Unilateral Arbitrator Appointment Clauses In Public-Private Contracts Are Violative Of Article 14 Of Constitution: Supreme Court
The Supreme Court held that the unilateral arbitrator appointment clauses in public-private contracts are violative of Article 14 of the Constitution.
The Constitution Bench held thus in civil appeals in which the Court had to decide the contours defining the independence and impartiality of Arbitral Tribunals under the Arbitration and Conciliation Act, 1996 (A&C Act).
The five-Judge Bench comprising CJI D.Y. Chandrachud, Justice Hrishikesh Roy, Justice P.S. Narasimha, Justice Pardiwala, and Justice Manoj Misra observed, “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. … Unilateral appointment clauses in public-private contracts are violative of Article 14 of the Constitution.”
The Bench said that the principle of equal treatment of parties applies at all stages of arbitration proceedings, including the stage of appointment of arbitrators.
Solicitor General (SG) Tushar Mehta, Additional Solicitor Generals (ASGs) K M Nataraj, Arvind Kamath, Senior Advocates Mahesh Jethmalani, Madhavi Divan, Guru Krishna Kumar, Anand Padmanabhan, Naresh Kaushik, Nakul Dewan, P V Dinesh, and Advocate Shashank Garg represented the appellants while Senior Advocates Gourab Banerji, Neeraj Kishan Kaul, S Ravi Shankar, Advocates Rohan Talwar, George Poothan Poothicote, and Anirurdh Krishnan represented the respondents.
Factual Background -
The A&C Act subjects party autonomy to certain mandatory principles such as the equality of parties, independence and impartiality of the tribunal, and fairness of the arbitral procedure. The reference to the Constitution Bench raised important issues of the interplay between party autonomy and independence and impartiality of the arbitral tribunal. The Law Commission of India in its 246th Report opined that party autonomy cannot be stretched to disregard the principles of impartiality and independence of the arbitral process, specifically at the stage of constituting of an arbitral tribunal. Hence, the Law Commission suggested automatic disqualification of persons whose relationship with the parties falls under any of the categories specified by law. Following upon the recommendations of the Law Commission, Parliament enacted the Arbitration and Conciliation (Amendment) Act 2015 to incorporate Section 12(5)4.
Section 12(5) renders a person whose relationship with the parties falls under any of the categories specified under the Seventh Schedule ineligible for appointment. Given the 2015 amendment, parties filed applications under Section 11(6) urging the invalidation of appointment procedures which gave one party dominance in appointing arbitrators. When the reference came up in July 2023, Attorney General R Venkataramani, submitted that the Union Government had constituted an Expert Committee on Arbitration Law (chaired by Dr. T K Viswanathan) to reconsider the provisions of A&C Act. It was further submitted that the issues that have been raised in the reference would fall within the broad remit of the Expert Committee. In January 2024, the Constitution Bench provided three months to the Union Government to evaluate the recommendations of the Expert Committee. The Court was informed in April 2024 that the Government had not taken any decision on the recommendations of the Expert Committee. Hence, the Constitution Bench decided to take up the reference for final hearing.
The following issues arose before the Supreme Court –
a. 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?
b. Whether the principle of equal treatment of parties applies at the stage of the appointment of arbitrators?
c. 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?
The Court in the above regard noted, “The possibility of bias is real in situations where an arbitration clause allows a government company to unilaterally appoint a sole arbitrator or control the majority of the arbitrators. Since the government has control over the arbitral tribunal, it can chart the course of the arbitration proceedings to the prejudice of the other party. Resultantly, unilateral appointment clauses fail to provide an effective substitute for judicial proceedings in India. Further, a unilateral appointment clause is inherently exclusionary and violates the principle of equal treatment of parties and procedural equality.”
The Court elucidated that the unilateral appointment clauses in a public-private contract fail to provide the minimum level of integrity required in authorities performing quasi-judicial functions such as arbitral tribunals and therefore, a unilateral appointment clause is against the principle of arbitration, that is, impartial resolution of disputes between parties.
