Unilateral Appointment of Arbitrators from Panels by PSUs Invalid: Supreme Court Sets New Guidelines
Central Organisation for Railway Electrification v. M/s ECI SPIC SMO MCML (JV) A Joint Venture Company
Court: Supreme Court of India
Judge Names: Chief Justice Dr. Dhananjaya Y. Chandrachud, Justice J B Pardiwala, Justice Manoj Misra, Justice Hrishikesh Roy, Justice Pamidighantam Sri Narasimha
Date of the Case: November 08, 2024
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I. Introduction
The Supreme Court of India’s judgment in Civil Appeal Nos. 9486-9487 of 2019 addresses the validity of arbitration clauses that allow unilateral appointment of arbitrators. The case involves Central Organisation for Railway Electrification (CORE) as the appellant and M/s ECI SPIC SMO MCML (JV), a Joint Venture Company, as the respondent. The Constitution Bench, through opinions by Chief Justice Dr. DY Chandrachud, Justice Hrishikesh Roy, and Justice PS Narasimha, examined whether an appointment process that permits one party to unilaterally appoint arbitrators or mandate selection from a curated panel violates the principles of independence and impartiality under the Arbitration and Conciliation Act, 1996.
II. Facts and Background of the Case
The case originated from Clause 64(3)(b) of the General Conditions of Contract between CORE and the Joint Venture Company. The clause stipulated that the Arbitral Tribunal would consist of three retired railway officers not below the rank of SAO officer. According to the procedure, the Railways would send a panel of at least four names of retired railway officers to the contractor. The contractor would then suggest two names from this panel to the General Manager within 30 days. The General Manager would appoint at least one of these suggested names as the contractor’s nominee and simultaneously appoint the remaining arbitrators, including the presiding arbitrator, either from within or outside the panel.
The matter gained complexity when conflicting judgments emerged regarding the validity of such unilateral appointment clauses. In TRF Ltd. v. Energo Engineering Projects Ltd. (2017), the Supreme Court held that a person ineligible to be an arbitrator cannot nominate another person as arbitrator. Subsequently, in Perkins Eastman Architects DPC v. HSCC (India) Ltd. (2019), the Court extended this principle to situations where one party has an interest in the outcome and unilaterally appoints an arbitrator.
However, in CORE v. ECI-SPIC-SMO-MCML (JV) (2019), a three-judge bench upheld the validity of the arbitration clause, distinguishing it from TRF and Perkins on the grounds that the contractor’s power to choose arbitrators counterbalanced the Railways’ appointment rights. This apparent conflict led to the matter being referred to a larger bench in Union of India v. Tantia Constructions Limited (2021), where the Court prima facie disagreed with the CORE judgment.
The reference to the Constitution Bench was necessitated by the need to clarify the correct position of law, particularly in light of the 2015 Amendment to the Arbitration Act which introduced Section 12(5) and the Seventh Schedule. These provisions established strict standards for arbitrator independence and impartiality. The Court was called upon to balance the principle of party autonomy with the fundamental requirements of arbitrator neutrality, especially in the context of public-private contracts where government entities often maintain panels of potential arbitrators.
The case thus presented crucial questions about the intersection of contractual freedom and procedural fairness in arbitration, requiring the Court to determine whether unilateral appointment clauses inherently compromise the independence and impartiality of the arbitral process.
III. Arguments
A. Petitioner’s Arguments
1. Violation of Equal Treatment Principle: The petitioners argued that 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, violates the principle of equal treatment under Section 18 of the Arbitration Act. They contended that such unilateral appointment procedures create an inherent bias in the arbitration process.
2. Constitutional Law Violations: The petitioners contended that unilateral appointment clauses in public-private contracts violate Article 14 of the Constitution for being arbitrary. They argued that such clauses give unfair advantage to one party, particularly when government entities are involved, and violate the principles of natural justice and fairness embedded in constitutional law.
3. Challenge Based on Section 12(5): The petitioners argued that after the 2015 Amendment to the Arbitration Act, Section 12(5) read with the Seventh Schedule prohibits any person whose relationship with the parties or counsel falls under specified categories from being appointed as an arbitrator. They contended that this provision overrides any prior agreement to the contrary.
