Judgement Analysis: Unilateral Appointment Of Arbitrators Is Illegal

A five judge bench of the Hon’ble Supreme Court of India has recently held that the unilateral appointment of arbitrators is illegal and the principle of equality under Section 18 of the Arbitration Act applies at all stages of the proceedings including the stage of appointment of arbitrators. The Court’s decision is bound to have huge impact qua disputes wherein one of the parties is a PSU (Public Sector Undertaking). This is a landmark decision for Arbitration.

The Central Organisation for Railway Electrification (“CORE/Appellant”) had a work contract with ECI SPIC SMO MCML (JV) (“Respondent”), a Joint Venture Company (JV) which was terminated on 01.11. 2017 as the JV failed to fulfil certain obligations.

The Respondent challenged that termination before the Allahabad High Court. The High Court dismissed the petition on 28.11.2017  directing the parties to resolve the dispute through arbitration as per the General Conditions of Contract (“GCC”) which provided for the creation of an arbitral tribunal comprising three members. After 2015 amendment to the Arbitration and Conciliation Act,1996 (“Arbitration Act”) which introduced Section 12(5), the Government of India, Ministry of Railways modified two provisions i.e. Clause 64(3)(a) and 64(3)(b) of the GCC vide Notification dated 16.11.2016. 

Section 12(5) provides for, “Notwithstanding any prior agreement to the contrary, any person whose relationship, with the parties or counsel or the subject-matter of the dispute, falls under any of the categories specified in the Seventh Schedule shall be ineligible to be appointed as an arbitrator:Provided that parties may, subsequent to disputes having arisen between them, waive the applicability of this sub-section by an express agreement in writing.”

Under the modified Clause 64(3)(a)(ii) of GCC, the applicability of Section 12(5) read with the Seventh Schedule of the Arbitration Act has been waived off, provided that, in cases where the total value of all claims exceeds Rs 1 crore. the Arbitral Tribunal shall consist of a panel of three gazetted railway officers not below Junior Administrative (“JA”) Grade or two Railway Gazetted Officers not below JA Grade and a retired railway officer, retired not below the rank of Senior Administrative (“SA”) Grade officer as arbitrators. 

Under the modified Clause 64(3)(b) of GCC, where applicability of Section 12(5) of the Arbitration Act has been not waived off. There is no bar under Section 12(5) read with the Seventh Schedule of the Arbitration Act for appointment of a retired employee to act as an arbitrator. Clause 64(3)(b) of GCC stipulated that the Arbitral Tribunal shall consist of a panel of three retired railway officers not below the rank of Senior Administrative Officer as the arbitrators as per the procedure indicated thereon. For this purpose, the Railway will send a panel of at least four names of retired railway officer(s) empanelled. The contractor will be asked to suggest to the General Manager (“GM”) at least two names out of the panel for appointment as the contractor’s nominee and the GM shall appoint at least one out of them as the contractor’s nominee. The GM will also simultaneously appoint from the panel or from outside the panel. 

In accordance with the GCC, CORE provided the Respondent with a list of four arbitrators to choose from twice vide letters dated 24.09.2018 and 25.10.2018. The Respondent did not choose two arbitrators and approached the High Court to appoint a sole arbitrator instead. They claimed that the CORE’s nominees were retired officers and were therefore ineligible to become arbitrators. 

CORE maintained that the High Court could not appoint a sole arbitrator as the GCC permitted the parties to appoint them. On 03.01.2019, the High Court appointed a retired judge as the sole arbitrator to adjudicate the dispute. Aggrieved by the High Court’s decision, CORE moved to the Supreme Court through a Special Leave Petition. 

On 17.12.2019, the 3-Judge Bench of the Supreme Court comprising Justices R. Banumati, A.S. Boppanna and Hrishikesh Roy set aside the appointment of sole arbitrator by the High Court. They held that the arbitrator had to be appointed as per the GCC. Further, it was held that a person could not be deemed ineligible simply because he was a retired officer.  On the question of eligibility of GM to nominate the arbitrator, the Supreme Court held that the power of the GM was offset by the fact the Respondent could choose two out of the three arbitrators. 