“It also violates the nemo judex rule which constitutes the public policy of India in the context of arbitration. Therefore, unilateral appointment clauses in public-private contracts are violative of Article 14 of the Constitution for being arbitrary in addition to being violative of the equality principle under the Arbitration Act”, it added.
Furthermore, the Court observed that, at the Section 11 stage, a referral court only has to determine the existence of arbitration agreement and the validity of the arbitration clause providing for the procedure for appointment of arbitrators will require the referral court to enter into a detailed consideration of evidence and render a finding as to law and facts. The Court said that this issue should be left to be decided by the arbitral tribunal in view of the doctrine of competence-competence and the arbitral tribunal is competent to rule on its jurisdiction, including the issue of validity of the arbitration clause for violating the equality principle under the A&C Act.
“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. … 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 (supra) is unequal and prejudiced in favour of the Railways”, it held.
The Court concluded that 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. It added that after the disputes have arisen, the parties can determine whether there is a necessity to waive the nemo judex rule and that the law laid down in the reference will apply prospectively to arbitrator appointments to be made after the date of the judgment.
Justice Hrishikesh Roy and Justice P.S. Narasimha gave their concurrent opinions.
Justice Roy remarked, “I am in agreement with the view of the learned Chief Justice that the principle of equality under Section 18 of the Arbitration and Conciliation Act,1996(for short ‘Arbitration Act’) applies at all stages of the proceedings including the stage of appointment of arbitrators. His judgment offers a thorough examination (in Part D) of the mandatory provisions within the Model Law and the Arbitration Act, which underscores the applicability of the equality principle and the same is not reiterated here for the sake of brevity. It is also correct to say that the Arbitration Act does not provide special or different treatment to government or government undertakings involved in arbitration.”
However, he disagreed with the view that the principles of constitutional law can be invoked to reinforce the equality doctrine in the realm of arbitration. He said that on this aspect, Justice Narasimha has rightly opined that public law principles evolved in Constitutional and Administrative law, should not generally be imported to arbitration law.
“In my view, all unilateral appointments must not be declared void by way of a declaration of this Court. … Unilateral appointment of Arbitrators is permissible as per the legislative scheme of the Arbitration Act. … The independence and impartiality of the arbitrator must be examined within the statutory framework of the Arbitration Act, particularly Section 18 read with 12(5). Public Law constitutional principles should not be imported to arbitration proceedings particularly at the threshold stage of Section 11”, he concluded.
Justice Narasimha opined, “I have had the benefit of the exhaustive and erudite judgment of the Hon’ble Chief Justice Dr. D.Y. Chandrachud. I have already given reasons for my decision. I find it necessary to indicate certain issues about the perspective and the final conclusion.”
He reiterated the necessary distinction between the duty of the parties to arbitration agreement to constitute an independent arbitral tribunal and the duty of the arbitrator to act judicially and said that in this case, we are concerned with the former and not about the duty of the arbitrator.
“Considering that the issue before us is the legality of a procedure in the arbitration clause, I find it difficult to apply the doctrine of bias or real likelihood of bias at this stage. The real issue is about the imbalance caused due to unilateral power of one of the parties to the contract to constitute the arbitral tribunal. Composition of the arbitral tribunal is part of party autonomy but there is always the power, coupled with duty, of the court to ensure that procedure under the arbitration clause enables constitution of an independent arbitral tribunal”, he noted.
Justice Narasimha further observed that a priori declaration that arbitration agreements that prescribe unilateral appointment procedures are invalid can lead to many problems in the day-to-day working of arbitral remedies
“The power to ensure that the arbitration agreement is compliant of the public policy requirement of establishing an independent and impartial tribunal is always of the Court. … 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. … 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. 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”, he concluded.
Accordingly, the Apex Court answered the reference.
Cause Title- Central Organisation for Railway Electrification v. M/s ECI SPIC SMO MCML (JV) A Joint Venture Company (Neutral Citation: 2024 INSC 857)
