INTRODUCTION
In what was otherwise yet another dispute between a public sector undertaking (PSU) and a private entity, an important question emerged: Can a party be compelled to elect and constitute the arbitral tribunal exclusively from a panel of arbitrators maintained by the opposing party?
The issue fell in a grey area and could have been legally answered either way. Generally speaking, one-sided appointments are invalid in law. The reasoning is rooted in the principle that arbitration is fundamentally a party-centric process, requiring equal exercise of autonomy by both parties. However, what happens when a party seeks to circumvent the prohibition on unilateral appointments by limiting the counterparty's choice to a pre-determined panel of arbitrators?
The Supreme Court, in a landmark judgment delivered by a Five-Judge bench in Central Organisation for Railway Electrification v. ECI SPIC SMO MCML (JV)[1], has addressed these questions comprehensively, providing much-needed clarity on the matter.
BACKGROUND
The issue first came-up before a 3-Judge Bench of the Supreme Court in Central Organisation for Railway Electrification v. ECI-SPIC-SMO-MCML (JV)[2] ("CORE") where the Apex Court was tasked with addressing the following questions:
Whether the appointment of former employees of a party as arbitrator(s) is valid under law, particularly in light of Section 12 read with the Seventh Schedule of the Arbitration and Conciliation Act, 1996 ("Arbitration Act")?
Whether the general manager of an enterprise could constitute the arbitral tribunal exclusively from a list or panel of arbitrators, provided the opposing party retained the right to nominate arbitrators from such list or panel of which at least one would eventually be a part of the arbitral tribunal?
The Supreme Court held that the general legal principle[3] deeming unilateral appointments as inherently invalid did not apply to the present case. The Supreme Court reasoned that the general manager’s authority to form the arbitral tribunal was counterbalanced by the opposing party’s right to nominate arbitrators from the names provided, with the general manager being obligated to appoint at least one of them as the opposing party’s nominee arbitrator.
Subsequently, in Union of India v. Tantia Constructions Ltd.[4], another 3-Judge Bench of the Supreme Court questioned the correctness of the decision in CORE[5] and prima facie disagreed with the ruling. In view of the same, the matter was put up for the consideration of the 5-Judge Bench for an authoritative and binding ruling on the issue.
ISSUES
The followed issues were culled out for the consideration of the Supreme Court:
Whether an appointment process which allows a party who has an interest in the dispute to unilaterally appoint a sole arbitrator, or curate a panel of arbitrators and mandate that the other party select their arbitrator from the panel is valid in law?
Whether the principle of equal treatment of parties applies at the stage of the appointment of arbitrators?
Whether an appointment process in a public-private contract which allows a government entity to unilaterally appoint a sole arbitrator or majority of the arbitrators of the Arbitral Tribunal is violative of Article 14 of the Constitution?
ANALYSIS OF THE SUPREME COURT
The Supreme Court began by conducting a thorough analysis of the core principles governing arbitration, while also tracing the development of the legal framework concerning the standards of impartiality and independence expected of arbitrators.
Core Principles
Party Autonomy: The Supreme Court reiterated that party autonomy forms the cornerstone of arbitration, allowing parties to mutually decide how their disputes should be resolved. Arbitration thrives on the principle that parties are free to tailor the process to suit their specific needs, including selecting the governing laws, procedural rules, and the arbitrators themselves. The Supreme Court has emphasised that the Arbitration Act grants maximum scope for party autonomy while ensuring that fairness and equality are not compromised, thereby striking a balance between private agreements and public interest.
Appointment of Arbitrators: The Supreme Court held that the Arbitration Act provides parties with the flexibility to decide on the number of arbitrators and the procedure for their appointment. If parties fail to agree, the Arbitration Act prescribes default mechanisms under Section 11 to ensure the constitution of an impartial arbitral tribunal.
Independence and Impartiality of Arbitrators: The Supreme Court emphasised the importance of independence and impartiality in arbitration, describing them as the bedrock of the arbitral process. In terms of the provisions contained under Section 12 of the Arbitration Act, arbitrators must disclose any circumstances that might raise doubts about their neutrality. The Fifth and Seventh Schedules of the Arbitration Act further provide a detailed framework for assessing potential conflicts of interest, ensuring that arbitrators remain impartial throughout the proceedings.
