is challenged, the initiating party often withdraws the arbitration to avoid an adverse judicial ruling, thereby perpetuating the cycle.
The Court expressed serious concern that such practices undermine the credibility of arbitration as an alternative dispute resolution mechanism. It observed that the misuse of arbitration for coercive recovery not only harms individual parties but also damages the integrity of the system as a whole.
A particularly noteworthy aspect of the judgment is the Court’s emphasis on the importance of genuine consent in institutional arbitration. The Court clarified that there is nothing inherently objectionable about institutional appointments, provided that both parties have agreed in advance to the involvement of a specific institution. However, in the absence of such agreement, one party cannot unilaterally impose an institution of its choice and claim that the resulting appointment is valid.
The Court also criticized the quality of interim orders passed by such arbitrators, noting that they often lack basic details regarding the process of appointment and invocation of arbitration. This, the Court observed, raises serious doubts about the independence and impartiality of the arbitrators in question.
In its final order, the Court quashed the appointment of the arbitrator and disposed of the petition. Importantly, the Court directed that a copy of the judgment be placed before the Board of Directors of the respondent company at its next meeting. This direction underscores the Court’s intention to hold corporate leadership accountable for practices that violate established legal norms.
The judgment sends a clear and unequivocal message to financial institutions and other entities engaging in arbitration: compliance with the law cannot be achieved through superficial or cosmetic measures. The principles of independence and impartiality are foundational to arbitration and must be upheld in both form and substance.
In reaffirming these principles, the Bombay High Court has not only addressed the specific dispute before it but also contributed to the broader development of arbitration jurisprudence in India. The decision serves as a reminder that while arbitration is intended to provide a flexible and efficient alternative to litigation, it must operate within the bounds of fairness and legality.