The sealed fate of Unilateral Arbitrator appointment clauses in public-private contracts in India
The Constitution bench of the Supreme Court delivered its judgment in Central Organisation for Railway Electrification v. M/s ECI SPIC SMO MCML (JV)1Civil Appeal Nos. 9486-9487 of 2019 on 08.11.2024. The majority judgment has been authored by the Chief Justice of India, Dr. D.Y. Chandrachud, for himself, Justice J.B. Pardiwala and Justice Manoj Mishra. Justice Hrishikesh Roy and Justice PS Narsimha authored their partially dissenting and concurring opinions.
I. Background to the reference
The case involved a contractual dispute between the Central Organisation for Railway Electrification and a Joint Venture Company regarding an arbitration clause in their contract, whereby the Railways retained authority over the selection of arbitrators by proposing a limited panel of retired railway officers. CORE’s procedure required the Joint Venture to choose arbitrators exclusively from the provided panel, raising concerns about the impartiality and independence of the arbitration process. This led to the judgment in Central Organisation for Railway Electrification v. ECI-SPIC-SMOMCML (JV)2[2019] 16 SCR 1234, (‘CORE’) wherein the Supreme Court held that Section 12(5) of the Arbitration and Conciliation Act of 1996 (‘Arbitration Act’) does not bar former employees from being appointed as arbitrators. It also examined whether a General Manager’s power to appoint arbitrators was valid, and upheld the arbitration clause, noting that the respondent had the power to choose two nominees, ensuring balance.
Subsequently, a three-judge bench led by Justice R.F. Nariman questioned the decision in CORE and referred the matter to the Chief Justice for constituting a larger bench, disagreeing with the view that an incapacitated appointing authority could still make valid appointments in Union of India v. Tantia Constructions Limited32021 SCC OnLine SC 271, (‘Tantia Constructions’). Later, another three-judge bench led by the then Chief Justice U.U. Lalit also referred the issue to a larger bench in JSW Steel Ltd. v. South Western Railway42022 SCC OnLine SC 1973. In this background, the following issues arose for consideration before the constitution bench.
II. Issues
- Whether 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 is valid in law;
- Whether the principle of equal treatment of parties applies at the stage of the appointment of arbitrators?
- Whether an appointment process in a public-private contract which allows a government entity to unilaterally appoint a sole arbitrator or majority of the arbitrators of the arbitral tribunal is violative of Article 14 of the Constitution.
III. Past developments
The Arbitration and Conciliation (Amendment) Act of 2015 introduced Section 12(5), which disqualifies individuals from being appointed as arbitrators if their relationship with any party falls under the categories specified in the Seventh Schedule of the Act. Subsequently, numerous applications were submitted under Section 11(6) to contest appointment procedures that permitted one party to exert predominant control over the selection of arbitrators.
Voestalpine Schienen GmbH v. Delhi Metro Rail Corporation Ltd5[2017] 1 SCR 798,(‘Voestalpine’) – The Court examined whether a panel of arbitrators constituted by the Delhi Metro Rail Corporation, consisting only of government employees or retired employees, violated Section 12(5). The Court highlighted the importance of arbitrator independence but did not prohibit retired government employees from serving as arbitrators. It ruled that both parties should be able to nominate from a diverse panel of arbitrators.
TRF Ltd v. Energo Engineering Projects Ltd,6 [2017] 7 SCR 409(‘TRF’) – In this case, the arbitration clause provided for the resolution of disputes by the sole arbitration of the Managing Director of the Buyer or his nominee. The issue before the three judges’ bench was whether the Managing Director was eligible to nominate a sole arbitrator under Section 12(5) of the Arbitration Act. The court relied on the maxim “qui facit per alium facit per se” (what one does through another is done by oneself) to hold that a person who is ineligible to be appointed as an arbitrator cannot nominate another person as an arbitrator.
Perkins Eastman Architects DPC v. HSCC (India) Ltd.7[2019] 17 SCR 275(‘Perkins’) – The Court examined an arbitration clause where the CMD of HSCC was empowered to appoint a sole arbitrator. It held that a person interested in the dispute cannot be involved in appointing an arbitrator, as it compromises the impartiality of the process.
IV. Contentions and Submissions
Contentions on behalf of the Respondents against unilateral appointments/curated panel:
• Party autonomy in arbitration is subject to mandatory provisions of the Arbitration Act, including Sections 18 and 12(5).
• An arbitration clause granting one party the exclusive right to appoint a sole arbitrator creates a reasonable apprehension of bias regarding the tribunal’s independence and impartiality.
