Balancing party autonomy and equal treatment of parties: Indian Supreme Court's decision on unilateral arbitrator appointments

Introduction

In November 2024, the Supreme Court of India delivered a landmark judgment in the case of Central Organisation for Railway Electrification v. M/s ECI SPIC SMO MCML (JV). This judgment addresses the issue of independence and impartiality of arbitral tribunals under the Indian Arbitration and Conciliation Act, 1996 (the "Act"), focusing on the unilateral appointment of arbitrators (by only one of the parties), under public-private contracts. The Court, by a majority decision, has laid down a clear marker that while parties enjoy significant autonomy in determining the arbitral procedure, that cannot come at the cost of fairness and equality in the constitution of arbitral tribunals.

Background

The dispute stems from a contract for railway electrification projects entered into by Central Organisation for Railway Electrification ("CORE") and M/s ECI SPIC SMO MCML (JV) ("Contractor"). The arbitration agreement between the parties (contained in the Indian Railways Standard General Conditions of Contract for Works ("GCC")) provided that the arbitral tribunal should consist of three retired railway officers. The appointment procedure envisaged the General Manager of CORE sending a panel of at least four names of proposed arbitrators to the Contractor, the Contractor suggesting two of these names to the General Manager and the General Manager then appointing one of these as the Contractor's nominee. The clause provided that the General Manager of CORE would also appoint the other arbitrators, including the presiding arbitrator, from the panel or outside it.

In 2020, a three-judge bench of the Indian Supreme Court upheld the clause noting that the right of the General Manager to appoint the arbitrators was counterbalanced by the fact that the Contractor could choose two of the names from the panel provided, one of whom would be its nominee. In doing so, the Court found that earlier decisions of the Supreme Court, TRF Ltd v. Energo Engineering Projects Ltd ("TRF") and Perkins Eastman Architects DPC v. HSCC (India) Ltd ("Perkins"), which held that unilateral appointments were not valid, were not applicable. In both of these earlier cases, the Court had reinforced the principle that unilateral appointments by 'ineligible' individuals i.e. those with a vested interest in the outcome of a dispute, such as an employee or director of a party, would not be valid.

Subsequently, another three-judge bench of the Indian Supreme Court, in Union of India v. Tantia Constructions Limited, disagreed with the 2020 decision and referred to a larger bench the question of whether an 'ineligible' appointing authority could unilaterally appoint arbitrators. A five-judge bench of the Indian Supreme Court has now considered the issue.

Issues

The Court framed the following issues for determination:

1. Whether it is legally permissible for a party with an interest in the dispute to unilaterally appoint a sole arbitrator or create a list of arbitrators from which the other party must choose its arbitrator?
2. Whether the principle of equal treatment of parties is applicable at the stage of appointment of arbitrators?
3. Whether an appointment process in a public-private contract, which allows a government entity to unilaterally appoint a sole arbitrator or the majority of the arbitral tribunal, violates Article 14 of the Indian Constitution?

Judgment

The Supreme Court examined in detail the principles underpinning the Act. The Court noted that prior to the amendments to the Act introduced in 2015 (the "2015 Amendments"), Indian courts typically upheld clauses allowing one party "unfettered discretion" to appoint a sole arbitrator. However, the 2015 Amendments introduced a rigorous scheme to ensure independence and impartiality of arbitrators including the concept of 'ineligibility' of arbitrators. This concept established that arbitrators with certain types of relationships (set out in the Seventh Schedule to the Act), are considered ineligible to act as arbitrators. According to Section 12(5) of the Act, this ineligibility can be waived only after disputes have arisen between parties by an express written agreement between them.

The Court also examined the concept of equality of parties in arbitration. The Court observed that arbitration is a quasi-judicial process and an alternative to the courts and must therefore be "grounded in a process that is independent and impartial". According to the Court, the implication of equal treatment is that parties should have similar procedural rights and that procedural equality is "a necessary concomitant to a fair and impartial adjudicatory process". The Court concluded that the independence and impartiality of arbitral proceedings requires equality between parties at all stages of the proceedings, including the stage of appointment of arbitrators.

The Court noted the applicability of the doctrine of bias – that no party can be a judge in its own cause – and observed that Section 12(5) of the Act disqualifies a person with certain types of relationships with the parties, the counsel or the subject matter from acting as an arbitrator. Accordingly, the Court found that unilateral appointment of an arbitrator by a person with an interest in the outcome of the arbitration would give rise to justifiable doubts regarding the independence and impartiality of the arbitrator and be contrary to "the adjudicatory function of arbitral tribunals". The Court also observed that making it mandatory for a private party to select an arbitrator from a curated panel in public-private disputes would raise doubts regarding fairness of the arbitral process.  

Conclusion

In light of the above considerations, the Court concluded as follows:

1. The principle of equal treatment of parties is applicable at all stages of arbitration, including the appointment of arbitrators.
2. While the Act does not prevent public sector undertakings from creating a panel of potential arbitrators, they cannot force the other party to select an arbitrator from this panel.
3. A clause that permits one party to unilaterally appoint a sole arbitrator gives rise to "justifiable doubts as to the independence and impartiality of the arbitrator" and that such a clause is contrary to the principle of equal participation in appointment of arbitrators.
4. With respect to a three-member panel, a clause requiring a party to select an arbitrator from a panel curated by the other party violates the principle of equal treatment of parties. The Court held the arbitration clause in this case to be unequal and prejudiced in favour of CORE.
5. Unilateral appointment clauses in public-private contracts violate Article 14 of the Indian Constitution.
6. The principle of express waiver under Section 12(5) of the Act also applies when parties wish to waive the right to object on the grounds of potential bias to an arbitrator appointed unilaterally. After disputes arise, parties can decide if they wish to waive the rule against bias.
7. The Court's conclusions in regard to three-member tribunals apply prospectively to arbitrator appointments made after the date of this judgment.

Comment

The Supreme Court has effectively brought an end to unilateral appointments of arbitrators in India, including appointments by 'ineligible' persons. This decision is likely to impact public sector undertakings, for which the utility of providing for arbitrator appointments by senior officers and maintaining panels of arbitrators is now significantly diminished.

In line with the earlier decisions of the Supreme Court in TRF and Perkins, this decision is also likely to impact other entities that commonly rely on unilateral appointment mechanisms in arbitration clauses to manage a large volume of contracts. Such entities should review their standard arbitration clauses and ongoing arbitration proceedings, particularly those involving a sole arbitrator, to assess the implications of this decision.

The authors would like to thank Adya Garg for her contribution to this blog post.