Background
A five-judge bench of the Hon'ble Supreme Court judgment in Central Organization for Railway Electrification v. M/s ECI SPIC SMO MCML (JV) considered the issue of unilateral appointment of arbitrators and selection of arbitrators from a panel of arbitrators curated by Indian public sector undertakings.
The need for reference to a larger five-judge bench of the Hon'ble Supreme Court arose due to divergent views in several previous decisions of the Hon'ble Supreme Court on the validity of arbitration clauses wherein one party has unilateral control over the appointment of arbitrators. The question first arose in the case of Voestalpine Schienen GmbH v. Delhi Metro Rail Corporation Ltd.2 wherein the Hon'ble Supreme Court examined the validity of arbitration clauses involving panel-based appointments. The Hon'ble Court established crucial principles, affirming that Section 12(5) read with the Seventh Schedule of the Arbitration and Conciliation Act, 1996 ("Act"), does not disqualify retired government employees from serving as arbitrators, while emphasizing the necessity of a broad-based panel to ensure independence and impartiality.
The jurisprudence developed further in TRF Ltd. v. Energo Engineering Projects Ltd.3, where a three-judge bench invoked the maxim "qui facit per alium facit per se" to establish that a person ineligible to serve as an arbitrator cannot nominate another. This principle was further extended in the case of Perkins Eastman Architects DPC v. HSCC (India) Ltd.4, where the Hon'ble Court invalidated unilateral appointments by parties with interest in the dispute.
However, a three-judge bench of the Hon'ble Supreme Court held a divergent view in Central Organisation for Railway Electrification v. ECI-SPIC-SMO-MCML (JV)5 ("CORE"), where the Hon'ble Court upheld an arbitration clause that provided for a structured appointment process, and upholding the unilateral appointment of arbitrators by the Central Organisation for Railway Electrification, distinguishing it from previous precedents. This position was subsequently challenged in Union of India v. Tantia Constructions Limited6, where another three-judge bench questioned reasoning laid down in CORE judgment regarding the validity of appointments by incapacitated authorities. The matter was thus referred to a larger bench, and the Hon'ble Supreme Court proceeded to schedule the final hearing in 2024 to resolve these conflicting interpretations and the judgment in the present case was delivered.
Legal Issues
The primary issues before the Hon'ble Supreme Court were:
- 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 to 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; and
- 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.
Court's Analysis
The Hon'ble Supreme Court's analysis in this landmark judgment focused on the fundamental principles of arbitration: party autonomy, equality between parties, and arbitrator independence. The Hon'ble Court undertook a comprehensive analysis, examining both the domestic and international perspectives.
Party Autonomy: While analyzing the party autonomy in arbitration, the Hon'ble Supreme Court set out a detailed approach. It recognized that party autonomy is fundamental in arbitration, and is outlined under Sections 10 and 11 of the Arbitration and Conciliation Act, 1996 ("Act"). The Hon'ble Court clarified that this autonomy isn't unlimited and must be impartial. The Hon'ble Court analyzed Section 12(5) of the Act, which, derives its existence from the International Bar Association Guidelines of Conflicts of Interest in International Arbitration, which outline situations where an arbitrator's independence or impartiality might be compromised. The Hon'ble Court held that parties cannot make arrangements that give one party too much control over the appointment of arbitrators, even if they agree to it in the arbitration agreement.
Equality in Arbitral Proceedings: The Hon'ble Supreme Court held that independence and impartiality of arbitral proceedings can only be ensured if both parties have an equal role at every stage of the arbitration, including the appointment of arbitrators. The Hon'ble Court emphasized that if parties are not equally involved in the arbitrator selection process, they may not have a fair chance of choosing an impartial tribunal. Building on the principles outlined in the Act, the Hon'ble Court held that independence, impartiality, and equality of the parties are interconnected, and impartiality and independence can only be effectively upheld if both parties have an equal opportunity at all stages of the arbitration process The Hon'ble Court further ruled that arbitration clauses allowing one party to unilaterally appoint a sole arbitrator or control the majority of arbitrators violate the principle of equal treatment outlined in Section 18 of the Act. These types of clauses are considered "inherently exclusionary" because they prevent both parties from equally participating in the arbitrator appointment process and upset the balance of rights.
Public-Private Arbitration: The Hon'ble Court examined the structure of public-private arbitrations and noted that the Act does not differentiate between public-private and private arbitrations in areas such as the appointment of arbitrators, conduct of proceedings, and the setting aside or enforcement of arbitral awards. The Hon'ble Court acknowledged the common practice among public sector undertakings of maintaining a panel of qualified professionals who have agreed to serve as potential arbitrators. The Hon'ble Court clarified, that while public sector undertakings may curate such panels, parties should not be compelled to select arbitrators exclusively from these panels in public-private arbitrations. Such panels may be offered as an option to private parties.
The Hon'ble Court also emphasized that the Act treats private and State entities (like public sector undertakings) equally, and the State must ensure that its contracts with private parties follow fair and reasonable procedures, especially in arbitrator appointments. It concluded that allowing one party to unilaterally appoint an arbitrator goes against the principles of equal treatment under both Article 14 of the Constitution and Section 18 of the Act.
Conclusion
Based on the analysis, it can be concluded that party autonomy is a fundamental aspect of arbitration and all parties must have control over various stages of the process. This autonomy begins with selecting the panel of the arbitral tribunal, extends to deciding the procedural rules for the arbitration, and concludes with determining how an arbitral award can be challenged in court. The Act incorporates party autonomy while also limiting judicial intervention. The Hon'ble Court has emphasized that once parties choose arbitration as their method of dispute resolution instead of traditional civil litigation, they take on the responsibility of ensuring that an independent and impartial tribunal is established. This judgment emphasizes the importance of maintaining core principles in arbitration agreements, particularly in public-private contracts, where ensuring impartiality and adhering to public policy considerations are of utmost significance.
Footnotes
1. (2024 INSC 857)
2. [2017] 1 SCR 798
3. [2017] 7 SCR 409
4. [2019] 17 SCR 275
5. [2019] 16 SCR 1234
6. 2021 SCC OnLine SC 271
Originally published 23.03.25
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