Supreme Court: While hearing two references made to the larger Bench, wherein the correctness of the Central Organisation for Railway Electrification v. ECI-SPIC-SMO-MCML (JV), (2020) 14 SCC 712 (‘ECI-SPIC’) was called in question and the issue of unilateral appointment of arbitrators, and that whether a person who is ineligible to be appointed as arbitrator, can nominate an arbitrator, was to be dealt with, the five-Judge Bench comprising of Dr. DY Chandrachud, CJI and Hrishikesh Roy, JB Pardiwala, PS Narasimha and Manoj Misra, JJ., held that unilateral appointment clauses in public-private contracts are violative of Article 14 of the Constitution.
The majority opinion was penned by CJI Dr. DY Chandrachud for Justices JB Pardiwala and Manoj Misra.
Justice Hrishikesh Roy and PS Narasimha delivered their separate judgments with concurrence with the majority on several points.
Background
In ECI-SPIC (supra) the dispute arose between the Central Organisation for Railway Electrification (‘CORE’) and ECI-SPIC-SMO-MCML (Joint Venture) (‘ECI’) when the ECI did not complete the work within the prescribed period under the Contract, subsequently, the Contract was terminated by the CORE as per Clause 62 of the General Conditions of the Contract (‘GCC’). Aggrieved by the termination of Contract, the ECI filed a petition before the Allahabad High Court, which was dismissed vide Order dated 28-11-2017 and the High Court directed the ECI to avail the alternative remedy by invoking the arbitration clause. Accordingly, the ECI requested the CORE for appointment of an Arbitral Tribunal for resolving the disputes between the parties and settle the claims value of Rs.73.35 crores. The CORE had sent two lists comprising of Railway Electrification Officers of JA Grade and four retired Railway officers, respectively, calling upon the ECI to select any two arbitrators for the constitution of tribunal. However, the ECI did not send any reply and filed an application before the High court under Section 11 of the Arbitration and Conciliation Act, 1996 (‘the Act’) seeking the appointment of a sole arbitrator.
The High Court vide order dated 03-01-2019, rejected the argument of the ECI- that the arbitrator is to be appointed as per GCC 64 (3)(a)(ii) and 64 (3)(b) of the Contract, and appointed Justice Rajesh Dayal Khare a retired judge of the Allahabad High Court as the sole arbitrator for resolving the dispute between the parties. Being aggrieved by the said orders, the ECI had preferred a Special Leave Petition to appeal before the Court.
The Court had rejected the contention of ECI the that when the General Manager of the CORE himself being ineligible to be appointed as an arbitrator under Section 12(5) read with Schedule VII of the Act, the General Manager cannot nominate any of the persons to be arbitrator and held that the General Manager was eligible to appoint an arbitrator. In ECI-SPIC (supra), the Court had rejected the applicability of TRF Ltd. v. Energo Engg. Projects Ltd., (2017) 8 SCC 377, (‘TRF Limited’) wherein it was held “that that once the arbitrator has become ineligible by operation of law, he cannot nominate another as an arbitrator.” A similar view as TRF Limited was taken by the Court previously in Perkins Eastman Architects DPC v. HSCC (India) Ltd., (2020) 20 SCC 760.
Later, in Union of India v. Tantia Constructions Limited, 2021 SCC OnLine SC 271, (‘Tantia’) the Bench disagreed with the view taken in ECI-SPIC (supra). It was stated that “once the appointing authority itself is incapacitated from referring the matter to arbitration, it does not follow that notwithstanding this, yet appointments may be valid depending on the facts of the case.” Therefore, the Bench had requested the then Chief Justice to constitute a larger Bench to look into the correctness of the ECI-SPIC (supra).
In JSW Steel Ltd. v. South Western Railway, 2022 SCC OnLine SC 1973, (‘JSW Steel’) it was noted that in Tantia (supra) the Court had expressed its disagreement with the ECI-SPIC and a request was placed before the then Chief Justice of India to constitute a larger Bench to look into the correctness of the said decision. Therefore, the Bench in JSW Steel had also called for the reference of the matter before the larger Bench.
Issues
-
Whether an appointment process allowing a party having an interest in the dispute to unilaterally appoint a sole arbitrator, or curate a panel of arbitrators and mandate that the other party select their arbitrator from the panel is valid in law.
-
Whether the principle of equal treatment of parties applies at the stage of the appointment of arbitrators.
-
Whether an appointment process in a public-private contract which allows a government entity to unilaterally appoint a sole arbitrator or majority of the arbitrators of the arbitral tribunal is violative of Article 14 of the Constitution.
Majority Decision
The majority opinion penned by CJI Dr. DY Chandrachud held that, the principle of equality of parties applies at all stages of arbitration proceedings, including the stage of appointment of arbitrators. The Court ruled that PSU’s are not prohibited from empanelling potential arbitrators, however, the other party cannot be mandated to select its arbitrator from the panel curated by PSUs.
