The Conundrum On Unilateral Appointment Of Arbitrator
The majority judgment passed by the Supreme Court of India in “Central Organisation for Railway Electrification Versus M/s ECI SPIC SMO MCML (JV) A Joint Venture Company1” (“CORE 2.0”) exemplifies radical regulation of party autonomy and reinforces impartiality in arbitration thus promoting balanced procedures and framework.?
The decisive judgement is predominantly opined, which is intrinsically articulated and authored by CJI Dr D.Y. Chandrachud and affirmed by Hon’ble Justices J.B. Pardiwala and Manoj Misra, respectively. Whereas, Hon’ble Justices Hrishikesh Roy and P.S. Narasimha delivered separate judgments, agreeing with the majority on several points. The judgment addresses the independence and impartiality of arbitral tribunals under the Arbitration and Conciliation Act 1996 (Arbitration Act), focusing on the balance between party autonomy and these principles.??
Majority Decision? ?
The majority opinion, authored by CJI Dr D.Y. Chandrachud for Justices J.B. Pardiwala and Manoj Misra, emphasized that the principle of equality applies throughout arbitration proceedings, including the appointment of arbitrators. The Court held that while Public Sector Undertakings (PSUs) may empanel potential arbitrators, mandating the other party to select an arbitrator solely from such a panel violates fundamental arbitration principles and fails to ensure impartiality.?
The judgment scrutinizes arbitration clauses in public-private contracts and states that unilateral appointment clauses are inherently flawed as they undermine the integrity required in quasi-judicial roles like arbitral tribunals. Such clauses breach the nemo judex in causa sua rule, a cornerstone of public policy in arbitration, by giving rise to doubts about the impartiality and independence of the arbitrators. Further, such clauses were found to be potentially arbitrary and violative of Article 14, which guarantees equality before the law. The court stressed the need for fairness and non-arbitrariness in government contracts, aligning with public policy and the fundamental principles of Indian law.?
It was also held that requiring a party to select arbitrators from a PSU-curated panel hinders equal participation and tilts the process unfairly. The Court declared that a three-member tribunal appointment process, such as the one in CORE (supra), prejudiced the non-PSU party and violated Article 14 of the Constitution.??
The ruling will apply prospectively to arbitrator appointments made after the date of this judgment and extends to three-member arbitration panels. The court also examined past cases, including Voestalpine Schienen GmbH v. Delhi Metro Rail Corporation Ltd., TRF Ltd v. Energo Engineering Projects Ltd, and Perkins Eastman Architects DPC v. HSCC (India) Ltd., which dealt with the eligibility of arbitrators and the unilateral appointment of arbitrators.?
Key Takeaways:?
The court concluded that:?
Justice Hrishikesh Roy's Opinion? ?
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Justice Roy concurred with the majority that the principle of equal treatment under Section 18 of the Arbitration Act applies at all stages, including arbitrator appointments. However, he disagreed with invoking constitutional principles to reinforce equality in arbitration, emphasizing that public law doctrines should not be imported into arbitration law. He stressed party autonomy and stated that arbitration without equality and autonomy is a soulless process. Justice Roy opposed the universal invalidation of unilateral appointments, citing Section 12(5) of the Act, which provides for waivers with written, post-dispute consent. He argued that judicial intervention should respect party agreements unless compelling reasons exist, advocating minimal intervention to honour agreements while ensuring fairness and preserving arbitration's autonomy.?
Justice PS Narasimha’s Opinion? ?
Justice P.S. Narasimha emphasized the balance between party autonomy and statutory obligations in arbitration. He stated that arbitration agreements must balance both, the contractual freedom of parties and the duty to ensure an independent arbitral tribunal. Party autonomy is a core characteristic of arbitration that includes the selection of tribunal members, procedural conduct, as well as post-award remedies. However, he noted that independence and impartiality are fundamental public policy requirements under Section 23 of the Contract Act, from which parties cannot opt-out.?
Justice Narasimha clarified that arbitration replaces civil courts as a forum but cannot waive the essential feature of impartial dispute resolution. He highlighted that agreements violating public policy are void under Section 23. He also differentiated between party obligations to form independent tribunals from the judicial role of arbitrators, cautioning against importing public law principles into contractual arbitration.?
He maintained that courts hold the authority to review arbitration agreements to ensure compliance with public policy, primarily under Sections 11, 14, and 34 of the Arbitration Act. He advocated for a case-to-case specific approach rather than universally invalidating unilateral appointment clauses, to uphold both party autonomy and fairness.?
Way Forward:?
“Non-banking financial companies include arbitration clauses in the standard form contracts entered into with the borrowers. Since the nature of the dispute generally involves default in payment by the borrowers, the arbitration clause allows the NBFCs to appoint an arbitrator. Nevertheless, the arbitrator has to satisfy the criteria laid down under Section 12.”?
Conclusion:?
CORE judgment significantly affects the process of arbitration right from the appointment procedure to the execution of arbitral award. The blanket invalidation of arbitration clauses containing unilateral appointment procedures without case-to-case analysis and taking into account the stakeholders such as Banks and financial institutions may yield unintended and unpalatable results. However, one must not lose sight of its established reputation as the most trusted alternative dispute resolution method to resolve disputes globally and its inherent ability to regulate and adapt to the needs of stakeholders. However, when it comes to institutional arbitration, the appointment of arbitrators is conducted through the institution itself, ensuring that both parties are provided with an equal opportunity to select arbitrators from the institution's panel. This process ensures fairness and neutrality in the appointment. Consequently, arbitrators appointed through institutional arbitration, with an independent fee arrangement and without the need to comply with Schedule IV, should be deemed valid. It is crucial to uphold institutional arbitration's established reputation as a trusted alternative dispute resolution method globally, while also recognizing its ability to regulate and adapt to the evolving needs of stakeholders.?