Supreme Court CB Starts Hearing On Validity Of PSUs Appointing Arbitrators From Their Own Panels

A Constitution Bench of the Supreme Court today (August 28) commenced the hearing on the issue whether a person, who is ineligible to be appointed as an arbitrator, can appoint an arbitrator. 

The Constitution Bench comprising Chief Justice of India DY Chandrachud, Justice Hrishikesh Roy, Justice PS Narasimha, Justice Pankaj Mithal, and Justice Manoj Misra was considering the issue.

The discussion pertained to the key issue of reference, that is the validity of an arbitration clause which prescribes that the appointment of the arbitrator will happen from a panel of arbitrators curated by one of the parties, which is mostly a public sector undertaking(PSU) in majority of the cases. The CJI verbally opined that in order to ensure that both the parties are satisfied with the independence and impartiality of the arbitrators, there needs to be a perception by the parties that the appointment process of such arbitrators is fair and independent.

“Independence at the stage of composition is a matter of perception. Because when you are entering into a judicial proceeding, the arbitration is a substitute to a judicial proceeding, so when parties are entering upon arbitration, it is their perception of an independent adjudicator or lack of independence which is crucial. Because there must be a condition which fosters a sense of confidence in the process.”

The CJI then added that such a perception is different from any test of determining whether an arbitrator is biased or not, as the perception stems from the confidence of the parties involved.

“ The independence at the stage of composition is not a subjective test that someone would or would not be biased, but the perception of the party must be of (having) an independent arbitrator.”

Senior Advocate Gaurab Banerji appearing for the respondents, a private joint venture company ,stressed that a panel unilaterally 'controlled' (formulated) by one party would fall foul of S. 11(8) read with S.12 of the Arbitration and Conciliation Act 1996. An appointment made amongst a panel curated by only the PSU (Public Sector Undertaking) would not be independent and impartial.

S.11(8) of the 1996 Act requires the Supreme Court or High Court or any person or institution designated by the Court to obtain a disclosure in writing from a prospective arbitrator regarding (a) any qualifications required for the arbitrator by the agreement of the parties; and (b) the contents of the disclosure and other considerations as are likely to secure the appointment of an independent and impartial arbitrator. S.12 of the Act lays down the grounds for challenge of the Arbitrator so appointed.

The Senior Counsel explained that in the event of an arbitration involving public sector undertakings and a private party, having a unilaterally appointed panel would leave a lingering doubt in the mind of the private party. He suggested that the only way to fix this concern is by having an independent and not a one-sided panel.

"The solution is an independent panel by an independent institution, that is why we are crying hoarse that we should have institutional arbitration."

Banerji further stressed that the heart of the issue is the one-sided curation of the panel by the party involved in the dispute.

“The problem is not the individuals in the panel, the problem is, who makes the panel?”

Justice Narasimha weighed in to point out that presently, the Court is faced with the issue of determining the factors which can be used to evaluate the independence of the arbitrator at the stage of composition

“The problem is what are the criteria, what are those principles on the basis of which we will be determining there is lack of independence here.”

The Counsel replied explaining that the very fact that an arbitrator is appointed through a pre-selected list of arbitrators is a determinant in itself to show a lack of independence. He stressed that the objective of arbitration was to have a mutually appointed third person to hear the issue. Allowing such unilateral appointments makes the panel an 'unloved and unappreciated panel'.

The Counsel additionally argued that (1) the unilateral appointment would fall foul of the 'magna carta' of equality between parties (referring to S.18 - equal treatment of parties) ; (2) such a unilaterally appointment panel will be hit by S.14 (termination of the mandate of arbitrator on failure or impossibility to act) .

Senior Advocate NK Kaul appearing for one of the respondents referred to the decision of Perkins Eastman Architects DPC vs. HSCC (India) Ltd. which held that a person ineligible by law to be an arbitrator cannot appoint an arbitrator himself as that would lead to an 'element of exclusivity in determining or charting the course for dispute resolution.'

Notably, in Perkins Case, Clause 24 of the Agreement empowered the Chairman and Managing Director of the company to make the appointment of a sole arbitrator and said Clause also stipulates that no person other than a person appointed by such Chairman and Managing Director of the respondent would act as an arbitrator.

The bench of Justices UU Lalit and Indu Malhotra held that a person who has an interest in the outcome or decision of the dispute must not have the power to appoint a sole arbitrator. In holding so the Court referred to the decision in TRF Limited vs.Energo Engineering Projects Limited, which held that a clause nominating the Managing Director himself to be the sole arbitrator and also empowering him to nominate another person to act would be invalid in law. The Managing Director ineligible by operation of law to act as an arbitrator, could not nominate another person to act as an arbitrator and that once the identity of the Managing Director as the sole arbitrator was lost, the power to nominate someone else as an arbitrator was also obliterated.

Senior Advocate NK Kaul Pushes For 'Institutional Arbitration' To Fix The Crisis Of Confidence In Unilateral Panel Appointments

During the hearing, Kaul shifted the discussion to the need and significance of having appointments of arbitrators from the panels devised by formal institutes of arbitration like the Delhi Centre for Arbitration or the ones present in Mumbai and Hyderabad etc.

CJI posed to Kaul that in the instance of having a curated panel of arbitrators which is not in violation of S.12(5) and 7th Schedule of the 1996 Act (categories of relationships between the arbitrator and any of the parties which may lead to conflict of interest), then could there be any other ground to object to the curation of such a panel.