• Section 12(5) of the Arbitration Act, by virtue of its non-obstante clause, overrides contrary arbitration agreements. While the statute does not explicitly prohibit an ineligible person from appointing an arbitrator, the decisions in TRF and Perkins correctly hold that an ineligible person may not appoint or select an arbitrator or arbitral panel.
• A unilaterally appointed panel violates the principle of equal treatment of parties under Section 18, a mandatory provision, which applies not only during arbitral proceedings but also at the stage of tribunal constitution.
• In Voestalpine, the court directed the constitution of a broad-based panel of arbitrators, but this limits the other party’s choice, violating the principle of equality and impartiality.
• CORE fails to address Voestalpine, Section 11(8), or the independence and impartiality requirement under Section 12. The counter-balancing test in Perkins applies only where both parties have an equal and unrestricted choice in appointing arbitrators, not where one party’s choice is limited by a pre-selected list.
• The prohibition on an ineligible person nominating an arbitrator or panel under Section 12(5) stems from Section 18, as a panel curated and controlled by one party raises “justifiable doubts” about the independence and impartiality of the arbitrator under Section 12.
Contentions on behalf of the Union in support of unilateral appointments/curated panel:
• Party autonomy is a core principle of the Arbitration Act. Section 11(2) allows parties to agree on a procedure for appointing arbitrators, which may include one party providing a panel of arbitrators for the other party to choose from.
• The Supreme Court or High Court may appoint an arbitrator under Section 11(8) only when parties fail to follow the agreed procedure, as outlined in Sections 11(4), 11(5), and 11(6). This does not limit the parties’ right to agree on their own procedure under Section 11(2).
• The terms “appointing” or “enlisting” an arbitrator are different from “acting” as an arbitrator. Section 12(5) prohibits an ineligible person, as listed in the Seventh Schedule, from being appointed as an arbitrator. However, the Act does not specifically prevent an ineligible person from appointing or listing potential arbitrators.
• The Arbitration Act does not recognize presumed ineligibility of arbitrators; the ineligibility must be actual and specific as per Section 12.• Equality of treatment under Section 18 applies during the arbitral proceedings and mandates equal treatment of the parties by the tribunal. It does not address the equality of the parties when agreeing on an appointment procedure, which occurs before the tribunal is formed.
• The Arbitration Act ensures the independence and impartiality of arbitrators through various safeguards, including: (i) Section 12(5) and the Seventh Schedule, (ii) mandatory disclosures under Section 12(1) and the Fifth Schedule, (iii) challenge procedures under Sections 13 and 14, and (iv) judicial review under Section 34.
• TRF erred in applying the maxim qui facit per alium facit per se, which is meant for delegation of authority. The appointment of an arbitrator under an arbitration agreement is not a delegation of the appointing party’s power.
V. Principles underpinning the Arbitration Act
1. Party autonomy: The Arbitration Act prioritizes party autonomy in the arbitral process. Phrases such as “unless otherwise agreed by the parties” and “failing any agreement” highlight that parties have the freedom to determine the procedures for arbitration, and an arbitrator is bound by the parties’ agreed procedures.
2. Mandatory provisions: Section 4 establishes that a party waives its right to object to non-compliance with certain provisions by proceeding with arbitration without raising an objection. It distinguishes between mandatory and derogable provisions, allowing parties to waive non-mandatory provisions.
3. Appointment of arbitrators: Under Section 11(2), parties are free to agree on the procedure for appointing arbitrators. However, if the parties fail to agree, or the agreed procedure is not followed, Section 11(6) empowers the Supreme Court or High Courts to appoint an arbitrator. Judicial involvement is a default mechanism, not an independent basis for appointment. Section 11(8) mandates the appointment of independent and impartial arbitrators.
4. Independence and impartiality: Section 12(5), introduced in 2015, disqualifies individuals from being appointed as arbitrators if they have a relationship with the parties or the dispute that falls within the categories in the Seventh Schedule. This provision overrides any prior party agreement, but the proviso allows parties to waive its application after the dispute has arisen, ensuring genuine party autonomy.
5. Equality in proceedings: Section 18 ensures that parties are treated equally and each party is given a full opportunity to present its case, establishing principles of equal treatment and a right to a fair hearing.
6. Public-Private arbitration: The Arbitration Act does not provide a special regime for disputes involving public authorities. Public-private contract disputes are generallygoverned by ordinary civil law, and arbitration remains a preferred mechanism, without any special treatment for the government.