4. Independence and Impartiality Concerns: It was argued that when a person having a financial interest in the outcome of arbitral proceedings unilaterally nominates a sole arbitrator, it gives rise to justifiable doubts about the independence and impartiality of the arbitrator. The possibility of bias is real because the person with interest can control the entire arbitration proceeding.
5. Public Policy Arguments: The petitioners contended that unilateral appointment clauses fail to provide the minimum level of integrity required in authorities performing quasi-judicial functions. They argued that such clauses are against the principle of arbitration itself, which requires impartial resolution of disputes between parties.
6. Procedural Fairness: They argued that equal participation of parties at the stage of appointment of arbitrators ensures impartiality during arbitral proceedings. A clause allowing unilateral appointment hinders equal participation and is inherently exclusionary, violating fundamental principles of procedural fairness.
7. Challenge to Panel System: The petitioners specifically challenged the system where one party curates a panel of arbitrators and mandates the other party to select from this panel. They argued this restricts the freedom of choice and effectively excludes the other party from meaningful participation in the appointment process.
8. Reference to International Standards: The petitioners cited international practices and conventions to support their argument that unilateral appointment clauses are considered problematic in various jurisdictions. They referenced cases from different countries where courts have struck down such clauses as being against principles of natural justice and fairness.
B. Respondent’s Arguments
1. Challenge to Unilateral Appointment Power: The respondent strongly argued against the arbitration clause that allowed one party to unilaterally appoint a sole arbitrator or curate a panel of arbitrators. They contended that such unilateral power violates the fundamental principles of natural justice and the requirement of an independent and impartial tribunal under the Arbitration Act.
2. Violation of Section 12(5) and Section 18: The respondent emphasized that unilateral appointment clauses violate Section 12(5) of the Arbitration Act, which prohibits appointments that raise justifiable doubts about independence and impartiality. They also argued that such clauses violate Section 18’s requirement of equal treatment of parties throughout the arbitration process, including the appointment stage.
3. Constitutional Law Arguments: The respondent contended that unilateral appointment clauses in public-private contracts violate Article 14 of the Constitution by being arbitrary and unreasonable. They argued that government entities must ensure fairness and non-arbitrariness in their contractual dealings, including arbitration procedures.
4. Panel Appointment Issues: Regarding panel appointments, the respondent argued that being forced to select an arbitrator from a panel curated by the other party effectively restricts their freedom of choice and creates an inherent bias in the arbitration process. They contended that such restriction violates the principle of party autonomy and equal participation in the arbitration process.
5. Public Policy Considerations: The respondent emphasized that arbitration agreements allowing unilateral appointments are void as being opposed to public policy under Section 23 of the Contract Act. They argued that such clauses undermine the fundamental principle of having an independent and impartial dispute resolution mechanism.
6. Unconscionability Argument: Drawing from international jurisprudence, particularly US cases, the respondent argued that arbitration agreements giving one party control over the pool of potential arbitrators are unconscionable and should be declared void.
7. Challenge to CORE Decision: The respondent questioned the correctness of the CORE judgment, arguing that it failed to consider the impact of the 2015 amendment to the Arbitration Act and the principles laid down in TRF Limited and Perkins cases regarding the independence and impartiality of arbitrators.
8. Need for Broad-Based Panel: Citing Voestalpine, the respondent argued that if panels are to be maintained, they must be broad-based and include diverse professionals to ensure independence and impartiality. They contended that restricted panels dominated by one party’s choices violate this principle.
9. Procedural Fairness: The respondent emphasized that the appointment process must not only be fair but must also appear to be fair. They argued that unilateral appointment powers create a reasonable apprehension of bias, undermining the credibility of the arbitral process.
10. International Standards: The respondent referenced various international jurisdictions and conventions that prohibit or restrict unilateral appointment powers, arguing that Indian law should align with these progressive standards to ensure the integrity of the arbitration process.
IV. International Perspective
International Approaches: The judgment extensively analyzed various international approaches to unilateral appointments in arbitration. The legislative framework across jurisdictions reveals diverse approaches. The New York Convention and UNCITRAL Model Law generally uphold party autonomy in tribunal composition. However, various national laws have adopted different approaches. The Netherlands allows courts to intervene if one party has a privileged position in appointments. German law permits court intervention if the appointment procedure disadvantages one party. Spanish law requires equal treatment in appointment procedures, while Estonian law allows court intervention if the appointment procedure materially damages one party.
