Termination for Non-Payment of Arbitral Fees Ultimately Flows from Section 32(2), but Court May Still Direct Appointment of a Substitute Arbitrator in Appropriate Cases

Case Background

The dispute arose between partners of a rice milling business operating under the name M/s Pannu Rice Mills. Differences emerged regarding management and financial affairs of the partnership, leading to invocation of the arbitration clause contained in the partnership deed. As the parties failed to mutually appoint an arbitrator, the High Court appointed a sole arbitrator under Section 11 of the Arbitration and Conciliation Act, 1996.

During the course of arbitral proceedings, the respondent filed a substantial counterclaim, increasing the total sum in dispute. In light of the enhanced valuation, the arbitrator revised the arbitral fees in accordance with the Fourth Schedule to the Act and directed both parties to deposit their respective shares of costs and expenses under Section 38.

The appellants expressed financial inability to deposit the revised fees, while the respondent declined to deposit the appellants’ share. Despite repeated opportunities granted by the arbitrator, the deposits were not made. Consequently, the arbitrator terminated the arbitral proceedings by invoking Section 38(2), on the ground that continuation of arbitration was not feasible without payment of costs.

This termination order effectively brought the arbitral proceedings to a close without adjudication of either the claims or counterclaims on merits, prompting the appellants to challenge the legality and consequences of such termination.

What The Lower Authorities Held

The appellants first approached the High Court under Article 227 of the Constitution challenging both the fixation of arbitral fees and the termination of proceedings. The High Court declined to interfere, noting that the Fourth Schedule governing arbitral fees had already been upheld and that the arbitrator had acted within the framework of Section 38.

Subsequently, the appellants filed a fresh petition under Section 11 seeking appointment of a substitute arbitrator on the ground that the mandate of the original arbitrator had come to an end. The High Court dismissed this petition, holding that termination of proceedings for non-payment of fees did not justify substitution under Section 15, and that the proper course was either to seek recall of the termination order or to challenge it under the statutory scheme.

The Court’s Reasoning

Centrality of Section 32 in the Statutory Scheme

The Supreme Court undertook an extensive analysis of the Arbitration and Conciliation Act, 1996, particularly the interplay between Sections 25, 30, 32 and 38. The Court emphasised that Section 32 is the principal provision governing termination of arbitral proceedings, providing that proceedings may be terminated when continuation has become unnecessary or impossible.

Termination of proceedings for non-payment of arbitral fees, though triggered by Section 38(2), was held to ultimately fall within the scope of Section 32(2)(c), as the tribunal cannot meaningfully proceed without deposits towards costs. Thus, Section 38 identifies the factual contingency, whereas Section 32 provides the substantive legal authority for termination.

Sections 25, 30 and 38 as Triggering Provisions

The Court clarified that provisions such as Sections 25 (default of a party), 30 (settlement), and 38 (deposit of costs) do not operate as independent sources of termination power. Rather, they denote specific circumstances that may lead the tribunal to conclude that continuation of proceedings is either unnecessary or impossible, thereby attracting termination under Section 32.

This interpretation harmonises the statutory framework and avoids fragmentation of termination powers across different provisions. It reinforces the idea that termination of arbitral proceedings is a substantive legal event governed by a unified statutory mechanism.

Effect on the Mandate of the Tribunal

The Court held that once arbitral proceedings are terminated within the meaning of Section 32, the arbitral tribunal’s mandate automatically terminates under Section 32(3). The tribunal becomes functus officio, and it cannot continue to adjudicate the dispute unless the termination order is set aside in accordance with law.

This conclusion rejected the argument that termination under Section 38 merely suspends proceedings or leaves scope for continuation before the same tribunal without addressing the termination order.

Distinction Between Termination of Proceedings and Survival of Dispute

A crucial clarification made by the Court was that termination of arbitral proceedings does not necessarily extinguish the substantive dispute between the parties. While the arbitral process before a particular tribunal may come to an end, the underlying claims and counterclaims continue to exist unless adjudicated on merits or otherwise extinguished in law.

This distinction allowed the Court to reconcile the statutory consequences of termination with the broader objective of ensuring resolution of disputes through arbitration.

Remedy and Power to Appoint a Substitute Arbitrator

The Court rejected the broad proposition that a party can automatically seek appointment of a substitute arbitrator under Sections 11 or 15 whenever proceedings are terminated for non-payment of fees. Ordinarily, such termination would require the aggrieved party to challenge the termination order itself under the appropriate statutory provisions.

However, considering the specific facts of the case — including prolonged pendency of arbitration, existence of substantial claims and counterclaims, and the need to avoid denial of adjudication on merits — the Court exercised its jurisdiction to mould relief. It held that, despite termination of proceedings, the ends of justice required that the dispute be decided through arbitration by a substitute arbitrator.

The Court therefore set aside the High Court’s refusal to appoint a substitute arbitrator and directed that a fresh arbitrator be appointed to adjudicate the disputes de novo, ensuring that neither party suffers irreparable prejudice due to procedural termination of earlier proceedings.

Statutory Interpretation

The judgment provides a structural interpretation of the Arbitration and Conciliation Act, 1996. Section 32 is recognised as the central provision governing termination of arbitral proceedings, while Sections 25, 30 and 38 address distinct procedural contingencies that may lead to such termination. By holding that termination ultimately flows from Section 32(2), the Court preserved doctrinal coherence and ensured uniform legal consequences for all forms of termination.

At the same time, the Court acknowledged that rigid application of termination consequences should not defeat substantive justice. Accordingly, while termination ends the mandate of the tribunal, the dispute itself may still be resolved through appointment of a substitute arbitrator in appropriate circumstances, particularly where proceedings had progressed substantially and dismissal would result in denial of adjudication.

Why This Judgment Matters

This decision settles an important doctrinal controversy in arbitration law concerning the source and effect of termination of arbitral proceedings. By clarifying that Section 32 is the ultimate source of termination power, the Court has removed uncertainty surrounding orders passed under Sections 25 and 38.

Equally significant is the Court’s nuanced approach to remedies. The ruling demonstrates that termination of proceedings does not necessarily bar adjudication of disputes and that courts may intervene to ensure that long-pending claims and counterclaims are decided on merits where justice so demands. This balances statutory discipline with equitable considerations and reinforces the pro-arbitration objective of ensuring effective resolution of disputes.

Final Outcome

The Supreme Court partly allowed the appeal, set aside the order of the High Court refusing appointment of a substitute arbitrator, and held that termination of arbitral proceedings for non-payment of fees is legally referable to Section 32(2) of the Arbitration and Conciliation Act, 1996. While affirming that such termination ordinarily results in cessation of the tribunal’s mandate, the Court directed that a substitute arbitrator be appointed to adjudicate the disputes between the parties de novo, so that the claims and counterclaims are decided on merits and no party is denied substantive justice.

Case Details

• Case Title: Harshbir Singh Pannu and Anr. v. Jaswinder Singh
• Citation: 2025 INSC 1400
• Court: Supreme Court of India
• Bench: J.B. Pardiwala, J.; R. Mahadevan, J.
• Date of Judgment: December 8, 2025