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

The Supreme Court today (August 29) continued its arguments 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.

Today, the second day of the hearing, Solicitor General Tushar Mehta appearing for the Union submitted that the government's ultimate endeavor in the present case is to ensure that arbitration as a dispute mechanism grows.

Weighing in on this, the CJI pointed out that the Union, in considering the welfare of the nation at large, should not lose sight of the increasing demand for private sector investment for the growth of the country's economy. It was crucial that the Union ensured policies which maintain fairness of the arbitration process so as to build confidence in the private players contributing to the economy.

'Are We Walking Into A Minefield?' Bench Ponders Over The Obstacles In Having A Uniform Policy For Curating Arbitrators' Panels

Referring to the decision in Voestalpine Schienen GmbH v. Delhi Metro Rail Corpn. Ltd. the SG submitted that 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.

Notably, In Voestalpine, the Court held that the selection of 5 potential arbitrators one-sidedly by one party from a larger curated panel was invalid. It was noted that the panel of arbitrators needs to be 'broad-based' comprising professionals of diverse backgrounds.

At this point, CJI asked : “ Would you be therefore contemplating a situation where the Government of India prepares a panel for all Government Undertakings of India which will include coalfield, railways etc or will it operate at a ministerial level? So the ministry of coal will have a panel, the ministry of finance will have a panel etc but that will again be unworkable.”

SG replied that there seems to be no problem with having a common panel selection process, however he will take instructions from the Union on the possible policy being contemplated on the aspect.

However, the CJI added that in the case of big PSUs like the Food Corporation of India having immense claims from 10 Crores to 10000 crores, it will be a 'gigantic' task for the Government of India to curate panels in such scenarios.

The SG pointed out in such situations, the government will have to curate the panels on the factors of value-based and eligibility-based requirements for each PSU category and the nature of the claims raised.

“ For some, we need only engineers, for some, where there are questions of law, we need judicial minds..”

Realizing the complexities involved, the CJI remarked, “Are we walking into a minefield?”

Justice Narasimha then ringed a word of caution that the government's suggestion for curating such panels may lead to interference in the autonomy of private parties. He added :

“ We are slowly and steadily effacing the distinction between public law and private law! Today's discussions and yesterday's discussions seem to be how to bring transparency in public dealings that is what public/ administrative law does. But this (arbitration) is in the realm of the private remedy where the choices are with the contracting parties to decide how the remedy should work out. It's a different matter, in a contract where there is a conflict of interest, contractual principles will resolve it, but superimposing public law perspectives as it has public tenders…so there is the transparency, a level playing field, those principles England has kept it aside completely, knowing very well , when it comes to private remedies.”

Justice Narasimha further analyzed that when dealing with contracts between the public sector and private parties, the principles of public law relating to transparency and equality may be applicable but not where both the parties are purely private, there the regime governing the conduct would fall solely under the Private Law sphere. He added that in the case of public-private contracts, the clauses mandating appointment from a unilateral panel of arbitrators can always be struck down by public law courts under the grounds of being unconscionable.

“File a petition before the Public Law Court saying this clause is invalid, you cannot have a contract under S. 28 of the Contract Act so to that extent the clauses will be set aside.”

The CJI also highlighted that in the event the Court is to lay down the structural parameters for the composition of the panel of arbitrators under Article 142 - powers to do complete justice- that may attract rampant criticism from private business stakeholders as the Court otherwise would not have the power to interfere to such an extent in matters of arbitration.

“ I dare say, we will be soundly criticized in the world of business and - what has the Supreme Court done? (critiques would wonder)”

At this juncture, Justice Roy also analyzed that the suggestions proposed by the SG for improving the panel selection process may deal with issues of transparency, impartiality, independence, integrity but would exclude the concerns of 'party autonomy' in selecting the arbitrators.

Notably, the 'party autonomy principle' can be found under S. 11(2) of the 1996 Act provides that the contracting parties are free to agree on a procedure for appointing the arbitrator or arbitrators for resolving their disputes.

Arguments By The Union

The main points of argument made by the SG were : (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 made references to several provisions of the 1996 Act such as S.11 (appointment of arbitrators), S. 21 (commencement of proceedings), S.25 (default of a party), S. 26 (expert appointed by Tribunal) and S. 28 (rules applicable to substance of dispute) to establish that throughout the scheme of the act, the autonomy of the parties is guaranteed in initiating the process of arbitration. He stressed that the phrase “unless otherwise agreed by the parties” mentioned across the provisions indicates the commercial bargaining power of the parties involved in the arbitration.

At a later stage, CJI referring to the prevalence of party autonomy throughout the 1996 Act, stated that if the legislature intended to strike off party autonomy at any place in the Act, it would have expressly mentioned so.

“Party autonomy is one golden thread which runs through the Act. If the legislature intends to override party autonomy, that overriding must be expressly set out or indicated in terms of such an Act”

The SG further referred to other Countries where that statute expressly prohibited the appointment of an arbitrator from a panel made by one party and an exception is made to the principle of party autonomy. These included : Netherlands; 2. Germany; 3. Spain;4. Estonia ; 5. Poland; 6. Russia.

Additional Solicitor General KM Nataraj, representing, India International Arbitration Centre briefly submitted that the statute lays no embargo on the person who appoints an arbitrator. He stressed that the requirement of independence and impartiality is for the arbitrator only.

Senior Advocates Arvind Kamath, Guru Krishna Kumar and Madhavi Divan appeared for the intervenors.

Kamath also highlighted that enlisting the names of arbitrators on a panel will not per se constitute an 'appointment' within the terms of the Act 1996. The enlisting is merely an administrative exercise. There also exists a 4 tier mechanism to ensure the independence and impartiality of arbitrators : (1) insertion of S.12(5) and Schedule 5 and 7(conflict of interest between arbitrator and parties) ; (2) mandatory disclosure by arbitrators; (3) right of the parties to challenge the arbitration award; (4) Judicial review of the award by arbitrator to ensure there was no bias.

Kumar while adopting the main submissions of the SG, stressed that the powers under S.11 (2)(parties set the procedure for appointment of arbitrators) are conditioned upon S.12 (grounds to challenge the mandate of arbitrator) of the Act. He also argued that the reliance placed on S.18 by the respondents to buttress the argument of mutuality in appointment was misplaced. According to him S.18 (equality principle) was a general provision where as S.11 dealt exclusively with appointment of arbitrators and the legislature has consciously decided to not mention the principle of mutuality in S.11.

Divan appearing for Non Banking Financial Companies briefly contended that the decision in Perkins Eastman cannot be interpreted to mean that a unilateral appointment of an arbitrator makes him ineligible. Notably, the court in Perkins Eastman Architects DPC vs. HSCC (India) Ltd. 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.'

The hearing will continue tomorrow.

Previously, the respondents made their submissions contended two key aspects: (1) the appointment through a unilaterally curated panel of arbitrators was against the equality principle and compromised the independence of the arbitrator; and (2) the solution to the first 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 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