Nov 15, 2024Play Hard But Play Fair: The Supreme Court Conclusively Rejects Unilateral Arbitrator(s) Appointments
Introduction
In Centrotrade Minerals & Metal Inc. v. Hindustan Copper Ltd.,1 the Supreme Court characterised party autonomy as the grund norm of arbitration. The principle of party autonomy entitles parties to choose the governing law of their transaction, the law governing the arbitral process, along with the applicable rules and the constitution of the arbitral tribunal. Indeed, freedom of parties to choose their own decision maker is perhaps the defining feature of arbitration.
Party autonomy, however, cannot amount to unfairness. Fair and equal treatment of parties is as fundamental to the arbitral process as party autonomy. The [Indian] Arbitration and Conciliation Act, 1996 (“Arbitration Act”) codifies such principles under Section 18 which signifies equal treatment to be provided to the parties in an arbitration proceeding.
The limits to party autonomy are perhaps best exemplified through the issue of unilateral appointments of arbitrators. Simply put, unilateral appointment entails that one party would have the advantage of being able to unilaterally choose the arbitral tribunal. The Supreme Court of India has frowned upon on such clauses in the past in TRF Ltd. v. Energo Engineering Projects Ltd.,2 (“TRF”) and Perkins Eastman Architects DPC v. HSCC (India) Ltd.,3 (“Perkins”), where persons affiliated to only one party had the right to choose an arbitrator.
One issue that remained undecided was whether a party, usually a public sector undertaking, could have the right to unilaterally curate a panel from which it could ask the counterparty to select the arbitrator(s). In Central Organisation for Railway Electrification v. ECI-SPIC-SMO-MCML (JV)4 (“CORE-II”), a 5 judge bench of the Supreme Court ruled that such a unilateral right to curate a panel was not legitimate and violated the principle of equal treatment of parties.
A brief history
In TRF,5 the Supreme Court held that if an individual has a vested interest in the outcome of the dispute, that person will be not eligible to serve as an arbitrator. The Supreme Court further stated that since such a person is not eligible to act as an arbitrator, any nomination made by such party would also be void.
In Voestalpine Schienen GmbH v. Delhi Metro Rail Corporation Ltd.,6 (“Voestalpine”) the Supreme Court dealt with a question of unilateral appointment of arbitrators where the contract prescribed a panel of government nominated five arbitrators to choose from for adjudication of any dispute. The Supreme Court reaffirmed the principle of equal and fair treatment and emphasized that a broad-based approach should be taken for the selection of arbitrators. The Supreme Court found that a dispute resolution clause limiting a party’s choice of arbitrator to a small panel raised concerns about impartiality, since the other party had limited choice in selecting the panel. However, during the course of the proceeding, Delhi Metro Rail Corp. Ltd. provided a list of 31 names which the Supreme Court described as a “broad based panel” and did not interfere in the constitution of the tribunal.
In Perkins,7 the Supreme Court held that since the managing director of a party to the dispute is ineligible to become an arbitrator under Section 12 and Seventh Schedule of the Arbitration Act, he/ she could not unilaterally nominate any other person as the arbitrator. The Supreme Court further stated that both parties should have the right to nominate arbitrator(s) of their own choice to maintain independence and impartiality, promoting a counter-balance approach where both parties are equally involved in the process.
More recently, arbitral awards have been set aside on account of unilateral appointment of the arbitral tribunal. In Upper India Trading Co. Pvt. Ltd. v. Hero Fincorp Ltd.8, the Delhi High Court set aside the arbitral award under Section 34 of the Arbitration Act ruling that the arbitrator was unilaterally appointed by one party making the entire arbitral proceedings non-est in law and violative of Section 12(5) read with Seventh Schedule of the Arbitration Act. Similarly, in Ram Kumar v. Shriram Transport Finance Co, Ltd.9 and Govind Singh v. Satya Group (P) Ltd.10, the Delhi High Court set aside the arbitral award on account of unilateral appointment of the arbitral tribunal.
These cases paved the way for challenges to arbitration clauses, especially in government contracts, which granted one party the authority to appoint an arbitrator from a fixed panel. Courts, including the Delhi High Court in cases like Taleda Square Private Limited v. Rail Land Development Authority,11 Proddatur Cable TV Digi Services v. Siti Cable Network Ltd.,12 and Afcons Infrastructure Ltd. v. Rail Vikas Nigam Ltd.,13 have consistently reinforced the need for a transparent and fair procedure in nominating arbitrators and have struck down such clauses. The Delhi High Court has highlighted the need for a counterbalance approach, where no party should have an undue advantage in selecting an arbitrator. The Court found that the procedure outlined in the contract failed to meet the necessary standard of fairness and impartiality and therefore declared it invalid.
The Supreme Court takes a lenient view in CORE-I
In Central Organisation for Railway Electrification v. ECI-SPIC-SMO-MCML (JV),14 (“CORE-I”), a 3 judge bench of the Supreme Court, while dealing with an appointment clause mandating the party to choose two arbitrators from the unilaterally nominated panel of four individuals, held that party autonomy was paramount in an arbitration and enforced the terms of the agreement as agreed by the parties.
The Supreme Court in the case of Union of India v. Parmar Construction Co.,15 dealt with a similar issue in appeal where the Rajasthan High Court appointed an arbitral tribunal under Section 11(6) of the Arbitration Act surpassing the terms agreed by the parties in the arbitration agreement. The Court held that if the parties have agreed to a procedure for appointment of arbitrator under arbitration agreement, the courts would not deviate from such procedure.