Kaul answered that a simple logic applies here in- what you cannot do directly, you cannot do indirectly either.

Justice Narasimha however raised another aspect- that the PSUs like Railway may get arbitration requests on a daily basis and it would in such a scenario become imperative for them to maintain a panel of arbitrators from which appointments to multiple arbitral disputes may take place. Therefore doing away with the present unilateral curation of panels would lead to administrative difficulties in searching and appointing for arbitrators in each and every case. He stressed that the 'process of the situation will be very difficult.'

However, Kaul clarified that his submission is not against having a panel from which the selection takes place but against the system of unilaterally creating such a panel of arbitrators by the PSUs from which the appointment is being done. This would in turn lead to a 'crisis of confidence' by the private party in viewing such an arbitration.

“The panel cannot be curated and given unilaterally from one side.”

CJI then said :

“If you have a crisis of confidence in the panel which they have created, certainly you would have a valid objection. But if you don't have a crisis of confidence in the panel which they have created, then why should you have an objection to appointing one of them? We also see that they should not be permitted to appoint from outside the panel. If they create a panel of 10, what's sauce for the goose is sauce for the gander…you must appoint one amongst the ten, they must appoint one amongst the 10 and the two arbitrators will then appoint a 3rd arbitrator.”

Kaul reiterated that the very existence of a one-sidedly curated panel of arbitrators by one of the parties goes contrary to the essence of the equality principle and it would be incorrect to apply the idiom of goose and gander in such a scenario.

“This with utmost humility will not be -sauce for the goose is sauce for the gander. That panel is only curated by them, That's why I said that Institutional Arbitrations - when an Institution curates a panel, its open to both the parties.”

The Senior Counsel then rooted for the need for appointments through the mandate of 'Institutional Arbitration'. Having panels curated by independent arbitration institutions would instil not just a sense of neutrality but also the parties' perception of assured neutrality in the resolution process. He further contended that PSUs or other government organizations through the present mechanism of appointing amongst a unilaterally set up panel cannot presume that they have a superior right over a private party.

The CJI however pointed out that in the 'Indian Reality' of the present arbitration scenario, it would be incorrect to overlook how often private parties influence the appointment process in a back door manner. This leads to compromise of the integrity of the arbitration process.

“Absent a transparent procedure, a lot of contractors, what they do is completely breach the integrity of the process by having the appointing authority appoint people of their choice. That happens through the backdoor. That's the Indian reality.”

The Senior Counsel then reiterated the cause of having institutional arbitration, as that would be the only solution to erase the doubt on the impartiality of the arbitrators.

The other intervenors appearing in the matter mainly contended that (1) the clause of unilateral appointments by PSUs for arbitration is hit by the test of public policy ; (2) there exists a 'skewed incentive' for the arbitrators appointed through the panels unilaterally by the appointing authorities to get re-appointed in other matters if they give an award in favor of the appointer; (3) S. 18 of the Act ensures that there is absolute equality between the arbitrating parties, but if there is no absolute equality at the stage of appointment, there would be lack of absolute equality even during the process;(4) The concept of 'absolute equality' under S.18 is different from the concept of 'Independence and Impartiality of arbitrators' under S.12, the former refers to the equality when there is mutuality in the appointment process; (5) S.11(2) refers to the term 'procedure' which requires interpretation by the Court to simplify the present issue.

The bench will hear the arguments raised by the Union tomorrow.

It may recalled that previously the Court deferred the hearing at the request of Attorney General for India R Venkataramani as the sixteen-member expert committee which has been constituted by the Ministry of Law and Justice was in the process of recommending reforms in the Arbitration and Conciliation Act, 1996.

Background

The references arise in the cases Central Organisation for Railway Electrification v. M/s ECI SPIC SMO MCML (JV) A Joint Venture Company and JSW Steel Limited v. South Western Railway & Anr. The issue involved in the matter is whether a person, who is ineligible to be appointed as an arbitrator, can appoint an arbitrator.

In 2017, in the case of TRF Ltd. v Energo Engineering Projects Ltd, the Supreme Court had first held that a person ineligible to be an arbitrator cannot nominate a person to be an arbitrator. A similar conclusion was reached by the Apex Court in Perkins Eastman Architects DPC v HSCC (India) Ltd in 2020. However, in the case of Central Organisation For Railway Electrification v ECL-SPIC-SMO-MCML (JV), (2020) the Supreme Court permitted the appointment by an ineligible person as arbitrator on grounds that the facts of Energo Engineering and Perkins Eastmen did not apply to the case at hand. This judgement was relied upon by the Karnataka High Court. However, the same was appealed against before the Apex Court.

In 2021, a 3-judge bench led by Justice Nariman doubted the view in Central Organisation for Railway Electrification and referred the issue to a larger bench in the case Union of India vs Tantia Constructions.

Later, a 3-judge bench led by the then CJI UU Lalit also referred the issue to a larger bench in JSW Steel Limited v. South Western Railway & Anr. 

Case details : CENTRAL ORGANISATION FOR RAILWAY ELECTRIFICATION vs. M/S ECI SPIC SMO MCML (JV) A JOINT VENTURE COMPANY C.A. No. 009486 - 009487 / 2019