Supreme Court Settles the Independence of Arbitrators in Public-Private Contracts (2024)

Date of the Judgment: 8 November 2024

Citation: 2024 INSC 857

Judges: Dr Dhananjaya Y Chandrachud, CJI, J B Pardiwala, J, Manoj Misra, J, Hrishikesh Roy, J, Pamidighantam Sri Narasimha, J

Can a party to a contract unilaterally appoint an arbitrator, or create a panel of arbitrators from which the other party must choose? The Supreme Court of India recently addressed this critical question in a batch of appeals concerning the independence and impartiality of arbitral tribunals. The core issue was whether allowing one party to have a dominant role in the appointment process compromises the fairness of arbitration. The judgment clarifies the interplay between party autonomy and the need for impartial arbitrators, particularly in public-private contracts. The majority opinion was authored by the Chief Justice of India, Dr. Dhananjaya Y Chandrachud, with a concurring opinion by Justice Hrishikesh Roy and a separate concurring opinion by Justice Pamidighantam Sri Narasimha.

Case Background

The case arose from a series of appeals challenging the appointment of arbitrators, particularly in public-private contracts where one party, often a government entity, had the power to unilaterally appoint arbitrators or create a panel from which the other party had to select. The appeals questioned the validity of such clauses under the Arbitration and Conciliation Act, 1996, especially after the 2015 amendment which introduced stricter criteria for the independence and impartiality of arbitrators.

The primary concern was whether these clauses violated the principle of equal treatment of parties, as enshrined in Section 18 of the Arbitration Act, and whether they were in conflict with the public policy of India, which requires fair and impartial dispute resolution. The cases also brought to the fore the conflict between party autonomy and the need for an independent and impartial arbitral process.

Timeline

Course of Proceedings

The matter was initially heard by a two-judge bench, which referred it to a three-judge bench due to conflicting views on the issue. Subsequently, a three-judge bench in Union of India v. Tantia Constructions Limited expressed disagreement with the earlier decision in Central Organisation for Railway Electrification v. ECI-SPIC-SMO-MCML (JV), leading to the constitution of this larger bench to settle the matter. The case was further complicated by the formation of an Expert Committee on Arbitration Law by the Union Government, which was also tasked with looking into the issues raised in this reference. However, as the government did not take any decision on the recommendations of the Expert Committee, the Constitution Bench decided to take up the reference for final hearing.

Legal Framework

The judgment extensively discusses the following key legal provisions:

• Section 7 of the Arbitration and Conciliation Act, 1996: Defines an arbitration agreement as an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship.
• Section 10 of the Arbitration and Conciliation Act, 1996: Allows parties the freedom to determine the number of arbitrators, provided that such number shall not be an even number.
• Section 11(2) of the Arbitration and Conciliation Act, 1996: Allows parties the freedom to agree on a procedure for appointing the arbitrator or arbitrators.
• Section 11(6) of the Arbitration and Conciliation Act, 1996: Provides recourse to the Supreme Court or High Court to appoint arbitrators when the agreed procedure fails.
• Section 11(8) of the Arbitration and Conciliation Act, 1996: Requires the appointing authority to ensure the appointment of independent and impartial arbitrators.
• Section 12 of the Arbitration and Conciliation Act, 1996: Specifies the grounds to challenge the appointment of arbitrators, including justifiable doubts as to their independence or impartiality.
  • Section 12(5) of the Arbitration and Conciliation Act, 1996: Renders a person ineligible to be appointed as an arbitrator if their relationship with the parties, counsel, or subject matter of the dispute falls under any of the categories specified in the Seventh Schedule. The proviso to this section allows parties to waive the applicability of this provision through an express agreement in writing, after the disputes have arisen.
• Section 18 of the Arbitration and Conciliation Act, 1996: Mandates that parties shall be treated with equality and each party shall be given a full opportunity to present his case.
• Section 23 of the Indian Contract Act, 1872: Prohibits unconscionable contracts and contracts that are against public policy.
• Section 28 of the Indian Contract Act, 1872: Bars any agreement that prohibits parties from enforcing their rights under contract by usual legal proceedings in ordinary tribunals, but makes an exception to a contract by which two or more persons agree to refer the disputes that may arise between them in respect of any subject or class of subjects to arbitration.

The Court also considered the UNCITRAL Model Law on International Commercial Arbitration 1985, particularly Article 2A which enunciates the principles to interpret the provisions of national arbitration laws, and Article 18 which deals with equal treatment of parties.

Arguments

The arguments presented by the various parties can be summarized as follows:

Submissions on behalf of the Appellants:

• Party autonomy is subject to mandatory provisions of the Arbitration Act, including Section 18 (equal treatment) and Section 12(5) (independence and impartiality).

• An arbitration clause giving one party the power to appoint a sole arbitrator creates a reasonable apprehension of bias.

• Section 12(5) overrides arbitration agreements, and an ineligible person cannot appoint an arbitrator or curate a panel.

