BREAKING| Unilateral Arbitrator Appointment Clauses In Public-Private Contracts Invalid; Can't Compel Selection Of Arbitrators From PSU's Panels : Supreme Court

The Supreme Court on Friday (November 8) ruled against clauses allowing Public Sector Undertakings to unilaterally appoint arbitrators to decide disputes with private contractors. 

The Constitution Bench held that while PSUs can maintain a panel of potential arbitrators, they cannot compel the other party to select its arbitrator from the panel.

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. 

Key Conclusions of majority judgment of CJI DY Chandrachud  

a. The principle of equal treatment of parties applies at all stages of the arbitration proceedings, including the stage of the appointment of arbitrators.

b. The Arbitration Act does not prohibit PSUs from empanelling potential arbitrators. However, an arbitration clause cannot mandate other party to select its arbitrator from the panel curated.

c. A clause that allows one party to unilaterally appoint a sole arbitrator gives rise to justifiable doubts as to the independence and impartiality of the arbitrator. Further, such a unilateral clause is exclusive and hinders equal participation of the parties in the appointment process of arbitrators.

d. In the appointment of a three member panel, mandating the other party to select is arbitrator from a curated panel of potential arbitrators is against the principle of equal treatment of parties. In this situation, there is no effective counter-balance as the parties do not participate equally in the process of appointing arbitrators.

e. Unilateral appointment clauses in public-private contracts are violative of Article 14 of the Constitution.

f. The priniciple of express waiver contained in the proviso to Section 12(5) also applies to situations where parties seeking to waive the allegations of bias against an arbitrator appointed unilaterally by one of the parties. 

g. The law laid down in the present reference will apply prospectively to arbitrator appointmnets to be made after the date of this judgment. This direction applies to 3-member tribunals.

Justice Hrishikesh Roy in a partial dissent held that unilateral appointments must not be declared invalid. Justice Roy's judgment emphasised on party autonomy. An eligible arbitrator not disqualified under schedule 7 can be appointed unilaterally and courts must refrain from interfering, he held.

Justice Narasimha's view :

It is duty of the court to ensure that the arbitration agreement inspires confidence. However, unilateral appointment of an arbitrator may not inspire confidence and violate public policy. The option of the  Court to determine if the tribunal is independent and impartial is only when an application is made.

What Led To The Reference?  

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 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 an arbitrator on grounds that the facts of Energo Engineering and Perkins Eastman 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. 

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, the 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.  

Senior Advocate PV Dinesh 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. Senior Advocate Anand Padmanabhan also for one of the NBFCs added that an 'implicit recognition' within the Act of 1996 was there to appoint an arbitrator by one of the parties.

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 an 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.

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

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

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