Judicial approaches also vary significantly across jurisdictions. The Swiss Federal Tribunal has held that no party should have preponderant influence on tribunal appointments. French courts generally uphold party autonomy in appointments. American courts have invalidated agreements giving one party exclusive control over arbitrator panels, particularly in cases where one party maintains exclusive control over the pool of potential arbitrators. English courts have emphasized the importance of consultation requirements in appointments.
These international approaches reveal several key principles. While party autonomy is universally valued in arbitration, many jurisdictions impose limits to ensure fairness in the appointment process. Different countries balance autonomy and fairness differently based on their legal culture and dispute resolution framework. No uniform international standard exists on unilateral appointments, though courts generally scrutinize procedures that give one party dominant control over the appointment process. This diversity in approaches across jurisdictions reinforces the need for caution in relying on foreign precedents or laws.
V. Court’s Reasonings
1. The Genesis of the Reference: The case originated from challenges to arbitration clauses that allow one party to unilaterally appoint arbitrators or mandate selection from a curated panel. Prior to the 2015 Amendment to Section 12 of the Arbitration Act, courts permitted such unilateral appointments. However, post-amendment, judgments oscillated between negative and conditional affirmations, creating uncertainty that needed to be resolved by this Constitution Bench.
2. Party Autonomy and Independence of Arbitral Tribunal: The Court identified two inviolable values in arbitration: party autonomy and the requirement of an independent and impartial arbitral tribunal. Party autonomy is recognized as the “brooding and guiding spirit” of arbitration, allowing parties freedom in determining arbitration procedures. However, this autonomy must be balanced with the fundamental requirement that the arbitral tribunal be independent and impartial.
3. Distinction Between Duties: Justice Narasimha emphasized a crucial distinction between two separate obligations. The first is the duty of parties to the arbitration agreement to constitute an independent tribunal, which stems from statutory framework and public policy considerations. The second is the duty of arbitrators to act judicially, which arises from the very nature of the adjudicatory function. The case primarily concerned the first obligation - the parties’ duty to constitute an independent tribunal - rather than the arbitrator’s duty to act impartially.
4. Application of Section 18 - Equal Treatment: The Court held that Section 18’s principle of equal treatment applies at all stages of arbitration, including the appointment of arbitrators. The Court reasoned that procedural equality is essential for securing legitimate adjudicative outcomes and creating a level playing field between parties. Equal participation in appointing arbitrators ensures both sides have an equal say in establishing a genuinely independent and impartial arbitral process.
5. Unilateral Appointments and Bias: The Court found that when a person with financial interest in the outcome unilaterally nominates a sole arbitrator, it gives rise to justifiable doubts about independence and impartiality. The possibility of bias is real because the interested party can control the entire arbitration proceeding through their appointment power. The Court noted it’s impossible to determine actual prejudice, but the circumstances create a real possibility of bias.
6. Panel Appointments and Equality: Regarding panel appointments, the Court held that mandating one party to select arbitrators from a panel curated by the other party violates the principle of equal treatment under Section 18 of the Arbitration Act. The Court reasoned that exclusive control over the panel creation process effectively excludes the other party from meaningful participation in the arbitrator selection process. This undermines procedural equality, which is essential for securing legitimate adjudicative outcomes and creating a level playing field between the parties.
7. Restrictions on Party Autonomy: The Court acknowledged that while the Arbitration Act does not prohibit PSUs from maintaining panels of potential arbitrators, an arbitration clause cannot mandate the other party to select its arbitrator solely from the panel curated by one party. The Court clarified that in a three-member panel, requiring one party to choose its arbitrator from a restricted panel created by the other party is against the principle of equal treatment, as there is no effective counterbalance to this unilateral control.
8. Public-Private Contracts: For public-private contracts, the Court emphasized that government entities must ensure the arbitral process is fair to both parties. Unilateral panel-based appointment clauses in such contracts were held to fail in providing an effective substitute for judicial proceedings. The Court ruled that such clauses violate the constitutional guarantee of equality under Article 14, as they give an unfair advantage to one party, particularly when government entities are involved.
9. Case-by-Case Examination: The Court clarified that questions regarding the validity of appointment procedures, including panel-based systems, require detailed consideration of evidence and submissions. These issues should be left for the arbitral tribunal to decide under the competence-competence doctrine, rather than the courts making advance declarations. The Court reasoned that this maintains the principle of minimal judicial interference while ensuring procedural fairness.
