Supreme Court Constitution Bench Begins Hearing On Legality Of PSUs Appointing Arbitrators from Self-Curated Panels

Supreme Court Constitution Bench Begins Hearing On Legality Of PSUs Appointing Arbitrators from Self-Curated Panels

On August 28, Constitution Bench of the Supreme Court began hearing a significant case on whether a person ineligible to be appointed as an arbitrator can appoint an arbitrator. The bench, consisting of Chief Justice of India DY Chandrachud, Justices Hrishikesh Roy, PS Narasimha, JB Pardiwala, and Manoj Misra, addressed the validity of an arbitration clause that prescribes the appointment of an arbitrator from a panel curated by one of the parties, often a public sector undertaking (PSU).

Chief Justice Chandrachud emphasized that ensuring both parties perceive the appointment process as fair and independent is crucial. He highlighted that while the perception of independence is key, it differs from a subjective test of an arbitrator’s bias. The Chief Justice noted that such a perception is essential as arbitration serves as a substitute for judicial proceedings, requiring confidence in the impartiality of the adjudicator.

UNCITRAL National Coordination Committee India, argued that a panel curated unilaterally by one party violates Sections 11(8) and 12 of the Arbitration and Conciliation Act, 1996. Section 11(8) mandates that the Supreme Court or High Court must obtain a disclosure from a prospective arbitrator regarding qualifications and impartiality, while Section 12 outlines grounds for challenging an arbitrator. They stressed that such a one-sided panel undermines independence and impartiality, proposing that institutional arbitration could resolve these concerns by providing a neutral and independent panel.

It was further pointed out that unilateral curation of panels leads to a lack of trust from the private party, and he criticized this approach as contrary to the principle of equality under Section 18 of the Act, which ensures equal treatment of parties. He also noted that such panels could be challenged under Section 14, which deals with the termination of an arbitrator's mandate due to incapacity or failure to act.

The respondents, referred to the Supreme Court decision in Perkins Eastman Architects DPC v. HSCC (India) Ltd., where it was held that a person ineligible to act as an arbitrator cannot appoint another person to act. they argued that for the necessity of institutional arbitration, where panels are curated by independent bodies, to ensure neutrality and address the crisis of confidence in the current system. He contended that the existing mechanism of unilateral panel curation by PSUs compromises the fairness of the arbitration process.

Chief Justice Chandrachud questioned if, in cases where the curated panel complies with Section 12(5) and the 7th Schedule of the 1996 Act, there could still be objections. The respondent responded that what cannot be done directly should not be permitted indirectly, reinforcing his stance against one-sided panel curation.

Justice Narasimha raised practical concerns, noting that PSUs like Railways handle numerous arbitration requests daily and maintaining a panel might be essential for administrative efficiency. Kaul clarified that his objection was not against having a panel but against the one-sided curation of such panels, arguing that it leads to a crisis of confidence among private parties.

The Chief Justice also mentioned the Indian Reality, where private parties sometimes influence the appointment process covertly, which undermines the integrity of arbitration.

The other intervenors argued that unilateral appointments by PSUs breach public policy and create a skewed incentive for arbitrators. They highlighted that such practices could violate the principle of equality under Section 18, and emphasized the need for interpretation of the term "procedure" in Section 11(2) to address these concerns.

The bench will continue hearing arguments from the Union on this matter. The case stems from disputes involving the Central Organisation for Railway Electrification and JSW Steel Limited, with previous judgments varying on the permissibility of appointments by ineligible individuals. In 2017, the Supreme Court ruled in TRF Ltd. v. Energo Engineering Projects Ltd. that an ineligible person cannot nominate an arbitrator. This was reaffirmed in Perkins Eastman Architects DPC v. HSCC (India) Ltd. in 2020, although the Court later allowed appointments by an ineligible person in Central Organisation for Railway Electrification v. ECL-SPIC-SMO-MCML (JV) (2020), leading to further appeals.