VI. Principle of equality in the appointment of arbitrators
• Arbitration as a quasi-judicial function: An arbitral tribunal functions quasi-judicially, as it adjudicates the rights and liabilities of the parties. It is bound by procedural and substantive law to make decisions or awards. Section 31 mandates that arbitral awards must be in writing, signed by all arbitrators, and state the reasons for the decision unless the parties agree otherwise. This aligns with the principle that quasi-judicial authorities must provide reasoning for their decisions. An arbitral award is binding and enforceable as a court decree.
• Equality in appointment of arbitrators: Section 18 upholds the principle of natural justice, ensuring that parties are treated with equality and given a full opportunity to present their case. The concept of equality under Article 14 of the Constitution ensures equal treatment of parties. Independence and impartiality of arbitral proceedings can only be maintained if both parties have an equal opportunity to participate throughout the process, including during the appointment of arbitrators. Thus, the principle of equal treatment applies at all stages of arbitration, including the appointment stage.
VII. Nemo judex rule and the doctrine of bias
• Principles of natural justice: Natural justice is based on two key principles: (i) nemo judex in causa sua (no one should be a judge in their own cause); and (ii) no decision should be made against a party without a reasonable opportunity to be heard. These principles serve both intrinsic and instrumental functions: intrinsic, as an end in itself ensuring fairness, and instrumental, as a means to achieve just outcomes. The nemo judex principle requires not only that justice be done, but also that it be seen to be done.8The King v. Sussex Justices, [1924] 1 KB 256
• Doctrine of bias: Bias arises when a judicial or quasi-judicial body has a predisposition towards one party, or a personal or financial interest in the outcome of the dispute. A biased member should not be part of a tribunal deciding the matter. A quasi-judicial authority empowered to decide a dispute between opposing parties “must be one without bias towards one side or the other in the dispute.”
• Test of real likelihood of bias:
a) Automatic disqualification: Bias based on legal, pecuniary, or personal interests automatically disqualifies a person from acting as an arbitrator or judge. A person with an interest in the outcome of a dispute is considered biased, regardless of the extent of the interest.
b) Real likelihood of bias: The nemo judex rule may be applicable where a judge’s conduct or circumstances give rise to an apprehension of bias. In such situations, the judge does not have a financial or cause-based interest in the outcome of the dispute but provides benefit to a party by failing to be neutral and impartial. The determination of bias does not depend upon actual proof of bias but whether there is a real possibility of bias based on the facts and circumstances.
• Indian approach to the bias test: This Court has consistently adopted the real likelihood test to determine bias. In Manak Lal v. Dr. Prem Chand Singhvi91957 SCC OnLine SC 10, the Supreme Court held that bias is assessed based on whether a litigant could reasonably perceive that bias might have influenced the tribunal’s decision. In Government of Haryana v. GF Toll Road Private Ltd.10(2019) 3 SCC 505, it was clarified that a retired government employee may act as an arbitrator unless circumstances suggest a reasonable apprehension of bias. Thus, in India, the sanctity and integrity of the arbitral process are held to the same standard of bias as that applicable to judicial authorities.
• Unilateral appointment of arbitrators is violative of the equality clause under Section 18: Equal treatment of parties at the stage of appointment of an arbitrator ensures impartiality during the arbitral proceedings. A clause allowing one party to unilaterally appoint an arbitrator violates the principle of equality under Section 18 of the Arbitration Act. Equal participation in the appointment process is crucial to ensure impartiality in arbitration. While PSUs may create a panel of arbitrators, they cannot require the other party to choose from this panel unless the other party explicitly waives the nemo judex rule. Equal treatment in the appointment process is fundamental to maintaining impartiality throughout the arbitration.
VIII. Public-private contracts and public policy
• Unconscionability under the Contract Act – In Lombardi Engg Ltd. v. Uttarakhand Jal Vidyut Nigam Ltd.11(2024) 4 SCC 341, the Supreme Court addressed an arbitration clause that required the party initiating arbitration to deposit 7% of the claim as security. This Court observed that an arbitration agreement has to comply with the “operation of law”, as the grundnorm. It was observed that the layers of grundnorm in the context of an arbitration agreement include (i) the Constitution of India; (ii) the Arbitration Act and any other Central and State law; and (iii) the arbitration agreement entered into by the parties under Section 7 of the Arbitration Act. The Court further held that party autonomy cannot be exercised to the point of violating fundamental constitutional rights. It concluded that the pre-deposit requirement in the arbitration clause violated Article 14 of the Constitution.