"Equality" in Arbitration: The Supreme Court held that the principle of equality is a non-negotiable aspect of arbitration under Indian law. The Supreme Court reiterated that Section 18 of the Arbitration Act mandates equal treatment of parties and ensures they have a fair and reasonably unrestricted opportunity to present their case. Highlighting the importance of fairness, the Supreme Court opined that no party can exploit contractual provisions or procedural rules to gain an unfair advantage.
Natural Justice: The Supreme Court opined that principles of natural justice, including the rule against bias and the right to be heard, are fundamental to arbitration proceedings. The Supreme Court reiterated that Article 14 of the Indian Constitution, which guarantees equality before the law, extends to arbitration, requiring that all actions, judicial or otherwise, are fair and non-arbitrary. The Supreme Court has held that adherence to natural justice ensures not only the fairness of the arbitration process but also public confidence in its outcomes, preventing any miscarriage of justice.
Bias: The Supreme Court reiterated that the test of "real likelihood of bias" is crucial for maintaining the impartiality of arbitral tribunals. In its judgment, the Supreme Court opined that even the perception of bias can undermine the legitimacy of the arbitration process.
DEVELOPMENTS IN INDIAN LEGAL FRAMEWORK ON INDEPENDENCE AND IMPARTIALITY OF ARBITRATORS
The Recommendations of the Law Commission of India
The Law Commission of India, in its 246th Report, discussed about the urgent need to reform the Arbitration Act to bring it in line with global standards for arbitrator neutrality and impartiality. The Report highlighted that arbitration, like any quasi-judicial process, must adhere to fundamental principles of natural justice. At the time when the Law Commission was formulating its recommendations, judicial precedents often prioritised contractual commitments over procedural fairness, particularly in cases where arbitration clauses allowed government employees directly connected to the dispute to serve as arbitrators. The Law Commission critiqued this approach, stressing that it compromised the fairness and integrity of the arbitration process.
Recognising the importance of party autonomy, the Law Commission argued that it should not override the need for unbiased dispute resolution. It recommended structural changes to the Arbitration Act to prevent the appointment of arbitrators with direct ties to the dispute or to one of the parties. Among its key proposals was the incorporation of guidelines inspired by the "Red" and "Orange" lists from the IBA Guidelines on Conflicts of Interest in International Arbitration. These schedules aimed to list out the circumstances that could raise reasonable doubts about an arbitrator's independence and impartiality. The Law Commission also proposed that individuals falling under the categories listed in the "Red" list should be automatically disqualified from serving as arbitrators, ensuring that conflicts of interest were strictly avoided. However, to balance this strict standard with party autonomy, the Report suggested allowing parties to waive such disqualifications through mutual agreement in writing, but only after the dispute had arisen. These recommendations were later adopted through the Arbitration and Conciliation (Amendment) Act, 2015, significantly enhancing the safeguards for impartiality and fairness in arbitration proceedings in India.
Prior Judgments of the Supreme Court
In Voestalpine Schienen GmbH v. Delhi Metro Rail Corporation Ltd.[6], the Supreme Court examined whether a panel of arbitrators exclusively comprising current or retired government employees, as constituted by the Delhi Metro Rail Corporation (DMRC), conflicted with the impartiality requirements under Section 12(5) of the Arbitration Act. While emphasising on the importance of independence of arbitrators, the Supreme Court stopped short of outright prohibiting retired government employees from serving as arbitrators. It held that a fair balance must be maintained by ensuring that both parties have the opportunity to nominate arbitrators from a panel that is sufficiently diverse.
In TRF Ltd v. Energo Engineering Projects Ltd.[7], the Supreme Court addressed an arbitration clause that designated the managing director of the buyer or their nominee as the sole arbitrator for dispute resolution. The key question before the Supreme Court was whether the managing director, being ineligible to act as an arbitrator under Section 12(5) of the Arbitration Act, could validly nominate someone else to act as the arbitrator. The Supreme Court relied on the legal principle qui facit per alium facit per se (he who acts through another acts himself) to hold that an individual disqualified from serving as an arbitrator cannot delegate the power to nominate another person as an arbitrator.
In Perkins Eastman Architects DPC v. HSCC (India) Ltd.[8], the Supreme Court considered an arbitration clause that vested the chairman and managing director with the authority to appoint a sole arbitrator. The Court held that a person with an interest in the outcome of the dispute could not participate in the appointment of an arbitrator, such involvement would compromise the neutrality and fairness of the process.