• Unilaterally appointed panels violate Section 18 by giving an unfair advantage to one party.

• Arbitration clauses that authorize one party to unilaterally appoint an arbitrator are unconscionable and violate Article 14 of the Constitution.

• The counter-balancing test of equal choice is not met when one party’s choice is restricted to a pre-selected list.

Submissions on behalf of the Respondents:

• Party autonomy is paramount, and Section 11(2) allows parties to agree on any procedure for appointing arbitrators, including one party preparing a panel.

• Section 11(8) applies only when parties fail to abide by an agreed procedure under Sections 11(4), 11(5) and 11(6).

• The act of “appointing” or “enlisting” is distinct from “acting” as an arbitrator, and Section 12(5) only prohibits ineligible persons from acting as arbitrators, not from appointing them.

• Section 18 applies only after the composition of the arbitral tribunal, during the conduct of arbitral proceedings.

• The Arbitration Act has adequate safeguards for the independence and impartiality of arbitrators, including Section 12(5), mandatory disclosures, challenge procedures, and judicial review.

• Voestalpine upheld the maintenance of panels of potential arbitrators by public sector undertakings.

• TRF erred by relying on the maxim qui facit per alium facit per se.

Submissions Table

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for determination:

1. 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;
2. Whether the principle of equal treatment of parties applies at the stage of the appointment of arbitrators; and
3. 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.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues:

Authorities

The Supreme Court relied on the following authorities:

Cases:

Legal Provisions:

Judgment

The Supreme Court held that:

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• Voestalpine Schienen GmbH v. Delhi Metro Rail Corporation Ltd. [CITATION]: Overruled on the aspect of limited choice of panel, but the broad-based principle for the panel of arbitrators was upheld.
• TRF Ltd v. Energo Engineering Projects Ltd [CITATION]: Approved and relied upon, holding that a person ineligible to be an arbitrator cannot nominate another arbitrator.
• Perkins Eastman Architects DPC v. HSCC (India) Ltd [CITATION]: Approved and relied upon, holding that a person with an interest in the dispute should not have the power to appoint a sole arbitrator.
• Central Organisation for Railway Electrification v. ECI-SPIC-SMO-MCML (JV) A Joint Venture Company [CITATION]: Overruled, as the appointment process was unequal and prejudiced in favor of the Railways.

The Court emphasized that while party autonomy is a core principle of arbitration, it is not absolute and is subject to mandatory provisions of the Arbitration Act, including Section 18 and Section 12(5). The Court held that unilateral appointment clauses in public-private contracts are violative of Article 14 of the Constitution, as they are arbitrary and hinder equal participation in the appointment process. Further, the Court noted that the principle of equal treatment of parties applies at all stages of arbitration, including the appointment of arbitrators.

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

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

“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.”

What weighed in the mind of the Court?

The Supreme Court emphasized several key aspects that influenced its decision:

• Independence and Impartiality: The Court stressed that the independence and impartiality of arbitral proceedings are paramount, and any process that undermines these principles cannot be upheld.
• Equality of Treatment: The Court highlighted the importance of equal treatment of parties at all stages of arbitration, including the appointment of arbitrators.
• Public Policy: The Court considered the public policy of India, which requires fair and impartial dispute resolution, and held that unilateral appointment clauses violate this policy.
• Reasonable Apprehension of Bias: The Court noted that a unilateral appointment process creates a reasonable apprehension of bias, which is sufficient to invalidate such clauses.
• Constitutional Mandate: The Court emphasized that the actions of public authorities must adhere to Article 14 of the Constitution, which mandates fairness and non-arbitrariness.

Sentiment Analysis of Reasons Given by the Supreme Court:

Fact:Law Ratio

Logical Reasoning:

Key Takeaways

• Unilateral appointment clauses in arbitration agreements, especially in public-private contracts, are generally invalid.
• Parties must have an equal say in the appointment of arbitrators to ensure fairness and impartiality.
• The principle of equal treatment applies at all stages of arbitration, including the appointment of arbitrators.
• Public policy requires that arbitration processes be fair and impartial, and this cannot be compromised by contractual terms.
• The decision applies prospectively to arbitrator appointments to be made after the date of the judgment for three member tribunals.

Directions

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

Development of Law

The ratio decidendi of the case is that unilateral appointment clauses in arbitration agreements are invalid as they violate the principles of independence, impartiality, and equality. This decision changes the previous position of law where unilateral appointment clauses were upheld by the Court. This judgement overrules the decision in Central Organisation for Railway Electrification v. ECI-SPIC-SMO-MCML (JV) and limits the scope of Voestalpine Schienen GmbH v. Delhi Metro Rail Corporation Ltd.

Conclusion

The Supreme Court’s judgment provides much-needed clarity on the issue of arbitrator appointments in public-private contracts. By emphasizing the importance of independence, impartiality, and equal treatment of parties, the Court has reinforced the integrity of the arbitration process. The decision ensures that arbitration remains a fair and effective alternative dispute resolution mechanism, particularly in contracts involving government entities.