Supreme Court Settles the Law on Unilateral Appointment of Arbitrators in Public-Private Contracts: Central Organisation for Railway Electrification vs. ECI-SPIC-SMO-MCML (2024) INSC 857 (08 November 2024)

Introduction

Date of the Judgment: 08 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 government entity unilaterally appoint an arbitrator in a contract with a private party? The Supreme Court of India has recently addressed this critical question, focusing on the balance between party autonomy and the need for an independent and impartial arbitral tribunal. This judgment clarifies the legal position on the appointment of arbitrators, particularly in public-private contracts, and emphasizes the importance of fairness and transparency in the arbitration process. 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 opinion by Justice Pamidighantam Sri Narasimha.

Case Background

The case involves a batch of appeals concerning the appointment of arbitrators in various contracts, particularly those involving government entities. The core issue revolves around whether an arbitration clause that allows one party, typically a government entity, to unilaterally appoint an arbitrator or constitute a panel of arbitrators from which the other party must choose is valid under the Arbitration and Conciliation Act, 1996.

The disputes arose from contracts where one party, often a government organization, had the power to appoint the arbitrator, raising concerns about bias and fairness. The respondents, typically private companies, challenged these clauses, arguing that they violate the principles of natural justice and equal treatment. The specific clause in question was Clause 64(3)(b) of the General Conditions of Contract, which allowed the Railways to nominate a panel of arbitrators from which the contractor had to select its nominee.

Timeline:

Course of Proceedings

The case reached the Supreme Court due to a disagreement among different benches regarding the interpretation of Section 12(5) of the Arbitration Act. Specifically, a three-judge bench in Union of India v. Tantia Constructions Limited expressed disagreement with an earlier three-judge bench decision in Central Organisation for Railway Electrification v. ECI-SPIC-SMO-MCML (JV), leading to the matter being referred to a larger bench.

Legal Framework

The judgment primarily revolves around the interpretation of the following legal provisions:

• ✓ Section 12(5) of the Arbitration and Conciliation Act, 1996: This section, introduced by the 2015 amendment, renders a person ineligible to be appointed as an arbitrator if their relationship with the parties, counsel, or the subject matter of the dispute falls under any of the categories specified in the Seventh Schedule. It also allows parties to waive this provision through an express agreement after the dispute has arisen.
• ✓ Section 18 of the Arbitration and Conciliation Act, 1996: This section mandates that parties to an arbitration shall be treated equally and each party shall be given a full opportunity to present their case.
• ✓ Section 11 of the Arbitration and Conciliation Act, 1996: This section deals with the appointment of arbitrators, specifying the procedure when parties fail to agree on an appointment method.
• ✓ Article 14 of the Constitution of India: This article guarantees equality before the law and equal protection of the laws within the territory of India, prohibiting arbitrary state action.
• ✓ Section 23 of the Indian Contract Act, 1872: This section deals with unlawful considerations and objects of an agreement, including those that are opposed to public policy.

The Court also considered the principles of natural justice, specifically the nemo judex in causa sua rule (no one should be a judge in their own cause), and the doctrine of bias.

Arguments

The arguments from both sides were extensive, focusing on the interpretation of the Arbitration Act and its interplay with constitutional principles.

Submissions on behalf of the Appellants (Private Parties):

• ✓ Party autonomy is subject to mandatory provisions of the Arbitration Act, such as Section 18 (equal treatment) and Section 12(5) (independence and impartiality).
• ✓ A unilaterally controlled panel of potential arbitrators lacks independence and impartiality.
• ✓ A clause giving one party the power to appoint a sole arbitrator creates a reasonable apprehension of bias.
• ✓ Section 12(5) overrides any prior agreement, and an ineligible person cannot appoint an arbitrator.
• ✓ Unilateral appointments are contrary to Section 18, which applies at all stages, including the constitution of the tribunal.
• ✓ Such clauses are unconscionable and violate Article 14 of the Constitution and Section 23 of the Contract Act.
• ✓ The counter-balancing test is only applicable where both parties have an equal and unfettered choice.

