Supreme Court Rules Unilateral Appointment Of Arbitrators In Public-Private Contracts Violates Article 14 Of The Constitution

Supreme Court Rules Unilateral Appointment of Arbitrators in Public-Private Contracts Violates Article 14 of the Constitution

The Supreme Court, while hearing two references made to a larger Bench regarding the correctness of the Central Organization for Railway Electrification v. ECI-SPIC-SMO-MCML (JV) decision, addressed the issue of unilateral appointment of arbitrators and whether a person ineligible to be appointed as an arbitrator can nominate one. The five-judge bench, comprising CJI Dr. DY Chandrachud and Justices Hrishikesh Roy, JB Pardiwala, PS

Narasimha, and Manoj Misra, JJ., ruled that unilateral appointment clauses in public-private contracts violate Article 14 of the Constitution. The majority opinion was penned by CJI Dr. DY Chandrachud, with Justices JB Pardiwala and Manoj Misra concurring. Justices Hrishikesh Roy and PS Narasimha delivered separate opinions, agreeing with the majority on several points but expressing differing views on the application of constitutional principles in arbitration.

In ECI-SPIC (supra), the dispute arose between the Central Organization for Railway Electrification (‘CORE’) and ECI-SPIC-SMO-MCML (Joint Venture) (‘ECI’) when ECI failed to complete the work within the stipulated time under the contract. Subsequently, CORE terminated the contract under Clause 62 of the General Conditions of the Contract (‘GCC’). Aggrieved, ECI filed a petition before the Allahabad High Court, which dismissed the petition and directed ECI to avail the alternative remedy of invoking the arbitration clause.

The ECI requested CORE to appoint an arbitral tribunal to resolve the dispute, which involved claims of Rs. 73.35 crores. CORE provided two lists of potential arbitrators: Railway Electrification Officers of JA Grade and retired Railway officers, asking ECI to select two arbitrators from the list. However, ECI did not respond and filed an application under Section 11 of the Arbitration and Conciliation Act, 1996 (‘the Act’) before the High Court, requesting the appointment of a sole arbitrator. On 3 January 2019, the High Court appointed Justice Rajesh Dayal Khare, a retired judge of the Allahabad High Court, as the sole arbitrator, rejecting ECI’s argument that the appointment process under GCC 64 was flawed. ECI then filed a Special Leave Petition (SLP) before the Supreme Court, challenging the appointment. The Court in ECI-SPIC (supra) ruled that the General Manager of CORE, though ineligible to be appointed as an arbitrator under Section 12(5) of the Act, was still eligible to nominate others.

This view was in conflict with the earlier judgment in TRF Ltd. v. Energo Engg. Projects Ltd., which held that once an arbitrator becomes ineligible under the law, they cannot appoint another arbitrator. This principle was reiterated in Perkins Eastman Architects DPC v. HSCC (India) Ltd.

In response to ongoing concerns, the Court in Union of India v. Tantia Constructions Ltd. overruled the ECI-SPIC decision, calling for a larger bench to re-examine the matter. This request was further echoed in JSW Steel Ltd. v. South Western Railway. Issues before the Court.

1. Whether an appointment process that allows one party with an interest in the dispute to unilaterally appoint a sole arbitrator or create a panel from which the other party must choose its arbitrator is valid.

2. Whether the principle of equal treatment of parties applies during the appointment of arbitrators.

3. Whether a unilateral appointment clause in a public-private contract, allowing a government entity to appoint a sole arbitrator or majority of the arbitrators, is violative of Article 14 of the Constitution. Majority Decision The majority opinion, authored by CJI Dr. DY Chandrachud, held that the principle of equality applies throughout the arbitration process, including at the stage of arbitrator appointment. The Court ruled that public sector undertakings (PSUs) are not prohibited from creating a list of potential arbitrators. However, the other party cannot be mandated to choose its arbitrator exclusively from this curated panel.

The Court found that unilateral appointment clauses in public-private contracts lack the impartiality and integrity required for quasi-judicial functions, such as those performed by arbitral tribunals. Such clauses are therefore incompatible with the principle of impartial dispute resolution and violate the "nemo judex" rule (no one can be a judge in their own cause), which forms part of public policy in India. A clause that allows one party to unilaterally appoint an arbitrator raises serious doubts about the arbitrator's independence and impartiality. The Court further ruled that mandating the other party to select an arbitrator from a list curated by the other side is contrary to the principle of equal participation in the arbitration process. This practice was deemed prejudicial to fairness, particularly when the appointment process heavily favored one party—such as in the case of CORE, where the process was deemed skewed in favor of the Railways.

The Court concluded that unilateral appointment clauses in public-private contracts violate Article 14 of the Constitution, which guarantees equality before the law. The judgment was made prospectively, applying only to future arbitrator appointments and to three-member arbitration tribunals.

Justice Hrishikesh Roy’s Opinion Justice Hrishikesh Roy concurred with the majority on the applicability of equal treatment under Section 18 of the Arbitration Act to all stages of arbitration proceedings, including the appointment of arbitrators. However, he differed in his approach to the invocation of constitutional principles to enforce equality in arbitration. Justice Roy emphasized that public law principles should not be generally imported into arbitration law, particularly when the Arbitration Act itself offers specific mechanisms for ensuring fairness. Justice Roy noted that while he agreed with the need to ensure fairness in arbitrator appointments, not all unilateral appointment clauses should be declared void. He pointed to the specific waiver provisions in Section 12(5) of the Arbitration Act, which allow parties to consent to an arbitrator’s appointment even after the dispute arises, provided there is express consent in writing.

Justice Roy stressed that fair treatment obligations should primarily be grounded in the Arbitration Act rather than in constitutional law principles. Judicial intervention should only occur when there is a complete lack of consensus between the parties. Justice PS Narasimha’s Opinion

Justice PS Narasimha, while agreeing with the majority, emphasized that the autonomy of parties in choosing arbitrators is a foundational principle of arbitration law. He reiterated that party autonomy should be respected and that the statutory duty to constitute an independent and impartial tribunal should be understood as a restraint on judicial intervention in the arbitration process. Justice Narasimha argued that public law principles should not be necessary to uphold impartiality in arbitration, as the duties related to arbitrator independence are already incorporated in the Arbitration Act and the Contract Act. He asserted that arbitration agreements that do not ensure impartiality and independence in the tribunal violate public policy and are void under Section 23 of the Contract Act.

Justice Narasimha stressed the importance of judicial oversight to ensure that arbitration agreements comply with public policy requirements, particularly regarding the establishment of independent and impartial tribunals.