Subsequent to the aforesaid decisions, a number of decisions have been rendered by the Supreme Court and the High Courts across India which reinforce the legal position that unilateral appointments are generally invalid in law.
DECISION OF THE SUPREME COURT
In its comprehensive judgment in Central Organisation for Railway Electrification v. ECI SPIC SMO MCML (JV)[9], the Supreme Court concluded by laying down the following principles:
Equal Treatment of Parties: The Supreme Court held that fairness must be maintained at every stage of arbitration, including the selection of arbitrators. Any procedure granting one party an undue advantage compromises the integrity of the arbitration process.
Empanelment by Public Sector Undertakings (PSUs): While PSUs may create panels of arbitrators, the Supreme Court ruled that requiring the opposing party to select arbitrators exclusively from such panels is inherently unfair and undermines the principle of equality in arbitration.
Unilateral Appointment of Sole Arbitrators: The Supreme Court determined that provisions allowing one party to unilaterally appoint a sole arbitrator are inherently biased and generally illegal. Such clauses cast doubt on the arbitrator's neutrality and tilt the process unfairly in favour of the appointing party.
Three-Member Tribunals and Restricted Panels: For three-member arbitral tribunals, requiring one party to choose an arbitrator from a list controlled by the other party has been deemed unacceptable. The Supreme Court found such practices prejudiced, particularly when employed by PSUs, as they undermine impartiality.
Constitutional Considerations (Article 14): The Supreme Court held that unilateral appointment clauses in agreements involving PSUs contravene Article 14 of the Indian Constitution, which enshrines the principle of equality. Excessive control by government bodies over the arbitration process was deemed to create an unfair imbalance.
Waiver under Section 12(5): The Supreme Court clarified that any waiver of disqualifications under Section 12(5) of the Arbitration Act must be made \oluntarily and only after the dispute has arisen.
Application of Section 18: The Supreme Court emphasised that Section 18, which mandates equal treatment of parties, applies to all phases of arbitration, including the appointment and constitution of the arbitral tribunal. No special privileges are afforded to government entities in this regard.
Party Autonomy in Arbitration: Party autonomy, the cornerstone of arbitration, encompasses the freedom to choose arbitrators, determine procedural rules, and decide on mechanisms for challenging awards. The Arbitration Act provides for significant autonomy while limiting judicial intervention to uphold the sanctity of this principle. The Supreme Court held that arbitration agreements failing to ensure the formation of an independent and impartial tribunal cannot be justified as an exercise of party autonomy. Such agreements violate public policy and are therefore unenforceable under the law.
OUR VIEWS ON THE IMPACT OF THE DECISION
On prospective application of the ruling
The Supreme Court’s decision reflects a thoughtful approach on balancing the principles of fairness and impartiality with the practical realities of arbitration. Arbitration, as a mechanism for dispute resolution, thrives on certainty and predictability, particularly in the commercial sector where long-term contracts and government-private partnerships often rely on well-established arbitration frameworks.
A retroactive application of the legal standards could have destabilised ongoing and concluded arbitrations, creating unwarranted ambiguity on the legitimacy of ongoing arbitrations and the enforceability of past awards.
On revisiting the existing arbitration agreements and dispute resolution clauses
For practitioners and stakeholders, the decision of the Supreme Court necessitates a careful reassessment of arbitration agreements, especially those containing unilateral or restrictive appointment clauses. One of the most immediate effects of the judgment is the likely revision of arbitration clauses in contracts involving government entities. Public sector undertakings (PSUs) and similar bodies may need to modify their standard terms to ensure that panels of arbitrators are more diverse and not confined to retired or serving government employees.
[1] 2024 SCC OnLine SC 3219
[2] (2020) 14 SCC 712
[3] TRF Ltd v. Energo Engineering Projects Ltd., (2017) 8 SCC 377 and Perkins Eastman Architects DPC v. HSCC (India) Ltd.
[4] (2023) 12 SCC 330
[5] (2020) 14 SCC 712
[6] (2017) 4 SCC 665
[7] (2017) 8 SCC 377
[8] (2020) 20 SCC 760
[9] 2024 SCC OnLine SC 3219
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