The Supreme Court disagreed with the reasoning in CORE-I in Union of India v. Tantia Constructions Ltd.16 and the case was referred to a 5 judge bench. A clause similar to the one in CORE-I also came up for consideration in JSW Steel Limited v. South Western Railway And Anr.17 and this was clubbed along with CORE-I for the reference to the larger bench.
The judgment in CORE-II
On 8 November 2024, the 5 judge bench of the Supreme Court in CORE-II passed its judgment. The Court considered the following issues: (i) Whether a clause under the contract can allow an interested party to the dispute to unilaterally appoint a sole arbitrator or a panel of arbitrator at its discretion?; (ii) Whether such clause in a public-private contract is valid under Article 14 of the Constitution of India?; and (iii) Whether the principles of fair and equal treatment apply at the stage of appointment of arbitrators?
The majority opinion given by Chief Justice D.Y. Chandrachud, Justice J.B. Pardiwala and Justice Manoj Misra (“Majority Opinion”) disagreed with the decision laid down in the case of Voestalpine and CORE-I, and observed that a clause could not allow a party to curate a panel of arbitrator at its own discretion and ask the other party to select the arbitrator from such a panel. Such clauses were in violation of the principle of fair and equal treatment enshrined in Section 18 of the Act since the other party was not consulted in curating the panel. The Court emphasised on procedural fairness and observed that any advantage given to one party to select the decision maker impinges on procedural equality and threatens the legitimacy of the entire arbitral process.
The Court went on to hold that in the context of public-private contracts, unilateral appointment of arbitrator or unilateral curation of a panel of arbitrators by any government body infringed Article 14 of the Constitution of India. The Court observed that the government or quasi-government authorities could suggest a panel of arbitrators but could not compel the opposite party to appoint the arbitrator based on the same panel unless a party expressly waived its right to object provided under Section 12(5) of the Arbitration Act.
Further, the Supreme Court held that the principle of equal and fair treatment enshrined under Section 18 of the Arbitration Act applies to all the stages of arbitration and could not be exempted when arbitrators are being appointed. Lastly, in order to avoid disruptions to the previous pending arbitration proceedings, the Court exercised its discretionary power under Article 142 of the Constitution to give prospective effect to the decision but only with respect to three-member tribunals.
Justice Hrishikesh Roy and Justice P. Narsimha issued dissenting opinions to the judgment. Even though the dissenting opinions agreed with the view that Section 18 of the Arbitration Act is applicable to all stages of arbitration, certain concerns were highlighted with respect to unilateral appointment as rendered by the majority:
- Firstly, it was highlighted that the principles of constitutional law and administrative law should not be invoked to reinforce the doctrine of equality while deciding a case of arbitration. There were enough safeguards under Section 18 of the Arbitration Act to ensure that equal and fair treatment is provided and the principles of Article 14 that concerns public law should not be highlighted.
- Secondly, party autonomy was paramount in an arbitration. Under Section 11(2) of the Arbitration Act, the parties were free to agree on a procedure for appointment of arbitrators. Any appointment of arbitrator is subject to safeguards with respect to disclosure and impartiality provided under Section 12, Sixth and Seventh Schedule of the Arbitration Act. Section 12(5) also provides for express waiver by a party. Thus, stating that the unilateral appointments are void through a declaration of the court would go against the spirit of party autonomy and legislative intent.
Conclusion
CORE-II exemplifies the Supreme Court’s careful balancing act of harmonising the fundamental principles of arbitration i.e. party autonomy and fair and equal treatment of parties. CORE-II serves as a reminder to parties to reinforce the requirement of a fair and impartial proceeding and maintain equality of arms.
Footnotes:
1. Centrotrade Minerals & Metals Inc. v. Hindustan Copper Ltd., (2020) 19 SCC 197
2. TRF Ltd. v. Energo Engg. Projects Ltd., (2017) 8 SCC 377.
3. Perkins Eastman Architects DPC v. HSCC (India) Ltd., (2020) 20 SCC 760.
4. Central Organisation for Railway Electrification v. ECI-SPIC-SMO-MCML (JV), Civil Appeal Nos. 9486-9487 of 2019.
5. TRF Ltd. v. Energo Engg. Projects Ltd., (2017) 8 SCC 377.
6. Voestalpine Schienen GmbH v. Delhi Metro Rail Corpn. Ltd., (2017) 4 SCC 665.
7. Perkins Eastman Architects DPC v. HSCC (India) Ltd., (2020) 20 SCC 760.
8. Upper India Trading Co. Pvt. Ltd. v. Hero Fincorp Ltd., 2024: DHC:1721.
9. Ram Kumar v. Shriram Transport Finance Co, Ltd., 2022 SCC OnLine Del 4268.
10. Govind Singh v. Satya Group (P) Ltd., 2023 SCC OnLine Del 37.
11. Taleda Square (P) Ltd. v. Rail Land Development Authority, 2023 SCC OnLine Del 6321.
12. Proddatur Cable TV Digi Services v. Siti Cable Network Ltd., 2020 SCC OnLine Del 350.
13. Afcons Infrastructure Ltd. v. Rail Vikas Nigam Limited, 2017 SCC OnLine Del 8675.
14. Central Organisation for Railway Electrification v. ECI-SPIC-SMO-MCML (JV), (2020) 14 SCC 712.
15. Union of India v. Parmar Construction Co., (2019) 15 SCC 682.
16. Union of India v. Tantia Constructions Ltd., 2021 SCC OnLine SC 271.
17. JSW Steel Ltd. v. South Western Railway, 2022 SCC OnLine SC 1973.