• The doctrine of unconscionability stems from equity. An unconscionable contract is one that no rational person, free from duress, would agree to, and that no fair or honest person would accept. Unconscionability includes: (i) a lack of meaningful choice for one party; and (ii) terms that are unreasonably favorable to one party.
• Public-private contracts and public policy of arbitration – Section 34 of the Arbitration Act specifies the grounds for setting aside an arbitral award. Section 34(2)(b) specifically provides that an arbitral award may be set aside if the court finds that the arbitral award conflicts with the public policy of India. This includes situations where the award is induced by fraud or corruption, contravenes the fundamental policy of Indian law, or violates basic notions of morality or justice. In Avitel Post Studioz Ltd. v. HSBC PI Holdings (Mauritius) Ltd.12(2024) 7 SCC 197, this Court held that the most basic notions of morality and justice under the concept of “public policy” will include bias. Given the public nature of government actions, it is essential that such contracts are entered into using fair and reasonable procedures. All actions by public authorities must adhere to principles of fairness and non-arbitrariness.
IX. Majority judgment:
• Equal Treatment Principle: The principle of ensuring equal treatment for all parties must be upheld at every stage of the arbitration process, including when it comes to the appointment of arbitrators.
• PSUs and Arbitrator Panels: The Arbitration Act does not prevent Public Sector Undertakings (PSUs) from forming a panel of potential arbitrators. However, it is not permissible for an arbitration clause to compel the opposing party to choose an arbitrator solely from the panel of arbitrators appointed by the PSU.
• Unilateral Appointment of Arbitrator: A clause that permits one party to unilaterally select a sole arbitrator raises legitimate concerns about the independence and impartiality of the arbitrator. Additionally, such a provision is inherently exclusive, as it limits the other party’s ability to participate equally in the arbitrator selection process.
• Appointment of Three-Member Panel: Requiring the other party to choose an arbitrator from a pre-curated list of potential arbitrators is a violation of the equal treatment principle. In this scenario, there is no adequate counterbalance, as the parties are not equally involved in the process of selecting arbitrators. This creates an imbalance, with the process being skewed in favor of one party—in this case, the Railways—thereby breaching the principle of fairness.
• Violation of Article 14: Unilateral appointment clauses, especially in public-private contracts, violate the principles of fairness and equality under Article 14 of the Indian Constitution, which guarantees the right to equality before the law.
• Waiver of Bias Allegation: The principle of express waiver, as outlined in the proviso to Section 12(5) of the Arbitration Act, applies in cases where a party seeks to waive the claim of bias against an arbitrator chosen unilaterally by one of the parties. After a dispute has arisen, the parties may mutually decide whether it is necessary to waive the rule that no one should be a judge in their own cause (nemo judex in causa sua).
• Prospective Application: The legal principles established in this judgment will apply prospectively, meaning they will govern arbitrator appointments made after the date of the judgment. This rule specifically applies to appointments made for three-member arbitration panels.
X. Partial dissenting opinion by Hrishikesh Roy, J.
Justice Hrishikesh Roy concurred with the Chief Justice that Section 18 of the Arbitration Act mandates equal treatment of parties at all stages of arbitration, including the appointment of arbitrators. However, he disagreed with invoking constitutional principles to reinforce this equality in the arbitration context. He clarified that unilateral appointments are not inherently impermissible and emphasized the distinction between ‘ineligibility’ and ‘unilateral’ appointments. Referring to TRF (supra), he noted that it addressed ‘ineligibility’ and not the permissibility of unilateral appointments, and that not all unilateral appointments should be voided by court declaration.
• Section 18 applies to all stages of arbitration, including the appointment of arbitrators. The Arbitration Act does not provide special treatment for the government, whether the arbitration is with or against it.
• Unilateral appointments are permissible under the Arbitration Act, provided the nominated arbitrator is eligible under the Seventh Schedule. Judicial intervention under Section 11(6) is warranted only when parties fail to reach consensus, and the Court must appoint an independent arbitrator under Section 11(8), read with Sections 12 and 18.
• The independence and impartiality of arbitrators must be assessed within the statutory framework, primarily under Sections 12(5) and 18. Constitutional and public law principles should not be imported into arbitration proceedings, particularly at the Section 11 threshold.
• He opined that any waiver of bias allegations must be made in writing after the dispute arises, as per Section 12(5) of the Arbitration Act. Judicial intervention should only occur when consensus between the parties is absent, and the Arbitration Act provides clear remedies for issues related to appointment of an arbitrator.
