Case Citation

C.A. Nos. 9486-9487/2019
Judgment Date: 8 November 2024
Bench Composition:
Chief Justice (Dr.) Dhananjaya Y. Chandrachud, Justice Hrishikesh Roy, Justice Pamidighantam S. Narasimha, Justice Jamshed B. Pardiwala, Justice Manoj Misra

Key Legal Questions

1. Whether a person ineligible to be an arbitrator under the Seventh Schedule of the Arbitration and Conciliation Act, 1996, can mandate the other party to choose an arbitrator from a panel curated by them.
2. Whether the principle of equal treatment of parties applies when appointing arbitrators.
3. Whether the unilateral appointment of arbitrators by a government entity in public-private contracts violates Article 14 of the Constitution.

Factual Background

1. Legislative Context:
   • Section 12(5) of the Arbitration and Conciliation Act, 1996 disqualifies individuals specified in the Seventh Schedule from being arbitrators due to conflicts of interest that may compromise impartiality.
   • Section 18 guarantees equal treatment of parties in arbitration proceedings.
2. Prior Judgments:
   • In TRF Ltd. v. Energo Engineering Projects Ltd. (2017), the Supreme Court held that an ineligible arbitrator cannot appoint another arbitrator.
   • In Perkins Eastman Architects DPC v. HSCC (India) Ltd. (2019), it was held that unilateral appointments by ineligible entities violated the principle of neutrality.
   • Conversely, in Central Organisation for Railway Electrification v. M/S ECI SPIC SMO MCML (JV) (2019), the Court upheld the validity of clauses allowing a PSU to provide a curated panel of arbitrators.
3. Referral to a Larger Bench:
   • In Union of India v. Tantia Constructions (2021), the Court questioned the CORE decision and referred the issue to a Constitution Bench to resolve conflicts regarding the unilateral appointment of arbitrators.

Decision of the Supreme Court

The Constitution Bench, by a 3:2 majority, held that clauses allowing one party to unilaterally appoint arbitrators or mandating the other party to choose from a curated panel violate the principles of equality and independence in arbitration.

Key Observations and Findings

1. Principles of Equality and Impartiality

• Majority Opinion:
  • Equal Treatment: The principle of equality under Section 18 of the Arbitration Act applies to all stages of arbitration, including the appointment of arbitrators. Unilateral appointments or restricted choices deprive the opposing party of procedural fairness and equality (¶75, CJ Chandrachud).
  • Impartiality: A sole arbitrator chosen unilaterally by one party is likely to give rise to justifiable doubts about their independence and impartiality, violating Section 12(5) (¶128, CJ Chandrachud).
  • Curated Panels: Restricting the other party to choose from a curated panel handpicked by one party undermines their freedom to appoint an arbitrator of their choice, further violating the principle of equality (¶¶131-133, CJ Chandrachud).
• Dissenting Opinions:
  • Justice Roy emphasized that unilateral appointments are not inherently invalid and the Arbitration Act provides sufficient safeguards against biased appointments (¶¶39-42, J. Roy).
  • Justice Narasimha noted that Section 18 does not explicitly govern the appointment stage, and the impartiality of arbitrators must be examined under the statutory framework rather than broad principles of administrative law (¶54.3, J. Narasimha).

2. Procedural Safeguards in Arbitration

• Majority Opinion:
  • Emphasized the importance of procedural fairness as a hallmark of arbitration. Equal participation in the appointment process is essential for preserving the neutrality and credibility of arbitration proceedings (¶129, CJ Chandrachud).
• Dissenting Opinions:
  • Justice Roy argued that the Act already provides for challenging appointments under Sections 12, 13, 14, and 15. Imposing a blanket prohibition on unilateral appointments would be unnecessary (¶42, J. Roy).

3. Public-Private Contracts and Article 14

• Majority Opinion:
  • State entities, as contracting parties, must act fairly and transparently under Article 14 of the Constitution. The unilateral appointment of arbitrators by a government entity undermines this obligation and contravenes public policy (¶¶157-163, CJ Chandrachud).
• Dissenting Opinions:
  • Justice Narasimha contended that the validity of such appointments must be evaluated on a case-by-case basis rather than imposing a broad prohibition (¶54.4, J. Narasimha).

4. Public Policy and Independence in Arbitration

• Majority Opinion:
  • Arbitration agreements involving unilateral appointments by PSUs contradict the public policy of India, as they erode the fairness and independence expected in arbitration proceedings (¶163, CJ Chandrachud).

Impact of the Judgment

1. Strengthened Neutrality in Arbitration:
   • The decision reinforces the importance of impartiality and equality in arbitration, ensuring that neither party is disadvantaged in the appointment process.
2. Implications for Government Contracts:
   • Public sector undertakings must revise arbitration clauses to ensure compliance with this judgment. Curated panels or unilateral appointments are no longer permissible.
3. Greater Clarity in Arbitration Law:
   • The judgment resolves conflicting precedents, aligning the arbitration process with principles of natural justice and constitutional fairness.

Conclusion

The Constitution Bench’s ruling marks a significant step towards ensuring procedural fairness and impartiality in arbitration, particularly in public-private contracts. By invalidating unilateral appointments and emphasizing the principle of equality of parties, the Court has bolstered the credibility and fairness of arbitration in India. However, the dissenting opinions underscore the need for a balanced approach that does not undermine party autonomy or overload the arbitration framework with prohibitions.

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