Can A Person Who Is Ineligible To Be An Arbitrator Nominate Arbitrator? Supreme Court Reserves Judgment

The Supreme Court today (August 30) reserved its judgment on the reference issue of 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 JB Pardiwala, and Justice Manoj Misra was considering 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.

In a three-day long deliberation, the Court examined the aspects of 'Party Autonomy' principle enshrined under the Arbitration and Concilation Act of 1996; the issue of ensuring independence and impartiality of arbitrators selections from a unilaterally curated panel by PSUs and possible policy solution that the Union may have to offer in devising a system for penal selections. 

ODR : A Potential Solution For Resolving Issues Of Expensive Arbitration, SG Highlights  

During the third day of hearing, Solicitor General Tushar Mehta (SG)appearing for the Union addressed the issue of struggles faced by small private stakeholders in affording expensive arbitrators. To resolves this, he highlighted the benefit of 'Online Dispute Resolution' (ODR). 

Advocate Sushant Garg explained to the bench that under the ODR there was a comprehensive list of arbitrators empaneled by individual institutions like SAMA and PreSolv360 which includes technical arbitrators as well as former judges. The fees schedule of the arbitrators is also cost-effective and affordable. 

"Sometimes the arbitrator is already aware that if a dispute comes to him, he will be paid 2000-5000 Rs. Most of these awards are given in a 45 days time period and there is no interference by either of the parties."

He added that many private parties including NBFCs (non-banking financial companies) already include ODR in their dispute resolution clauses. 

"They have already incorporated a clause in their own agreement that it would (arbitration) go to PreSolv or SAMA or any other ODR platform"

However the CJI reiterated the main issue - "the question is whether the NBFC can themselves appoint an arbitrator and say look we are going to send this dispute to you?" 

The SG answered that it was crucial to look at the larger picture when considering arbitration dealings with NBFC. He stressed that the ODR mechanism is very practical for the majority of the instances where small claims by non-banking depositors are involved. The cases involving multiple stakeholders in big arbitrations can be segregated from the former. 

Whether The Court Should Give A Prospective Overruling If It Decides To Set Aside Decisions In TRF And Perkins Eastman? 

Garg on behalf of the Union argued that it would not be desirable for the Court to give a prospective application of its judgement in the present case in the event it overrules the decisions in TRF Ltd. v Energo Engineering Projects Ltd,  and Perkins Eastman Architects DPC v HSCC (India) Ltd in 2020. A detailed report on the Doctrine of Prospective Overruling can be read here. 

In TRF, 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. However, in the case of Central Organisation For Railway Electrification (CORE) 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.

He pointed that if the Courts gives a prospective overruling, then those arbitration awards which have been set aside in light of CORE decisions will have to be reopened de novo. The prospective overruling would mean that the decision in TRF and Perkins was good law  in the past which would be contrary to the Court's ruling if it holds the decisions to be incorrect in the present case. 

During the hearing, Senior Advocate Mahesh Jethmalani appearing for one the intervenors defended the unilateral appointments and argued that there is no ban on the persons mentioned under the 7th Schedule in appointing an arbitrator. Notably 7th Schedule lays down the list of persons who may not be appointed as an arbitrator. 

"If they wanted to ban , the legislators could have just added another clause saying arbitrators appointed by persons in clauses 1-19 above."  

Senior Advocate PV Dinesh also appearing for one of the NBFCs briefly submitted that the very arbitrability of the dispute has to be dealt with objectively, inviting no room for subjectivity. Thus even if it is assumed that the appointing authority or the arbitrator himself is biased, logic would still prevail in deciding certain subject matters like money recovery. 

"If the subject matter can only be adjudged objectively, there is no subjective element. Because this happens in recovery of money simplicitor arbitration proceedings. There it is more of a management of a contract to a logical conclusion."  

He further added in instances where an ex-parte award is passed, it should be assumed that the S.12(5) has been waived as per its proviso.

The proviso states that "Provided that parties may, subsequent to disputes having arisen between them, waive the applicability of this sub-section by an express agreement in writing". S.12(5) makes any person ineligible to be appointed as arbitrator who falls within the prohibited relations listed under Schedule 7. 

Senior Advocate Anand Padhmanabhan appearing for one of the NBFCs expanded on the argument that there is an 'implicit recognition' within the Act of 1996 to appoint an arbitrator by one of the parties. In contending so he relied upon a conjoint reading of Sections 11(2); 12(3); 12(4) and 11(6) of the Act- he stressed that none of provisions which prescribes conditions to challenge of an arbitrator limit an appointment by one party.

In the concluding part, Senior Advocate NK Kaul appearing for the respondents stressed that clauses which allow unilateral appointment are hit by Article 14 of the Constitution on grounds being unconscionable.  

What Were The Main Points Raised By The Parties ? 

Arguments By The Union

Solicitor General Tushar Mehta appearing for the Union mainly contended that (1) arbitration having its roots in a contract between parties, reflects a necessary act of volition (mutual agreement by the parties for arbitration of disputes); (2) party autonomy as a concept is ingrained in the entire architecture of the Arbitration and Conciliation Act of 1996 (1996 Act); (3) the respondent's arguments suggesting a neutral panel is incorrect, the correct issue to be examined is whether there is a restriction which prohibits the panel of arbitrators curated by one party; (4) the panel of arbitrators is 'maintained' by the PSUs/ government party and not 'controlled'- the difference is that in maintaining the panel, neutrality of the arbitrators in ensured. 

The SG also submitted in furtherance to the observations in  Voestalpine Schienen GmbH v. Delhi Metro Rail Corpn. Ltd., the following suggestions can be considered in addition to the decision's observation on the need for the panel of arbitrators to be 'broad-based' : (a) the preparation of the panel must be open to all and transparent;(b) issuance of an advertisement laying down parameters for the appointment. 

Additional Solicitor General KM Nataraj, representing, India International Arbitration Centre, Senior Advocates Arvind Kamath, Guru Krishna Kumar and Madhavi Divan appearing for the intervenors also expanded on the about propositions. 

Arguments By The Respondents 

Senior Advocate Gaurab Banerji appearing for the UNCITRAL National Coordination Committee India , stressed that a panel unilaterally 'controlled' (formulated) by one party would fall foul of S. 11(8) (Mandatory disclosures by prospective arbitrators)  read with S.12 (grounds to challenge mandate of arbitrator) 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.

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 also 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.' 

He stressed that solution to the issue is the need to have a 'institutionalized arbitration' where arbitrators are selected from a neutral panel created by a third-party arbitration institution.. 

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 judgment 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 the 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.

Reports From Previous Hearings : 

Can PSUs Appoint Arbitrators From Their Self-Curated Panels? Supreme Court CB Hears Arguments [Day 2]

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

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