XI. Partial dissenting opinion by P.S. Narsimha, J.
Justice Narasimha observed that invoking Section 18 of the Arbitration Act to mandate equal treatment of parties during arbitrator appointments presents challenges. He clarified that Section 18 obligates the arbitral tribunal, not the parties, to ensure equality. Additionally, he expressed difficulty in applying the doctrine of bias at the appointment stage and cautioned against prematurely declaring all unilateral appointment clauses as void. He also noted that a mere relationship with the appointing party does not inherently compromise arbitrator independence.
• Arbitration embodies two interdependent principles: party autonomy (contractual freedom) and the statutory obligation to form an independent and impartial arbitral tribunal. Party autonomy, central to arbitration, includes selecting arbitrators, determining procedures, and deciding how awards are challenged. This autonomy is embedded in the Arbitration Act, with judicial intervention restricted.
• Once parties opt for arbitration, they must ensure an independent, impartial tribunal. Arbitration, as an alternative to civil court proceedings under Section 28 of the Contract Act, cannot compromise essential features like independence and impartiality. These principles are enshrined in Section 23 of the Contract Act, making non-compliant arbitration agreements void. Agreements that do not ensure an independent and impartial tribunal violate public policy and are unenforceable.
• It is unnecessary to apply constitutional or administrative law principles to arbitration proceedings. The duties governing arbitration, including impartiality, are rooted in the Contract and Arbitration Acts, ensuring judicial restraint. Courts have the duty to ensure arbitration agreements comply with public policy by establishing independent and impartial tribunals. This responsibility is statutory under the Contract Act and the Arbitration Act.
• While parties may maintain a panel of arbitrators, clauses allowing one party to unilaterally appoint an arbitrator may undermine independence and violate public policy. Courts will scrutinize such clauses and declare them invalid if necessary. Courts will not issue blanket rulings on the invalidity of unilateral appointment clauses. Instead, they will assess each case based on the agreement’s specific terms and context.
• All pending challenges to unilateral appointment clauses will be resolved by assessing whether such clauses enable the constitution of an independent and impartial tribunal.
XII. PSL Opinion
The judgment dispels the confounding doubts surrounding the vexed issue concerning appointment of arbitrators from panels curated unilaterally by public sector undertakings and comprising exclusively of retired government employees. While there has been no embargo placed on appointment of retired government officials as arbitrators, the Supreme Court has authoritatively ruled against clauses which envisaged appointment of majority arbitrators on three member tribunals exclusively from the curated panels maintained by government organisations unilaterally. The ruling will apply prospectively from the date of the judgment and will not impact ongoing arbitrations where the tribunal is comprised of members appointed from the curated panels. Suffice to say that any procedure that ostensibly undermines independence and impartiality creates a legitimate apprehension of bias, unfairness, equality, and justice and has to be invalidated without subjective evaluation. In our opinion, the Court has chosen to err on the side of caution and preserve the sanctity of the arbitral process right from the appointment stage, and espoused the cardinal obligation to constitute a fair, independent and impartial arbitral tribunal by judicially whittling down the flexibility offered to agree on a appointment procedure by virtue of party autonomy.
This pronouncement is likely to give a further impetus to use of institutional arbitration clauses in commercial contracts. However, the radical regulation and fetters placed on government organizations and PSU’s may prove to be counterproductive and dissuade such parties from using arbitration as a preferred dispute resolution method in their contracts. Resultantly, we may observe that more government organizations and PSU’sfollow in the footsteps of Oil India Limited and Oil and Natural Gas Corporation, who have recently taken conscious decisions to distance from arbitration for dispute resolution in their high value contracts, in sync with the Finance Ministry’s letter of June 2024. This does not bode well for the future prospect of arbitration in India, as government entities continue to be the biggest litigant in the country. The imposition of constitutional principles of equality and fairness enshrined under Article 14 in the commercial dealings related to the arbitral appointment process appears to be slightly excessive and may certainly have a deterring effect.
The dissenting judgments, rightly strike a slightly discordant note and takes a conventional view advocating against importing public law principles to evaluate arbitrator appointment procedures. When there are effective statutory safeguards built in the Arbitration Act and Contract Act, to address any concerns regarding an unfair appointment process, the need to employ constitutional principles seems disproportionate. The blanket invalidation of arbitration clauses containing unilateral appointment procedures from curated panels without case by case analysis may yield unintended and unpalatable results. As always, only time will reflect the true picture and one can only hope for the best outcomes for the industry.
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