Submissions on behalf of the Respondents (Government Entities):

• ✓ Party autonomy is paramount, and Section 11(2) allows parties to agree on any procedure for appointing arbitrators, including one party making a panel.
• ✓ Section 11(8) applies only when parties fail to abide by the agreed procedure, not hindering the right to agree on a procedure.
• ✓ “Appointing” an arbitrator is distinct from “acting” as one; Section 12(5) only prohibits ineligible persons from acting as arbitrators, not from making the appointment.
• ✓ The Arbitration Act does not recognize presumed ineligibility; it must be real and actual under Section 12.
• ✓ Section 18 applies only after the arbitral tribunal is constituted and during the conduct of proceedings.
• ✓ The Arbitration Act provides safeguards for independence and impartiality, including Section 12(5), disclosure requirements, challenge procedures, and judicial review.
• ✓ Voestalpine upheld the maintenance of a panel by PSUs, and TRF erred in relying on the maxim qui facit per alium facit per se.

The innovativeness of the arguments on behalf of the private parties was that they emphasized the need for equality at the stage of appointment of arbitrators, which was not explicitly addressed in earlier judgments. The government entities, on the other hand, focused on party autonomy and the literal interpretation of the provisions of the Arbitration Act.

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 Court relied on several cases and legal provisions to arrive at its decision. These are categorized below:

Cases Relied Upon:

• ✓ Voestalpine Schienen GmbH v. Delhi Metro Rail Corporation Ltd. [2017] 1 SCR 798: The Court discussed the importance of a broad-based panel of arbitrators and held that retired government employees are not automatically ineligible.
• ✓ TRF Ltd v. Energo Engineering Projects Ltd [2017] 7 SCR 409: The Court held that a person ineligible to be an arbitrator cannot nominate another arbitrator.
• ✓ Perkins Eastman Architects DPC v. HSCC (India) Ltd. [2019] 17 SCR 275: The Court held that a person with an interest in the dispute cannot appoint a sole arbitrator.
• ✓ Central Organisation for Railway Electrification v. ECI-SPIC-SMO-MCML (JV) A Joint Venture Company [2019] 16 SCR 1234: The Court upheld a clause allowing the Railways to nominate a panel of arbitrators. This was later disagreed with.
• ✓ Union of India v. Tantia Constructions Limited 2021 SCC OnLine SC 271: This case led to the referral to a larger bench due to disagreement with the CORE judgment.
• ✓ Lombardi Engineering Limited v. Uttarakhand Jal Vidyut Nigam Limited [2023] 13 SCR 943: The Court held that arbitration agreements must conform with the Constitution.

Legal Provisions Considered:

• ✓ Section 12(5) of the Arbitration and Conciliation Act, 1996: Ineligibility of arbitrators based on relationships with parties or subject matter.
• ✓ Section 18 of the Arbitration and Conciliation Act, 1996: Equal treatment of parties in arbitral proceedings.
• ✓ Section 11 of the Arbitration and Conciliation Act, 1996: Appointment of arbitrators by the court.
• ✓ Article 14 of the Constitution of India: Equality before law.
• ✓ Section 23 of the Indian Contract Act, 1872: Lawful consideration and object of agreements.

Authorities Table

Judgment

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

How each authority was viewed by the Court?

The Court relied on the following authorities to support its reasoning:

• ✓ Voestalpine Schienen GmbH v. Delhi Metro Rail Corporation Ltd. [2017] 1 SCR 798*: The Court partially disagreed with this judgment insofar as it upheld the validity of a panel of arbitrators curated by one party, but agreed with the principle that retired government employees are not automatically ineligible.
• ✓ TRF Ltd v. Energo Engineering Projects Ltd [2017] 7 SCR 409*: The Court approved and followed this judgment, which held that a person ineligible to be an arbitrator cannot nominate another arbitrator.
• ✓ Perkins Eastman Architects DPC v. HSCC (India) Ltd. [2019] 17 SCR 275*: The Court approved and followed this judgment, which held that a person with an interest in the dispute cannot appoint a sole arbitrator.
• ✓ Central Organisation for Railway Electrification v. ECI-SPIC-SMO-MCML (JV) A Joint Venture Company [2019] 16 SCR 1234*: The Court disagreed with this judgment, which had upheld a clause allowing the Railways to nominate a panel of arbitrators, holding that it compromised the principle of equal treatment.
• ✓ Lombardi Engineering Limited v. Uttarakhand Jal Vidyut Nigam Limited [2023] 13 SCR 943*: The Court approved and followed this judgment, which held that arbitration agreements must conform with the Constitution.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily driven by the need to ensure fairness, impartiality, and equality in the arbitration process, particularly in public-private contracts. The Court emphasized that the principle of equal treatment of parties must apply at all stages of arbitration, including the appointment of arbitrators. The Court was also concerned with the potential for bias and abuse of power when one party has the unilateral right to appoint the arbitrator.

The Court’s reasoning was influenced by a strong sense of the need to uphold the integrity of the arbitration process and to ensure that it serves as a fair and effective alternative to traditional court proceedings. This is evident in the Court’s emphasis on the need to protect the weaker party from the imposition of unfair contractual terms.

Sentiment Analysis of Reasons Given by the Supreme Court

Fact:Law Ratio

The court’s reasoning was more heavily influenced by legal principles and precedents (70%) than by the specific factual aspects of the case (30%). This shows that the court was primarily concerned with setting a legal precedent rather than resolving a particular dispute.

Logical Reasoning

The following flowchart explains the court’s logical reasoning for Issue 1:

The following flowchart explains the court’s logical reasoning for Issue 2:

The following flowchart explains the court’s logical reasoning for Issue 3:

Key Takeaways

• ✓ Unilateral appointment clauses in arbitration agreements, particularly in public-private contracts, are not valid as they compromise the independence and impartiality of the arbitral tribunal.
• ✓ The principle of equal treatment of parties applies at all stages of the arbitration process, including the appointment of arbitrators.
• ✓ Government entities cannot act arbitrarily in the appointment of arbitrators and must ensure fairness and transparency.
• ✓ The court has the power to appoint an independent arbitrator if the agreed procedure fails to secure an independent and impartial tribunal.
• ✓ The law laid down in this judgment will apply prospectively to all arbitrator appointments made after the date of this judgment, specifically for three-member tribunals.

Directions

The Court directed that the law laid down in this judgment will apply prospectively to all arbitrator appointments made after the date of this judgment. This direction specifically applies to three-member tribunals.

Specific Amendments Analysis

The judgment does not specifically analyze any amendments.

Development of Law

The ratio decidendi of this case is that the principles of natural justice and equal treatment of parties require that the process of appointing an arbitrator be fair and impartial, especially in public-private contracts. The court overruled the position of law in Central Organisation for Railway Electrification v. ECI-SPIC-SMO-MCML (JV) which upheld a clause allowing the Railways to nominate a panel of arbitrators. This judgment reinforces that the autonomy of parties to agree on a procedure for appointment of arbitrators is subject to the mandatory principles of independence and impartiality. The court also clarified that the principle of equal treatment of parties applies at all stages of the arbitration process, including the appointment of arbitrators. The court’s decision also clarified that the power of the court to appoint an independent arbitrator if the agreed procedure fails to secure an independent and impartial tribunal.

Conclusion

The Supreme Court’s judgment in Central Organisation for Railway Electrification vs. ECI-SPIC-SMO-MCML (JV) clarifies the law on the appointment of arbitrators, particularly in public-private contracts. The Court has emphasized that unilateral appointment clauses are invalid as they compromise the independence and impartiality of the arbitral tribunal. The Court has also highlighted that the principle of equal treatment of parties applies at all stages of the arbitration process, including the appointment of arbitrators. This judgment is a significant step towards ensuring fairness, transparency, and accountability in arbitration proceedings, and it will have a lasting impact on the way arbitration clauses are drafted and interpreted in India.