In, another 3-Judge Bench of the SC comprising Rohinton Fali Nariman, Navin Sinha, K.M. Joseph in Union of India vs. M/s. Tantia Constructions Ltd., 2021 SCC OnLine SC 271 prima facie disagreed with the view of Judgment dated 17.12.2019 for the basic reason that once the appointing authority itself is incapacitated from referring the matter to arbitration, it logically does not follow that appointments can still be valid based solely on the specific facts of the case. The Bench requested the Hon’ble Chief Justice to constitute a larger Bench to look into the correctness of the judgment. 

On 26.06.2023, the Supreme Court constituted a new five-judge bench that would hear this reference.

Issues

Whether an appointment process which allows a party who has an interest in the dispute 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? 
Whether the principle of equal treatment of parties applies at the stage of the appointment of arbitrators?
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?

Findings of the Court

The then Hon’ble Chief Justice of India, Dr. D.Y. Chandrachud, Mr. Justice J.B. Pardiwala and Mr. Justice Manoj Misra concluded that the principle of equal treatment of parties applies at all stages of arbitration proceedings, including the stage of 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. Further, such a unilateral clause is exclusive and hinders equal participation of the other party in the appointment process of arbitrators. In the appointment of a three-member panel, mandating the other party to select its arbitrator from a curated panel of potential arbitrators is against the principle of equal treatment of parties. In this situation, there is no effective counterbalance because parties do not participate equally in the process of appointing arbitrators. The process of appointing arbitrators in CORE is unequal and prejudiced in favour of the Railways. Unilateral appointment clauses in public-private contracts are violative of Article 14 of the Constitution. The principle of express waiver contained under the proviso to Section 12(5) also applies to situations where the parties seek to waive the allegation of bias against an arbitrator appointed unilaterally by one of the parties. After the disputes have arisen, the parties can determine whether there is a necessity to waive the Nemo judex in causa sua rule which means that no one should be a judge in his own cause. The law laid down in the present reference will apply prospectively to arbitrator appointments to be made after the date of this judgment and to three-member tribunals.

Hon’ble Mr. Justice Hrishikesh Roy agreed with the view of the Hon’ble Chief Justice of India that the principle of equality under Section 18 of the Arbitration Act applies at all stages of the proceedings including the stage of appointment of arbitrators.

Hon’ble Mr. Justice P.S. Narasimha, in his dissenting opinion, held that neither public policy considerations under the Contract Act or the Arbitration Act restrain the parties to the arbitration from maintaining a panel of arbitrators in any manner. It is not necessary to apply public law principles evolved in constitutional and administrative laws. Further, the occasion for the court to examine the constitution of the independent and impartial tribunal under the arbitration clause will arise when one of the parties makes an application under Sections 11, 14 or 34 of the Arbitration Act. It is not permissible for the court to give an advance declaration that all such agreements which enable one of the parties to unilaterally constitute the arbitral tribunal would be void per se. 

The Supreme Court Judgment therefore by majority decision overturned the decision of 3-Judge Bench of the Supreme Court.

 Viewpoint

The Supreme Court reinforced that the principle of equal treatment, codified in Section 18 of the Arbitration Act, is applicable at all stages of arbitration, including the appointment of arbitrators. Mandating one party to select arbitrators from a panel created by the other party, as seen with the Indian Railways’ modified GCC clauses, was found to be unequal and favouring the Railways. This judgment has substantial implications for PSUs and their standard contract terms. The Supreme Court clarified that while PSUs are not barred from empanelling arbitrators, an arbitration clause should not restrict the other party to choose from that list, as it conflicts with the equal treatment mandate. Consequently, PSUs will need to revisit and amend their GCC clauses to align with this decision.

This will be viewed as a positive change for all the organisations who are doing business with the PSUs. 

Authors: Ms. Amrita Narayan (Partner), Mr. Ashwin Rakesh (Principal Associate) and Mr. Madhav Sharma (Associate), HSA Advocates.