Appointment of Arbitrators: Supreme Court settles balance between Party Autonomy and Equality

On November 8, 2024, the Supreme Court of India, in Central Organization for Railway Electrification vs. M/s ECI-SPIC-SMO-MCML (JV), delivered a landmark decision on unilateral appointment of arbitrators. A five-judge Bench addressed whether an arbitration clause permitting one party to curate a panel of arbitrators, from which the other party selects, adheres to the principle of impartiality under the Arbitration and Conciliation Act, 1996 (Arbitration Act). This judgment has significant implications for party autonomy and equality in arbitration agreements, ultimately underscoring the principle that party autonomy in arbitration is subject to fairness and impartiality.

The dispute originated from a contract for railway electrification between the Central Organization for Railway Electrification (CORE) and M/s ECI-SPIC-SMO-MCML (JV), involving an arbitration clause under Clause 64(3)(b) of the Indian Railways General Conditions of Contract. This clause provided that any dispute would be arbitrated by a panel chosen and approved by the General Manager of the Railways, consisting of retired railway officers. However, the General Manager retained the right to appoint all arbitrators, including the presiding arbitrator, even though the contractor was allowed to nominate two from a list provided by CORE. The contractor challenged this clause on the grounds that it deprived them of an impartial tribunal.

Earlier landmark rulings on similar issues include Voestalpine Schienen GmbH v. Delhi Metro Rail Corporation and TRF Ltd. v. Energo Engineering Projects Ltd. In Voestalpine, the Supreme Court addressed whether a government-curated panel of arbitrators for public contracts could satisfy Section 12(5) of the Arbitration Act, emphasizing that a broad-based panel was essential to ensure neutrality. Following this, in TRF Ltd., the Supreme Court further limited unilateral appointments by ruling that if a party was ineligible to act as an arbitrator, they also could not appoint one. Building on TRF, the Supreme Court in Perkins Eastman Architects DPC v. HSCC (India) Ltd ruled that clauses allowing the unilateral appointment of a sole arbitrator were invalid.

In 2020, the three-judge Bench in the CORE case diverged from these precedents by upholding an appointment process from a restricted panel of retired railway officers, considering it balanced by the contractor’s limited choice. However, this interpretation faced criticism in Union of India v. Tantia Constructions Limited, where a larger Bench referral of CORE was requested to revisit the standards for arbitration clauses in government contracts.

Specifically, the Court examined whether arbitration clauses allowing a government entity to control the arbitrator selection process adhered to Section 12(5) of the Arbitration Act, which mandates independence and impartiality. Another key issue was whether an appointment process that grants one party the power to curate a list of arbitrators for the opposing party to choose from, inherently violates the principle of equal treatment of parties under Section 18 of Arbitration Act. Additionally, the Court was tasked with determining whether such unilateral appointment procedures could be considered unconscionable under Indian contract law, raising questions about the broader application of public policy considerations in arbitration involving government bodies.

The Supreme Court’s analysis in this judgment centered on principles governing party autonomy, equality, and independence in the appointment of arbitrators. The Court examined both domestic and international perspectives on these principles, assessing how foreign jurisdictions approach similar concerns.

Party Autonomy and its limits

Arbitration is fundamentally built on party autonomy, allowing parties to determine the structure and process for resolving disputes. However, the Supreme Court noted that this autonomy is constrained by mandatory requirements for neutrality and fairness. Section 12(5) of the Arbitration Act explicitly limits a party’s ability to appoint arbitrators with potential biases or connections to the appointing party, reflecting the essential requirement for impartiality. The Court has ruled that while parties are free to structure arbitration agreements, they cannot do so in a way that grants one party disproportionate influence over arbitrator appointments, as this could lead to an unfair tribunal.

Equality in Arbitrator appointments

The Court has now emphasized that equality between parties is a core tenet of arbitration, especially in appointing arbitrators. Relying on Section 18 of the Arbitration Act, which mandates equal treatment throughout the arbitral process, the Court held that this principle also extends to the appointment stage. The Court reasoned that a party should not have sole authority to curate or select arbitrators in a manner that could disadvantage the other party. The requirement for balance in appointment ensures that both parties have equal participation, thus reducing the risk of bias.

