By Hunar
[Author is a student at Rajiv Gandhi National University of Law, Punjab]
A five-judge bench of the Supreme Court delivered its judgment in Central Organisation for Railway Electrification (CORE) v. M/s ECI-SPIC-SMO-MCML (JV), resolving the longstanding debate on unilateral appointments of sole arbitrators in public-private contracts. The ruling marks a pivotal step toward promoting procedural impartiality and inclusivity in Indian arbitration. While the judgment’s implications extend across public-private contractual frameworks, this article undertakes a nuanced critique of the decision, analysing it through the lens of established case law. It further examines the intricate balance between party autonomy and safeguards against bias, as enshrined in the Arbitration and Conciliation Act, 1996.
Introduction
On August 28, 2024, a Constitution Bench of the Supreme Court began hearing whether persons ineligible to act as arbitrators can appoint arbitrators to adjudicate a dispute. In Central Organisation for Railway Electrification (CORE) v. M/s ECI-SPIC-SMO-MCML (JV) (CORE I), a three-judge Bench of the Apex Court allowed ex-employees of the Railways to act as arbitrators. As per the General Conditions of Contract, the General Manager was to appoint an arbitrator, despite being ineligible to act as one under Section 12(5) of the Arbitration Act. A three-judge Bench in Union of India v. M/s Tantia Constructions Limited (Tantia) called for a reference to a larger bench following which a five-judge bench was constituted to adjudicate the present matter in Central Organisation for Railway Electrification v. M/s ECI SPIC SMO MCML (JV) A Joint Venture Company (CORE II). The Court had two questions to answer: first, is unilateral appointment process violative of Article 14?; second, can a party with vested interest unilaterally appoint a sole arbitrator or mandate the other party to choose from a curated panel?
The Law on Unilateral Appointments
In TRF Ltd v. Energo Engg. Projects Ltd (TRF), the Supreme Court dealt with the issue of unilateral appointments in light of the provisions of Section 11(6) of the Arbitration Act. The Managing Director of a party was appointed as the arbitrator despite having an interest in the dispute. The Seventh Schedule of the Arbitration Act consists of relationships which disqualify a person from acting as an arbitrator which includes a Managing Director. The Court regarded any further appointment by a person who is disqualified under Section 12(5) of the Arbitration Act as invalid. Thus, TRF laid down the rule in cases of unilateral appointments.
The rules laid down by the Court in TRF were applied and affirmed in Voestalpine Schienen GmbH v. Delhi Metro Rail Corpn. Ltd (Voestalpine). The Supreme Court instructed that the list of arbitrators to be provided by the DMRC must be ‘broad-based’ to present adequate choice to the other party to choose an arbitrator. Further, in Perkins Eastman Architects DPC v. HSCC (India) Ltd. (Perkins), the Supreme Court held that parties must have equal opportunity to choose arbitrators of their choice to ‘counter-balance’ each other’s interests.
Origins of the Present Matter
The present matter originated from the decision in CORE I where the appellant challenged the appointment of a sole arbitrator by the Allahabad High Court as being against the contractual clauses of the agreement. The Court relied on Voestalpine and held that a panel may contain ex-employees as it would not disqualify the person from acting as an arbitrator. The Court did not deem it fit to allow the parties to deviate from the terms of the agreement according to which the appointment of arbitrators was to be done. The arbitration clause required the Purchaser to make a panel of arbitrators comprising eligible engineers who were serving or retired employees of any Government departments or PSUs. The nomination from a list of ex-employees was upheld due to their expertise. Disqualification due to status of employment would render all employees in the government sector as ineligible to act as arbitrators.
In CORE I, the names proposed for appointment were Railway Gazetted Officers in a dispute involving the Central Railways of India and not just ‘any’ government employee. Such an appointment could potentially be riddled with unjust bias and opacity in appointment, leaving no choice to the other party.
Following this, the Constitutional Bench delivered its judgment in CORE II on 8 November 2024, thereby clearing the controversy. The Bench held that PSUs may frame a panel of potential arbitrators but cannot coerce the other party from choosing an arbitrator from the curated list. The judgment is a welcome step towards equal treatment of parties and ensuring impartiality and fairness in the arbitration procedure.
Nullification of Unilateral Appointments
On the issue whether the appointment process allowing a party with an interest in the dispute to unilaterally appoint an arbitrator, Justice Chandrachud analysed the scope of unilateral appointment clauses and deduced that such clauses in public-private contracts run the risk of introducing justifiable grounds of doubt and impartiality, against the principles of natural justice. Justice Chandrachud holds that a unilateral clause is exclusive and violative of Article 14 of the Constitution as it hinders equal treatment of parties.
