SC Rules Against Unilateral Appointment of Arbitrators in Arbitration Agreements

On 8th November 2024, the Supreme Court of India delivered a landmark judgment in the case of Central Organisation for Railway Electrification v. M/s ECI SPIC SMO MCML (JV) A Joint Venture Company, 2024 INSC 857. This case dealt with crucial issues regarding the appointment of arbitrators in arbitration agreements, especially when one party is empowered to unilaterally appoint an arbitrator from a curated panel. The Court's decision has far-reaching implications for public-private contracts and arbitration processes in India.

Case Background

The central issue in this case revolved around Section 12(5) of the Arbitration and Conciliation Act, 1996, which disqualifies individuals from being appointed as arbitrators if they have any vested interest in the outcome of the dispute, as listed in the Seventh Schedule. The Supreme Court had previously ruled in TRF Ltd v. Energo Engineering Projects Ltd (2017) and Perkins Eastman Architects DPC v. HSCC (2019) that a person disqualified from being an arbitrator due to bias cannot be given the power to appoint an arbitrator.

However, in the case of Central Organisation for Railway Electrification v. M/s ECI SPIC SMO MCML (JV) A Joint Venture Company (2019), the Court upheld a clause allowing the Indian Railways to maintain a panel of arbitrators, from which the private party had to choose an arbitrator. This decision raised concerns, as the General Manager of the Railways, who was disqualified from being an arbitrator under the Act, had the authority to appoint an arbitrator.

The matter was subsequently referred to a Constitution Bench in 2021 due to conflicting rulings and concerns over whether such practices were in line with constitutional principles, particularly Article 14, which guarantees equality before the law.

The Judgment: Majority Opinion

The Constitution Bench, consisting of five judges, delivered its judgment with a 3:2 majority. The Bench held that clauses in arbitration agreements allowing one party to unilaterally appoint a sole arbitrator are impermissible. It ruled that while Public Sector Undertakings (PSUs) are not prohibited from empanelling potential arbitrators, mandating the other party to choose exclusively from this curated panel violates the principle of equality between the parties in an arbitration.

The majority opinion, authored by Chief Justice Dr. Dhananjaya Y. Chandrachud, and supported by Justices Manoj Misra and Jamshed B. Pardiwala, stressed that the equal treatment of parties must be maintained throughout the arbitration process, including during the appointment of arbitrators.

Key Points of the Ruling

Unilateral Appointment is Impermissible: The Court held that the unilateral appointment of a sole arbitrator by one party undermines the equality of opportunity for both parties in the arbitration process. The appointment could potentially lead to a conflict of interest and bias, which violates the principle of impartiality.
Empaneling Arbitrators: The Court acknowledged that PSUs can maintain a panel of potential arbitrators, but forcing the other party to select from this curated list violates the principle of party autonomy and equality. The selection process must allow equal participation from both parties.
Application of Section 18: The Court held that the independence and impartiality of arbitrators must be ensured at all stages of arbitration, including at the time of appointment. The requirement of Section 18 of the Arbitration Act (which mandates impartiality) applies during the appointment process.
Public-Private Contracts: The Court reinforced the public policy requirements in public-private contracts. It ruled that the state must act in a fair and transparent manner, especially in arbitrations involving government entities. The unilateral appointment of an arbitrator by the state was deemed to contravene Article 14 of the Constitution, which ensures equality before the law.

Dissenting Opinions

While the majority ruled against unilateral appointments, two judges, Justice Hrishikesh Roy and Justice Pamidighantam S. Narasimha, dissented.

Justice Roy argued that unilateral appointments are not inherently invalid, provided the appointee is not disqualified under the Seventh Schedule. He suggested that existing safeguards in the Arbitration Act, like challenges to biased arbitrators, are sufficient.
Justice Narasimha contended that Section 18 (ensuring impartiality) does not apply at the time of the appointment of the arbitrator. He felt that the tribunal, rather than the parties, should be responsible for ensuring impartiality once the arbitration process begins.

Repercussions and Impact

This ruling is a game-changer for arbitration in India, particularly for public-private contracts. The judgment emphasizes the need for fairness and impartiality in arbitration proceedings and strengthens the principle of equality under Article 14 of the Constitution. Here’s why it matters:

Public Sector Undertakings (PSUs): PSUs now need to reassess their arbitration agreements, ensuring that the appointment of arbitrators does not infringe on the equality and impartiality principles.
Arbitration Process: The ruling reaffirms that the appointment process itself must be free from bias, ensuring fairness from the very start of arbitration proceedings.
Contractual Fairness: The judgment sets a precedent for ensuring that arbitration clauses in public-private contracts adhere to constitutional principles, guaranteeing a level playing field for all parties.

Conclusion

The Central Organisation for Railway Electrification v. M/s ECI SPIC SMO MCML (JV) judgment is a crucial step towards ensuring fairness and impartiality in arbitration processes. It reinforces the importance of the equality of parties, particularly in public-private contracts, and aligns India’s arbitration practices with international standards of procedural fairness. With this ruling, the Supreme Court has placed significant emphasis on making arbitration processes more transparent, ensuring that no party has an unfair advantage in the selection of arbitrators.

Read full judgement here: Document