10. Dissenting Views:
Justice Hrishikesh Roy's Dissent:
Justice Roy agreed with the majority's view that the principle of equality under Section 18 of the Arbitration Act applies at all stages of the arbitral proceedings, including the appointment of arbitrators. However, he diverged in his approach, emphasizing that the obligations of fair treatment should be grounded firmly within the Arbitration Act itself, rather than importing principles from constitutional and administrative law.
In Justice Roy's opinion, the statutory safeguards provided under the Arbitration Act, such as Sections 12, 13, 14 and 15, offer adequate checks and balances to ensure the independence and impartiality of the arbitral tribunal. He stressed the need to preserve party autonomy and maintain the principle of minimal judicial intervention, which is a core tenet of arbitration law.
Justice Roy was of the view that courts should refrain from imposing their own opinions to countermand the clear intent of the parties reflected in the arbitration agreement, unless there are compelling reasons to do so. He held that the choice of the parties in the agreement should not be disregarded without good reason, especially when the Arbitration Act itself enables parties to waive certain mandatory provisions like Section 12(5).
Importantly, Justice Roy was of the opinion that it would be impermissible for the court to give a blanket declaration that all unilateral appointment clauses are invalid. Instead, he advocated for the examination to be done on a case-by-case basis at the stage of considering applications under Sections 11, 14 or 34 of the Act. In his view, the statutory framework of the Arbitration Act provides sufficient safeguards, and the court should exercise restraint in interfering with the parties' choices, unless there are compelling reasons to do so.
Justice Pamidighantam Sri Narasimha's Dissent:
Justice Narasimha, while agreeing with the principle of equality, took a different approach in locating the obligations of the parties to constitute an independent and impartial arbitral tribunal. He sought to ground these obligations within the framework of the Contract Act and public policy considerations, rather than relying on constitutional principles.
Justice Narasimha emphasized the importance of maintaining a balance between party autonomy and the duty to constitute an independent tribunal, which he identified as the two inviolable values underpinning arbitration. In his view, declaring all unilateral appointment clauses void as an advance ruling would be impermissible, and the court should examine the agreements on a case-by-case basis at the stage of considering applications under Sections 11 or 14 of the Act.
Importantly, Justice Narasimha cautioned against over-emphasizing the "trappings of a court" and the application of public law principles in the realm of contractual dispute resolution through arbitration. He opined that sourcing the obligations from the Contract Act and Arbitration Act is important to preserve the integrity of party autonomy and maintain judicial restraint.
According to Justice Narasimha, the court's power to ensure the arbitration agreement enables the constitution of an independent tribunal is recognized and incorporated in the Contract Act and Arbitration Act itself. He believed this should be the basis for the court's examination, without the need to rely on constitutional principles.
Justice Narasimha's dissent, therefore, focused on the need to locate the obligations within the framework of contract law and public policy, rather than constitutional law, to strike a balance between party autonomy and the duty to constitute an impartial tribunal. He cautioned against making blanket declarations and advocated for a case-by-case examination of the agreements.
VI. Conclusion
Based on the comprehensive analysis presented in the judgment, the Supreme Court has concluded that an appointment process under an arbitration agreement which allows a party with interest in the dispute to unilaterally appoint a sole arbitrator or curate a panel of arbitrators and mandate the other party to select their arbitrator from that panel violates the principles of independence and impartiality enshrined in the Arbitration Act. The Court held that the principle of equal treatment of parties applies at all stages of arbitration proceedings, including appointment of arbitrators, and that unilateral appointment clauses in public-private contracts violate Article 14 of the Constitution. While the Arbitration Act does not prohibit PSUs from empanelling potential arbitrators, an arbitration clause cannot mandate the other party to select its arbitrator from the panel curated by PSUs. The Court clarified that in a three-member panel, mandating one party to select its arbitrator from a curated panel is against the principle of equal treatment as there is no effective counterbalance. The principle of express waiver under Section 12(5) proviso applies to situations where parties seek to waive allegations of bias against a unilaterally appointed arbitrator. Importantly, the Court ruled that this judgment will apply prospectively to arbitrator appointments made after the date of this judgment, with this direction applying specifically to three-member tribunals.