Kiran Raj

The Supreme Court of India Division Bench of Justice J.B. Pardiwala and Justice R. Mahadevan has partly allowed an appeal arising from a partnership dispute, directing the High Court to appoint a substitute arbitrator for a fresh round of arbitration while clarifying the consequences of non-payment of arbitral fees. In a situation where one party did not pay its share of the arbitrator’s fee and the other declined to advance that amount, the Court held that an arbitral tribunal is competent to discontinue proceedings under the second proviso to Section 38(2) of the Arbitration and Conciliation Act, 1996. It further stated that the aggrieved party must first seek recall of the termination order before the tribunal and, if that request is rejected, approach the court under Section 14(2).

The dispute arises from a partnership firm constituted in 2013 to operate hospital and related services in Amritsar, with a third partner inducted in 2014 and an arbitration clause in the partnership deed. In 2017, disputes arose regarding capital contributions and day-to-day management. In 2018, the partners seeking dissolution issued a legal notice invoking arbitration and, receiving no reply, approached the High Court under Section 11 of the Arbitration and Conciliation Act, 1996, which appointed a sole arbitrator.

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Before the arbitral tribunal, the claimants filed a monetary claim and the respondent filed a counter-claim. The arbitrator determined a consolidated fee under the Fourth Schedule and directed both parties to pay equal shares under Section 38. The respondent contended he should pay only a reduced share proportionate to his partnership interest, and the claimants later filed an affidavit stating inability to pay their full share and declined to have the respondent advance it. On continued non-payment, the arbitrator terminated the proceedings under Section 38. The record included the partnership deeds, the notice invoking arbitration, the fee orders and affidavits on fee liability. The claimants then moved the High Court under Article 227 challenging the fee determination, the Fourth Schedule and the termination, followed by a fresh Section 11 petition seeking appointment of a new arbitrator.

The Court framed three questions of law: “First, what meaning should be ascribed to the words, termination of the arbitral proceedings, figuring in the different provisions of the 1996 Act? Is the phrase susceptible to only one meaning?” It further asked: “Two, what is the meaning and effect of the termination of arbitral proceedings contemplated under Section 38 of the Act 1996? Is it the same as the termination of arbitral proceedings contemplated under Section 32?” and “Three, what is the remedy available to a party aggrieved by an order passed by an arbitral tribunal terminating the proceedings?”

Answering the first and second issues, the Court held that “the termination of proceedings under Section 38 (due to non-payment of an arbitrator’s fees) would have the same effect of termination as the termination of arbitral proceedings contemplated under Section 32.” It observed that “The common thread that runs across Sections 25, 30, 32, and 38 of the Act, 1996 respectively is that although the arbitral proceedings may get terminated for varied reasons, yet the consequence of such termination remains the same i.e., the arbitral reference stands concluded and the authority of the tribunal stands extinguished.”

The Court then recorded the following conclusions:-

"(I) Section 32 of the Act, 1996 is exhaustive and covers all cases of termination of arbitral proceedings under the Act, 1996. The power of the arbitral tribunal to pass an order to terminate the proceedings under the scheme of the Act, 1996 lies only in Section 32(2).

(II) Sections 25, 30 and 38 of the Act, 1996 respectively, only denote the circumstances in which the tribunal would be empowered to take recourse to Section 32(2) and thereby, terminate the proceedings.

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(III) The use of the expression “the mandate of the Arbitral Tribunal shall terminate” in Section 32 of the Act, 1996 and its omission in Section(s) 25, 30 and 38 of the said Act, cannot be construed to mean that the nature of termination under Section 32(2) is distinct from a termination under the other aforesaid provisions of the Act, 1996.

(IV) The expression “mandate of the Arbitral Tribunal” is merely descriptive of the function entrusted to the tribunal, namely, the authority and duty to adjudicate the disputes before it. It refers to the obligation of the arbitral tribunal to administer the arbitration by conducting the proceedings in order to adjudicate upon the disputes referred to it.

(V) Irrespective of whether the proceedings are terminated on account of the passing of a final award, or by the withdrawal of claims, or on account of default by the claimant, or the intervention of any impossibility in the continuation of the proceedings, the legal effect remains the same, inasmuch as the arbitral tribunal thereafter stands divested of its authority to act in the reference.

(VI) The common thread that runs across Sections 25, 30 32 and 38 of the Act, 1996 respectively is that although the arbitral proceedings may get terminated for varied reasons, yet the consequence of such termination remains the same i.e., the arbitral reference stands concluded and the authority of the tribunal stands extinguished.

(VII) There is a clear distinction between a procedural review and a review on merits. The arbitral tribunal possesses the inherent procedural power to recall an order terminating the proceedings as such power is merely to correct an error apparent on the face of the record or to address a material fact that was overlooked. It does not tantamount to revisiting the findings of law or reappreciating the substantive issues already decided.

(VIII) Where an arbitral tribunal passes an order for terminating the proceedings under the Act, 1996, the appropriate remedy available to the parties would be to first file an application for recall of such order before the arbitral tribunal itself. The arbitral tribunal would then in turn be required to examine whether the order does or does not deserve to be recalled.

(IX) If a favourable order is passed for recommencing arbitration proceedings, the only option available to a party aggrieved therefrom, would be to participate in the proceedings and thereafter, challenge the final award under Section 34 of the Act, 1996.

(X) If, however, the recall application is dismissed, the party aggrieved therefrom, would be empowered to approach the court under Section 14(2) of the Act, 1996. The court would then in turn examine whether the mandate of the arbitrator stood legally terminated or not. If it finds that the proceedings were not terminated in accordance with the law, it would be empowered to either set-aside the order of termination of proceedings and remand the matter to the arbitral tribunal, or, if the circumstances so require, proceed to appoint a substitute arbitrator in terms of Section 15 of the Act, 1996.

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The Court criticised the absence of legislative clarification, noting that “It is indeed very sad to note that even after these many years, procedural issues such as the one involved in the case at hand, have continued to plague the arbitration regime of India. The Department of Legal Affairs has now, once again proposed to replace the existing legislation on arbitration with the Arbitration and Conciliation Bill, 2024” and recommending that “the Arbitration and Conciliation Bill, 2024 should explicitly provide the nature and effect of the termination of proceedings insofar as the authority of the arbitral tribunal is concerned to entertain a recall application. A proper remedy against an order terminating the proceedings is the need of the hour.”

The Court held: “It has been more than three -years, that the order for termination of the proceedings came to be passed by the Sole Arbitrator. In such circumstances, we are of the view, that this is a fit case for the appointment of a substitute arbitrator to look into both the claims and the counter -claims filed by the appellants and the respondent, respectively.”

The Court directed: “In the result, this appeal is partly allowed. The matter is remanded to the High Court for the appointment of a substitute arbitrator. The High Court shall undertake the exercise for appointing an arbitrator within a period of two weeks from the date of receipt of this order. Pending application(s), if any, shall stand disposed of. The Registry shall forward one copy each of this judgment to all the High Courts and one copy shall also be forwarded to the Department of Legal Affairs, Ministry of Law & Justice, Government of India.”

Case Title: Harshbir Singh Pannu and Anr. v. Jaswinder Singh
Neutral Citation: 2025 INSC 1400
Case Number: Civil Appeal No. 14630 of 2025 [Arising out of Special Leave Petition (Civil) No. 10389 of 2025]
Bench: Justice J.B. Pardiwala, Justice R. Mahadevan