The idea of party autonomy can conflict with the independence and fairness of arbitrators, especially when parties pre-decide in their arbitration agreement that one party has the exclusive right to appoint arbitrators. A similar issue was decided by the Hon’ble Supreme Court of India (SC).
The SC addressed the issue of unilateral appointment of arbitrators in public-private contracts. It held that while the Arbitration and Conciliation Act,1996 (‘Arbitration Act’) does not prevent any PSU from maintaining an empanelment of potential arbitrators, a clause that permits one party to unilaterally appoint a sole arbitrator undermines the principle of fairness and equality. Section 12(5) introduced by Arbitration and Conciliation (Amendment) Act 2015 has established that individuals falling into any of the disqualified categories in the Seventh Schedule cannot be appointed as arbitrators. Following this amendment, parties began filing applications under Section 11(6) of the Arbitration Act, challenging appointment procedures that gave one party excessive control over the selection of arbitrators, thus violating the principles of fairness and equal participation
In Voestalpine Schienen GmbH v. Delhi Metro Rail Corporation Ltd, the Delhi Metro Rail Corporation (DMRC), a government entity, violated Section 12 of the Arbitration and Conciliation Act, 1996, by forming a panel of government engineers for arbitration, which undermined the principle of impartiality.
In TRF Ltd. v. Energo Engineering Projects Ltd., the court ruled that a clause requiring a person with a vested interest in the outcome of the dispute, like the Managing Director or their nominee, cannot be unilaterally allowed to appoint the arbitrator, as it breaches the principle of impartiality.
In Perkins Eastman Architects DPC v. HSCC (India) Ltd., the court found a similar issue with a clause that allowed the CMD of HSCC to appoint a sole arbitrator. The court decided that a person with an interest in the dispute’s outcome should not have the power to select the arbitrator, as it could introduce bias.
In Central Organisation for Railway Electrification v. ECI-SPIC-SMOMCML (JV), the court examined a clause involving retired railway officers as arbitrators. It clarified that Section 12(5) does not prevent former employees of a party from being appointed as arbitrators, provided there is no conflict of interest.
Based on the above cases, the following issues were addressed by the Hon’ble Supreme Court of India in this judgment.
- Is it legally valid for a party with an interest in the dispute to unilaterally appoint a sole arbitrator or create a panel and mandate that the other party must select their arbitrator from the panel?
- Does the principle of equal treatment apply when appointing arbitrators?
- Does allowing a government entity to unilaterally appoint a sole arbitrator or the majority of arbitrators in a public-private contract violate the right to equality under Article 14 of the Constitution?
Observations of the Court:
Arbitration is a Quasi-Judicial Function
Arbitrators operate under a contractual relationship with the parties involved, but their rights and responsibilities stem from a mix of this contract and the quasi-judicial authority granted by national laws. They must perform their quasi-judicial roles in a manner that adheres to the principles of natural justice.
While the Arbitration Act allows parties considerable freedom to shape their arbitration process, it also establishes a procedural framework that governs the formation of the arbitral tribunal and the conduct of proceedings. The inclusion of Section 12(5) and Section 18 guides arbitrators to uphold fairness and equality throughout the arbitration process aligning with natural justice principles. Consequently, the Arbitration Act mandates that arbitral tribunals act judicially when resolving disputes. If an arbitral award results from a tribunal’s composition or procedural violations of mandatory provisions in the Act, it can be set-aside.
Autonomy of Parties & Principles of Equality
The interplay between Section 11 and Section 18 raises significant conflicts about the interpretation of statutory provisions and their implications for fairness in arbitration proceedings. Section 18 emphasizes equality throughout all proceedings, while Section 11 grants parties the autonomy to pre-decide their own procedures for appointing an arbitrator.
A central issue in this context is whether the term “proceedings” in Section 18 encompasses all stages of arbitration, including the crucial initial step of appointing an arbitrator. If the appointment process is one-sided, it could undermine the integrity of the arbitration process, potentially violating the principles of fairness and equality that Section 18 seeks to uphold. Article 14 of the Constitution reinforces this notion by mandating that all individuals are treated equally under the law.
Now, does the autonomy in appointing arbitrator under Section 11 take precedence over the principles of natural justice? The 246th Report of the Law Commission of India highlighted the significance of party autonomy in arbitration while cautioning that it should not undermine the essential principles of impartiality and independence within the arbitration process. Thus, if formal equality is not upheld during the appointment process, one party may find themselves at a disadvantage in selecting an impartial arbitral tribunal. Such a scenario could fundamentally compromise the essence of arbitration, leading to situations where one party faces an arbitrator who may already have a predisposition against them. Although Section 11(2) allows the parties to decide on a method for appointing arbitrators however, an appointment is always subject to challenge if the agreed procedure for appointment by the parties fails to adhere to the standards of independence and impartiality prescribed under Section 12. Therefore, a clause that grants one party unilateral rights to appoint a sole arbitrator compromises the equal participation of the other party and undermines the fairness of the arbitration process as a whole.
Public-Private Contract
Since Public Sector Undertakings (PSUs) frequently engage in arbitration disputes, they require qualified arbitrators. Thus many PSUs maintain a curated pool of potential arbitrators. While the Arbitration Act allows parties to an arbitration agreement to establish such panels, issues arise when PSUs require other parties to select their arbitrators exclusively from this list. The possibility of bias is real in situations where an arbitration clause allows a one party to unilaterally appoint a sole arbitrator or control the majority of the arbitrators. An arbitration clause cannot compel the opposing party to choose an arbitrator solely from the PSU’s curated panel. However, PSUs may offer this option if the other party explicitly waives the nemo judex rule.
The principle of Nemo Judex in Causa Sua, a Latin phrase meaning “no one should be a judge in his own cause,” is a fundamental tenet of natural justice that asserts that individuals cannot adjudicate cases in which they have a personal interest.
Conclusion:
From my perspective, this decision is a crucial step toward ensuring that arbitration processes are conducted transparently and equitably. SC acknowledged the inherent power imbalance often present in contracts involving government entities and private parties. SC’s assertion that parties to the arbitration agreement must have equal participation in the appointment of arbitrators reflects a broader commitment to uphold the integrity of arbitration act as a fair means of resolving disputes. Moreover, the ruling aligns with the constitutional mandate for equal treatment, ensuring that both parties are treated fairly throughout the arbitration process.
In essence, this ruling will set as a precedent for future as a guiding framework for resolving disputes under arbitration.
Case Title: Central Organisation for Railway Electrification v. ECI-SPIC-SMOMCML (JV)
Citation : 2024 INSC 857
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