The Supreme Court ruled that unilateral arbitrator appointment clauses violate impartiality, equal treatment, and Article 14 of the Constitution. Justice Chandrachud emphasized fair arbitration processes, while Justice Roy upheld eligible unilateral appointments, and Justice Narasimha stressed public policy compliance. Future arbitrator appointments must align with these principles.

The Arbitration and Conciliation (Amendment) Act, 2015, was enacted following recommendations from the 246th Report of the Law Commission of India, emphasizing the importance of impartiality and independence in arbitration. Section 12(5), introduced by the amendment, disqualifies individuals with specified relationships under the Seventh Schedule from acting as arbitrators. This provision has been the subject of various judicial interpretations.

In Voestalpine Schienen GmbH v. DMRC, the Supreme Court invalidated a clause limiting the opposing party's choice of arbitrators, emphasizing the need for a broad-based panel. In TRF Ltd v. Energo Engineering Projects Ltd, the Court ruled that an ineligible arbitrator under Section 12(5) could not appoint another arbitrator. Extending this principle, Perkins Eastman Architects DPC v. HSCC (India) Ltd. held that a party with an interest in the dispute could not unilaterally appoint a sole arbitrator. In Central Organisation for Railway Electrification v. ECI-SPIC-SMOMCML (JV), the Court upheld an arbitration clause permitting the appointment of retired railway officers, distinguishing the case based on balanced appointment procedures.

In Union of India v. Tantia Constructions Limited, a three-judge bench disagreed with the ruling in Central Organisation for Railway Electrification, questioning whether appointments by an incapacitated authority could remain valid. The Bench referred the issue to a larger Bench for reconsideration. Meanwhile, the Union Government constituted an Expert Committee on Arbitration Law, chaired by Dr. T.K. Viswanathan, to review the Arbitration Act. On 17 January 2024, the Constitution Bench granted three months to the government to assess the committee's recommendations. By 16 April 2024, no decision had been made, prompting the Court to take up the reference for final hearing.

The Court observed that it must decide whether a party interested in a dispute can unilaterally appoint a sole arbitrator or curate a panel for the opposing party to select from. It further noted the need to determine if the principle of equal treatment applies at the stage of arbitrator appointments and whether unilateral appointment mechanisms in public-private contracts by government entities violate Article 14 of the Constitution.

Justice Dr. Dhananjaya Y Chandrachud, Justice J B Pardiwala, and Justice Manoj Misra

The Court emphasized that “the principle of equal treatment of parties applies at all stages of arbitration proceedings, including the stage of appointment of arbitrators.” The Bench acknowledged that while the Arbitration Act does not prohibit Public Sector Undertakings (PSUs) from maintaining panels of potential arbitrators, “an arbitration clause cannot mandate the other party to select its arbitrator from the panel curated by PSUs.”

The Judges observed that a clause permitting one party to unilaterally appoint a sole arbitrator creates justifiable doubts about the independence and impartiality of the arbitrator. Such clauses were described as exclusive, hindering the equal participation of the other party in the arbitrator appointment process. The Court noted that this lack of parity violates the principle of equal treatment.

Regarding three-member arbitral tribunals, The Court stated that requiring one party to select its arbitrator from a panel curated by the other party was “against the principle of equal treatment of parties.” Such arrangements were deemed unequal, with the process prejudiced in favor of the party curating the panel. Referring to the CORE (supra) case, the Judges found the process biased and skewed toward the Railways.

The Bench also held that “unilateral appointment clauses in public-private contracts are violative of Article 14 of the Constitution.” The Court added that the principle of express waiver under the proviso to Section 12(5) of the Arbitration Act applies to situations where parties waive allegations of bias against a unilaterally appointed arbitrator.

Finally, the Bench clarified that the law laid down in this judgment will apply prospectively to arbitrator appointments made after the judgment date, extending this directive to three-member arbitral tribunals. The Court concluded by stating that “the reference is answered in the above terms.”

Justice Hrishikesh Roy

Justice Hrishikesh Roy, in his conclusion, outlined key principles regarding arbitration and the role of courts under the Arbitration Act. He stated that Section 18 of the Arbitration Act applies to all stages of arbitration, including the appointment of arbitrators, and emphasized that the Act does not provide any special treatment to the government, irrespective of whether arbitration involves or is initiated by the government.

Justice Roy further clarified that the unilateral appointment of arbitrators is permissible under the legislative framework of the Arbitration Act. He distinguished between "ineligibility" and "unilateral" appointments, asserting that as long as the arbitrator nominated by a party is eligible under the Seventh Schedule of the Act, such appointments—whether unilateral or otherwise—should be valid. He explained that judicial intervention at the appointment stage should remain narrow and should only occur in cases of a complete lack of consensus, under Section 11(6), where the court may appoint an independent and impartial arbitrator in accordance with Sections 11(8), 12, and 18.

Additionally, Justice Roy highlighted that the independence and impartiality of arbitrators should be assessed strictly within the statutory framework of the Arbitration Act, particularly under Section 18 read with Section 12(5). He cautioned against the application of public law and constitutional principles to arbitration proceedings, particularly at the threshold stage of Section 11.

Justice Pamidightantam Sri Narasimha

Justice P.S. Narasimha concluded his findings by emphasizing the principles underpinning arbitration and the statutory obligations arising from it. He observed that arbitration is governed by two interdependent principles: party autonomy and the statutory duty to constitute an independent and impartial arbitral tribunal. Party autonomy, he noted, is a "brooding and guiding spirit of arbitration," enabling parties to choose their arbitrators, the procedural framework, and methods of challenging awards while limiting judicial intervention. However, he clarified that this autonomy is not absolute and must align with statutory obligations and public policy considerations.

Justice P.S. Narasimha reiterated that when parties opt for arbitration, they undertake a duty to establish an independent and impartial tribunal. Justice P.S. Narasimha held that "independence and impartiality must exist in every forum," considering these principles to be an inviolable public policy requirement under Section 23 of the Contract Act. Justice P.S. Narasimha emphasized that arbitration agreements violating this public policy are void, stating, "any submission that the said agreement is a binding contract...is not tenable as such an agreement will be against public policy."

Furthermore, Justice P.S. Narasimha asserted that the judiciary holds the power to ensure arbitration agreements comply with the public policy requirement of establishing an impartial tribunal. Justice P.S. Narasimha remarked, "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."

Addressing arbitration agreements that allow unilateral constitution of tribunals, Justice P.S. Narasimha opined that such clauses often fail to inspire confidence in their independence. However, he declined to declare all such agreements void in advance, explaining that "no two agreements are the same" and that their validity must be examined on a case-by-case basis when raised under Sections 11, 14, or 34 of the Arbitration Act.

Finally, Justice P.S. Narasimha directed that all pending applications challenging unilateral appointment clauses should be adjudicated by applying the test of whether the agreement facilitates the establishment of an independent and impartial tribunal.

Case Details: Central Organisation for Railway Electrification v/s M/s ECI SPIC SMO MCML (JV) A Joint Venture Company, 2024 INSC 857

Advocate for the Petitioner: Adv. Amrish Kumar 

Advocate for the Respondent: Adv. Sridhar Potaraju