Independence and impartiality as non-negotiable

The independence and impartiality of arbitrators are essential to maintaining trust in arbitration, especially in cases involving public sector entities with the power to control the appointment process. The Court emphasized that retired officers of a government entity may inherently lack the appearance of impartiality, especially when disputes involve public sector undertakings. Consequently, the Supreme Court has now drawn a line by reinforcing that any clause allowing one party to select arbitrators from their former employees or associates, risks breaching the independence requirement.

Comparative jurisprudence and the international perspective

Examining foreign jurisprudence and principles, the Supreme Court referred to international arbitration standards and the IBA Guidelines on Conflicts of Interest in International Arbitration. Many foreign jurisdictions have upheld the view that arbitration procedures must guarantee impartiality at all stages. The Court noted these standards, which require transparency and broad-based arbitrator panels, resonate with the UNCITRAL Model Law on International Commercial Arbitration, promoting uniformity in arbitration laws. The Court stated how Indian law should align with these practices, especially in public-private arbitrations, where transparency is critical to maintaining integrity.

Public Policy considerations in Public-Private Arbitrations

In cases involving government entities, arbitration clauses are scrutinized under public policy principles, primarily under Article 14 of the Constitution, which ensures equality before the law. The Court held that unilateral appointment rights by public sector undertakings in arbitrations with private parties are constitutionally unsound, as they could infringe upon the private party’s right to a fair and impartial tribunal. It concluded that public policy imposes a non-negotiable duty on parties to ensure unbiased arbitrator appointments, particularly in the public sector where disputes may have wider ramifications.

Nemo Judex Rule and Doctrine of Bias

The Supreme Court also reinforced the nemo judex rule (no one should be a judge in their own cause), asserting that any tribunal appointment process giving one party a dominant influence over selection may result in perceived bias. This doctrine supports the Court’s position that impartiality must be evident from the outset, requiring neutral appointment processes.

The Supreme Court has specifically held that arbitration clauses permitting one party, particularly a public sector entity, to unilaterally control arbitrator appointments are invalid if they undermine the principle of equality and impartiality required under the Arbitration Act. In this case, the Court struck down the relevant clause of the contract, which allowed CORE to select arbitrators from a panel exclusively composed of retired railway officers, as this process did not provide a balanced or impartial tribunal. The Court found that the clause violated Section 12(5) of the Arbitration Act, which mandates impartiality by prohibiting appointments involving close relationships with one of the parties, and Section 18 of the Arbitration Act, which ensures equal treatment of parties. The Court also held that while the Arbitration Act does not prohibit PSUs from empanelling potential arbitrators, an arbitration clause cannot mandate the other party to select its arbitrator from the panel curated by PSUs.

The Court reinforced the precedent set in TRF Limited (supra), confirming that a party rendered ineligible by Section 12(5) of the Arbitration Act cannot unilaterally appoint arbitrators, as it would compromise the tribunal’s neutrality. The Court also clarified its departure from earlier cases like Voestalpine (supra), where a broad-based, impartial panel was permissible.

Further, the Court also made a note that the present ruling shall be prospective in nature, that is, applicable to the arbitrator appointments to be made after the date of this judgment.

The Supreme Court’s decision in Central Organization for Railway Electrification strengthens India’s arbitration framework by aligning it with global standards of fairness and impartiality. While affirming party autonomy as a cornerstone of arbitration, the Court clarified that such autonomy cannot override fundamental principles ensuring equal treatment and neutrality. This judgment reinforces that arbitration agreements must uphold these core values, especially in public-private contracts, where impartiality and public policy concerns are paramount.

About the authors: Padmaja Kaul is a Partner, Kushagra Sah is a Senior Associate and Vansh Bhutani is an Associate at JSA.

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