Alandmark ruling has held that unilateral appointment clauses in public-private contracts violate article 14 of the Constitution of India.
The bench, comprising DY Chandrachud, Hrishikesh Roy, JB Pardiwala, PS Narasimha and Manoj Misra, addressed the legality of such clauses, especially when they allow one party (often a public sector entity) to have predominant control over the arbitrator appointment process.
The ruling aimed to clarify whether unilateral appointment clauses align with the principles of equality and impartiality enshrined in the Arbitration and Conciliation Act, 1996, and the Constitution of India.
The case
A dispute arose between the Central Organisation for Railway Electrification (CORE) and ECI-SPIC-SMO-MCML (joint venture), when ECI did not complete the work within the prescribed period under the contract.
The contract was terminated by CORE after which ECI sought to invoke an arbitration. ECI filed a petition before the Allahabad High Court, which was dismissed, and ECI was directed to an alternative remedy by invoking the arbitration clause.
Accordingly, ECI requested CORE appoint an arbitral tribunal to resolve the dispute including settlement of claims of INR733.5 million (USD8.6 million). CORE sent two lists of possible arbitrators that included serving and retired officers of the railway, calling on the ECI to select any two. However, ECI did not reply and filed an application before the Allahabad High Court seeking the appointment of a sole arbitrator.
This application resulted in the appointment of Justice Rajesh Dayal Khare, a retired judge of the Allahabad High Court, as a sole arbitrator. However, ECI, aggrieved by the appointment, filed a special leave petition to appeal before the Supreme Court of India.
The major contention raised by ECI was that when a general manager is himself ineligible of being nominated as an arbitrator, he cannot further nominate others to be in the panel of arbitrators. This was rejected by the apex court. It was held that the general manager can appoint an arbitrator.
The decision
The majority opinion analysed the principles of arbitration law and the fact that parties’ equality applies at all stages of an arbitrator’s appointment. The court ruled that public sector undertakings (PSUs) are not necessarily prohibited from empanelling potential arbitrators, but the other party cannot be mandated to select the arbitrator from the curated lists compiled by PSUs.
The court also held that a unilateral appointment clause is in violation of the principle of nemo judex in causa sua (no one should be a judge in their own case), which is in violation of the public policy of India in the context of arbitration. It was further held that the process of appointment of arbitrators by CORE violated the principle of equal treatment of parties. Unilateral appointment clauses in public-private contracts also violate article 14 of the constitution. Furthermore, contract law provides that a contract induced by undue influence is unconscionable.
The judgment also cites jurisprudence from US courts, which have consistently held that an arbitration agreement that provides for the unilateral formation of a panel of arbitrators by one of the parties is inherently inequitable and unconscionable. It conflicts with the fundamental notions of fairness and does not meet the “minimum levels of integrity which we must demand of a contractually structured substitute for judicial proceedings”.
Justice Narasimha concurred with the majority opinion, and distinguished arbitration law from constitutional and administrative law principles. He opined that while public law doctrines like equality and fairness are relevant, their application in arbitration law must remain within the statutory framework. He highlighted the need for judicial restraint in arbitrator appointments, emphasising party autonomy and allowing parties to agree on procedures for appointment unless these blatantly contravene statutory principles.
Justice Roy concurred with the majority opinion and echoed the sentiment that the independence of arbitrators is a fundamental aspect of arbitration and that any appointment mechanism must withstand scrutiny under the “real likelihood of bias” test.
It was also held that the substitution of arbitration in place of civil courts is only for a forum and not for contracting out of the most essential feature of a dispute resolution, i.e. independence and impartiality. This essential feature is the inviolable public policy consideration from which the parties cannot opt out.
Conclusion
The Supreme Court’s ruling presents a pivotal moment for Indian arbitration law. By invalidating unilateral appointment clauses in public-private contracts, the court sought to safeguard fairness and impartiality in arbitral proceedings. This judgment reinforces the emphasis on party equality and autonomy, setting a standard for arbitration agreements in both the public and private sectors.
In the future, arbitration agreements will require that the arbitrator appointment process necessitates both parties’ equal participation, avoiding any undue advantage to one party.
The dispute digest is compiled by Numen Law Offices, a multidisciplinary law firm based in New Delhi & Mumbai. The authors can be contacted at support@numenlaw.com. Readers should not act on the basis of this information without seeking professional legal advice.