While adducing all unilateral appointments as automatically nullified, the Court oversteps its bounds and expands the restriction under Section 12 of the Arbitration Act. Section 12 provides a mechanism to address issues of bias by requiring arbitrators to furnish any circumstances that may affect their impartiality. Disclosure requirements are mentioned in the Sixth Schedule of the Act. If the Legislature had intended a wider interpretation of nullifying unilateral appointment clauses, the proviso to Section 12 that allows parties to waive disclosure requirements would not exist. Section 12, as well as the Fifth and Seventh Schedules read together, bar an arbitrator who has a relationship with the parties. Other safeguards include Section 14 which terminates the mandate of an arbitrator when he is unable to perform his functions or fails to act without undue delay. Post appointment as well, an arbitrator’s mandate can be challenged under Section 13(2) of the Arbitration Act.
Justice Hrishikesh Roy, in his partial dissent, upholds principles of party autonomy. Justice Roy underscores the importance of party autonomy, free from judicial interference. When parties agree on a clause for unilateral appointment, the Court must not countermand their intent. Section 11(2) allows the parties to agree on a procedure of appointment, subject to Section 11(6) which stipulates that the Courts must only interfere when “a party fails to act as required under that procedure.” With the insertion of Section 11(6A), the scope of scrutiny is further reduced at the stage of appointment. The role of judicial intervention under Section 11 is solely limited to determination of the ‘existence’ of an arbitration agreement.
Thus, there lies a difference between the ineligibility of an arbitrator translating into unilateral appointments and their nullification. Equating the two would be against the tenets of the Arbitration Act. Ineligibility of an arbitrator can be cured by statutory safeguards as adduced above. Disclosure obligations ensure that parties have recourse to the law to ensure impartial and fair procedure which is tested against the objective standards of the Seventh Schedule.
Curated Panels and Limitation of Choice
In both Voestalpine and CORE I, a panel was created by one party mandating the other party to choose an arbitrator from the panel. Justice Chandrachud holds that since such a curation of arbitrators is only done by one party, the freedom of choice is restricted which is against the principle of equal treatment under Section 18. While the Arbitration Act does not disallow parties from making a list of arbitrators, the problem arises when PSUs make it mandatory for the other party to nominate their arbitrators from that list.
As per the author, this marks a landmark shift in the equal treatment of parties. By upholding the applicability of the principle of equality at the stage of appointment of arbitrators, the Court has emphasised that arbitration must remain fair and neutral. The decision stands grounded in Article 14 of the Constitution. The Court affirmed procedural impartiality by ensuring that rules which constitute the decision-making process must not favour any party. Upholding TRF and Perkins, an arbitration clause mandating the right to choose from a prescribed panel has been held violative of equal treatment.
However, the judgment lacks the analysis of a ‘broad-based’ panel as held in Voestalpine. While all clauses mandating the arbitrator be appointed from a panel have been held as violative, the judgment is silent on ‘broad-based’ panels to provide larger freedom to choose. The scheme of the Arbitration Act does not prohibit the parties from curating panels of potential arbitrators. However, there is a possibility that individuals included in such panels were chosen due to a predisposition of favouring one party. Instances of discretion in such limited pools of arbitrators can be potentially tackled through broad-based panels. While Voestalpine aimed to ensure a balance between autonomy and institutional control, CORE II brings a stricter approach with limited flexibility for PSUs.
The Way Ahead
The ruling bolsters confidence in arbitration by ensuring independent and unbiased appointment procedures, reducing perceived biases in public-private contracts. By upholding TRF and Perkins, it addresses power asymmetry, making arbitration more autonomous and equitable. While a milestone for equality of parties, it poses operational challenge. Public-private contracts become susceptible to higher costs with potential involvement of external institutions in the appointment process. Expertise is often the major reason for appointing ex-employees of a public entity as arbitrators. With the resistance towards their appointment, expertise of tribunals faces limitations. Moreover, silence on the position of appointing broad-based panels, in line with Voestalpine, poses a challenge to party autonomy. Broad-based panels foster diversity in arbitrators’ backgrounds and affiliation, reducing the risk of perceived or actual bias. By ensuring that arbitrators are chosen based on neutrality and expertise, broad-based panels uphold the integrity of the arbitration. Despite these concerns, the judgment is a significant step toward enhancing trust between parties and promoting the efficiency and credibility of arbitration in India, aligning with international standards of fairness and neutrality.