“Unilateral appointment clauses in a public-private contract fail to provide the minimum level of integrity required in authorities performing quasi-judicial functions such as arbitral tribunals. Therefore, a unilateral appointment clause is against the principle of arbitration, that is, impartial resolution of disputes between parties. It also violates the nemo judex rule which constitutes the public policy of India in the context of arbitration.”
The Court held that a clause that allows one party to unilaterally appoint a sole arbitrator gives rise to justifiable doubts as to the independence and impartiality of the arbitrator. Further, it said that, such a unilateral clause is exclusive and hinders equal participation of the other party in the appointment process of arbitrator. The Court added that appointment of a three-member panel, mandating the other party to select its arbitrator from a curated panel of potential arbitrators is against the principle of equal treatment of parties and there is no effective counterbalance because parties do not participate equally in the process of appointing arbitrators.
The Court also rendered the process of appointing arbitrators in CORE (supra) as unequal and ruled that it was prejudiced in favour of the Railways. Unilateral appointment clauses in public-private contracts are violative of Article 14 of the Constitution. The Court clarified that the said ruling would be applicable prospectively to arbitrator appointments to be made after the date of this judgment and is applicable to three-member tribunals.
Justice Hrishikesh Roy’s opinion
Justice Roy concurred with the majority opinion that the principle of equal treatment under Section 18 of the Arbitration Act is applicable at all stages of the proceedings including the stage of appointment of arbitrators. However, he penned that he does not concur with the view- that the principles of constitutional law can be invoked to reinforce the equality doctrine in the realm of arbitration and agreed with Justice Narasimha that, the public law principles evolved in Constitutional and Administrative law, should not generally be imported to arbitration law.
On the aspect of bias in arbitrator’s selection and party autonomy, he stated that-
“Arbitration without party autonomy prevailing, will be like a redressal mechanism, without spirit. Liberty for the parties opting for Arbitration without equality being enshrined from the stage of inception to conclusion would be like a soulless process.”
However, he viewed that all unilateral appointments must not be declared void by way of a declaration of this Court and illustrated that the Arbitration and Conciliation (Amendment) Act 2015 in Section 12(5) itself provides for a specific waiver i.e. (a) an express consent in writing and (b) the consent must be obtained after the dispute has arisen. Further, he opined that the obligations of fair treatment should be grounded in the Arbitration Act rather than in the principles of Constitutional or administrative law. The parties’ choice in the agreement should not be disregarded without compelling reasons, through judicial intervention especially when the Arbitration Act provides clear remedies under Sections 12, 13, 14, and 15 of the Arbitration Act. Only when there is a complete lack of consensus between the parties that the Court’s interference under Section 11 could be justified.
Justice PS Narasimha’s opinion
“Mere existence of some relationship with the appointing authority does not inherently undermine autonomy.”
Justice Narasimha stated that, “dispute resolution through arbitration encompasses two independent yet interdependent principles:
-
contractual freedom as party autonomy; and
-
statutory obligation as duty to constitute an independent arbitral tribunal.
He explained that party autonomy in making of an arbitration agreement is an essential feature of arbitration, as it commences with choosing the members of the arbitral tribunal, extends to the procedure that would apply for its conduct, and concludes with the method by which an award could be challenged before a court. It is thus a brooding and guiding spirit of arbitration. Further, he added that party autonomy is sufficiently incorporated in the Arbitration Act, along with a restraint on judicial intervention.
He opined that, the moment parties choose arbitration over ordinary civil proceedings for dispute resolution, their duty to establish an independent and impartial tribunal arises. The substitution of arbitration in place of Civil Courts as an exception under Section 28 of the Contract Act, 1872 is only for a forum and not for contracting out of the most essential feature of a dispute resolution, i.e., independence and impartiality must exist in every forum. He emphasized that this essential feature is the inviolable public policy consideration under Section 23 of the Contract Act from which the parties cannot opt out. Further, he added that arbitration agreements which do not comply with this public policy consideration are void under Section 23 of the Contract Act.
He opined that it is not necessary to apply public law principles evolved in constitutional and administrative laws in view of the statutory incorporation of these duties. Sourcing these duty obligations from Contract Act and Arbitration Act is important to maintain the integrity of the party autonomy and restraint of judicial institutions.
“The power to ensure that the arbitration agreement is compliant of the public policy requirement of establishing an independent and impartial tribunal is always of the Court.”
Justice Narasimha added that, it is the duty of the Court to ensure that the arbitration agreement inspires confidence and it will enable establishment of an independent and impartial arbitral tribunal.
[Central Organisation for Railway Electrification v. ECI-SPIC-SMO-MCML, 2024 SCC OnLine SC 3219, decided on: 08-11-2024]
Buy Arbitration and Conciliation Act, 1996 HERE
Buy Constitution of India HERE
