Unilateral appointment of arbitrator clauses in public-private contracts unconstitutional: SC

The judgement was delivered by a bench of Chief Justice DY Chandrachud and Justices Hrishikesh Roy, PS Narasimha, Pankaj Mithal and Manoj Misra.

CJI Chandrachud Justices Mithal and Misra authored a separate judgement, while Justice Hrishikesh Roy and PS Narasimha wrote two separate judgements on the matter.

In the judgement by CJI Chandrachud, the top court said that the principle of equal treatment of parties applies at all stages of arbitration proceedings, including the stage of appointment of arbitrators.

"Unilateral appointment clauses in public-private contracts are violative of Article 14 of the Constitution," CJI said.

CJI further said, "The Arbitration Act does not prohibit PSUs from empanelling potential arbitrators. However, an arbitration clause cannot mandate the other party to select its arbitrator from the panel curated by PSUs.

"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, such a unilateral clause is exclusive and hinders equal participation of the other party in the appointment process of arbitrators," the top court said

"In the 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. In this situation, there is no effective counterbalance because parties do not participate equally in the process of appointing arbitrators. The process of appointing arbitrators in CORE (supra) is unequal and prejudiced in favour of the Railways," the top court said.

"The principle of an express waiver contained under the proviso to Section 12(5) also applies to situations where the parties seek to waive the allegation of bias against an arbitrator appointed unilaterally by one of the parties. After the disputes have arisen, the parties can determine whether there is a necessity to waive the nemo judex rule," the top court said.

"The law laid down in the present reference will apply prospectively to arbitrator appointments to be made after the date of this judgment. This direction applies to three-member tribunals," the top court added.

Justice Roy said that he is in agreement with the view of Chief Justice Chandrachud that the principle of equality under Section 18 of the Arbitration and Conciliation Act,1996 applies at all stages of the proceedings including the stage of appointment of arbitrators.

"Unilateral appointment of Arbitrators is permissible as per the legislative scheme of the Arbitration Act. There is a distinction between 'ineligibility' and 'unilateral' appointment of arbitrators. As long as an arbitrator nominated by a party is eligible under the Seventh Schedule of the Act, the appointment (unilateral or otherwise), should be permissible," Justice Roy said.

"It is only in cases of a complete lack of consensus that the court should exercise its power under Section 11(6) of the Arbitration Act to appoint an independent and impartial arbitrator as per Section 11(8) read with Section 12 and 18 of the Arbitration Act. At the appointment stage, the scope of judicial intervention is otherwise extremely narrow," Justice Roy said.

"The independence and impartiality of the arbitrator must be examined within the statutory framework of the Arbitration Act, particularly Section 18 read with 12(5). Public Law constitutional principles should not be imported to arbitration proceedings, particularly at the threshold stage of Section 11," Justice Roy said.

"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. This principle is recognised and statutorily incorporated in the Contract Act and the Arbitration Act. 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," Justice Narasimha said in his separate judgement.

"Neither public policy considerations under the Contract Act or the Arbitration Act restrain the parties to the arbitration from maintaining a panel of arbitrators in any manner. However, arbitration agreements enabling one of the parties to unilaterally constitute an arbitral tribunal do not inspire confidence of independence and may violate the public policy requirement of constituting an independent and impartial tribunal. The court will, therefore, scrutinise the agreement and hold them to be invalid if it considers it appropriate," Justice Narasimha said.

The court was hearing a batch of appeals and was dealing with the contours defining the independence and impartiality of arbitral tribunals under the Arbitration and Conciliation Act 1996.

The Arbitration Act allows parties to agree on a procedure for the appointment of arbitrators. The sanctity of hearing in the arbitration agreement underscores the autonomy of parties to settle their disputes by arbitrators of their choice.

However, the Arbitration Act subjects party autonomy to certain mandatory principles such as the equality of parties, independence and impartiality of the tribunal, and fairness of the arbitral procedure. The reference to the Constitution Bench raises important issues of the interplay between party autonomy and independence and impartiality of the arbitral tribunal.(ANI)