Introduction
Party autonomy is undoubtedly a cornerstone of arbitration proceedings, allowing parties substantial freedom to shape the contours of their dispute resolution process. This freedom extends to choosing arbitrators and defining procedural rules, reflecting a central appeal of arbitration over litigation. However, this autonomy has limits, particularly where it intersects with the mandatory provisions of the Arbitration and Conciliation Act, 1996 (“Arbitration Act / Act”), designed to uphold fairness, impartiality and transparency.
Balancing party autonomy with these core standards has, therefore, become a delicate but essential undertaking in arbitration law. The Constitution Bench of the Supreme Court of India (“Supreme Court / Court”) in its recent ruling in Central Organisation for Railway Electrification (“Appellant”) v. M/s ECI SPIC SMO MCML (JV) (“Respondent”)[1](“CORE II”)hasdirectly addressed this balance in the context of unilateral appointment of arbitrators. The Supreme Court was deciding the reference that arose from Union of India v. Tantia Constructions Limited[2]and JSW Steel v. South Western Railway[3],wherein the three-judge bench of the Supreme Court prima facie disagreed with the ruling of the Coordinate Bench in Central Organisation for Railway Electrification v. M/s ECI SPIC SMO MCML (JV)[4](“CORE I”)[5].
Evolution of the Legal Regime surrounding Unilateral Appointments
The Supreme Court, prior to the enactment of the Arbitration and Conciliation (Amendment) Act, 2015 (“2015 Amendment”), generally upheld the unilateral appointment clauses in arbitration agreements, emphasising on party autonomy. Nonetheless, the Supreme Court acknowledged the risk of perceived bias and has often observed that such clauses should be gradually eliminated to ensure impartiality and independence in the arbitration process.
The 2015 Amendment addressed these concerns by tightening the standard for arbitrator appointments to align with international norms. It introduced specific provisions to enhance transparency and prevent conflicts of interest.[6] It can be said that it is this shift, led by the 2015 Amendment, that laid the groundwork for the CORE II ruling.
Judicial opinions on unilateral appointments of arbitrators in India have remained divided even after the 2015 Amendment, reflecting two differing perspectives. One line of thought emphasises the principles of fairness, transparency and impartiality in the appointment process, aligning with the 2015 Amendment’s intent to mitigate biases and ensure a balanced tribunal. Courts following this approach have closely scrutinised clauses that grant one party greater control over the appointment process, particularly when an individual ineligible to be appointed as an arbitrator is empowered to appoint the sole arbitrator.
For instance, in TRF Limited v. Energo Engg. Projects Ltd.[7] (“TRF”), the Supreme Court held that a person himself ineligible to act as an arbitrator under Section 12(5) of the Act cannot also nominate an arbitrator. Similarly, in Perkins Eastman Architects DPC v. HSCC (India) Ltd.[8] (“Perkins”), the Supreme Court, relying on the ruling in TRF, stated that the advantage gained by one party from nominating an arbitrator would get counterbalanced by equal power with the other party in scenarios involving three member tribunals.
On the other hand, a competing view places party autonomy at the forefront, arguing that the freedom to structure arbitration agreements according to the parties’ needs is a hallmark of arbitration itself. Courts favouring this approach have upheld unilateral appointments as valid, provided they comply with procedural requirements and the basic safeguards outlined in the amended Act. In CORE I, the Supreme Court held that an arbitration clause allowing one party to select two individuals from a panel of four is valid, stating that the parties’ powers were counterbalanced.
Recommendations of the T.K. Viswanathan Expert Committee[9]
The Expert Committee, after analysing the judicial developments, recommended that, notwithstanding any agreement to the contrary, the appointment of arbitrators should require the consent of both parties. To preserve party autonomy, the Expert Committee recommended that this requirement may only be waived by the parties by an express agreement, subsequent to disputes having arisen between them.
This divergence in judicial approaches and the omission of the aforesaid recommendations of the Expert Committee in the Draft Amendment Bill[10] have contributed to a lack of consensus, underscoring the need for clear guidance on balancing party autonomy, with the principles of fairness in arbitrator appointments — a gap that the Supreme Court’s decision in CORE II seeks to address.
The Present Ruling: Rebalancing Impartiality and Independence with Party Autonomy
The majority judgement in CORE II has reiterated that party autonomy under the Arbitration Act is not without limits and is circumvented by certain mandatory provisions of the Act, which prevail over the arbitration agreement between the parties.
Regarding the applicability of the principle of equal treatment in arbitration proceedings, the Court observed that these proceedings are quasi-judicial and must adhere to the principles of natural justice as outlined in Section 12(5) and Section 18 of the Arbitration Act. It was held that for the arbitral proceedings to be independent and impartial, equal treatment and participation of parties is required at all stages of the proceedings, including during arbitrator appointment. Thus, the applicability of Section 18 of the Arbitration Act was said to be even at the stage of arbitrator appointment.
The Court also delved into the doctrine of bias and stated that unilateral appointment of a sole arbitrator gives rise to the real possibility of bias and is fundamentally contrary to the adjudicatory function of the arbitral tribunal. With respect to three-member tribunals, the Court affirmed the counterbalance approach as laid down in Perkins. However, the Court distinguished between Voestalpine and CORE I, wherein one party was mandated to select a nominee arbitrator from a panel curated by the other. The Court held that such clauses, due to the lack of effective counterbalance, restrict the freedom of the party and go against the principle of equal treatment enshrined under Section 18 of the Arbitration Act. The judgment underscores that requiring one party to select from a narrow, pre-defined panel, curated by the other party, can create a legitimate perception of partiality, ultimately invalidating such clauses.
Arbitration under public-private contracts
The Court also analysed the applicability of constitutional principles of equality and non-arbitrariness, specifically in the context of arbitration proceedings under public-private contracts. The Court addressed the public nature of the government’s activities and those of its instrumentalities, emphasizing that they must ensure the arbitral process, including the procedure for appointing arbitrators as outlined in the contract, is fair to the other party to avoid any form of arbitrariness. In this context, the Court held that a unilateral appointment clause in such contracts is inherently exclusionary and violates the principle of equal treatment of parties and procedural equality as enshrined under Article 14 of the Constitution, as well as the Arbitration Act.
Let the Tribunal Decide – limited role of courts at the stage of Section 11
The Court, aware of the potential increase in challenges to the initiation of arbitration proceedings resulting from the present ruling, reaffirmed the principle of minimum judicial interference and kompetenz-kompetenz. It stated that the referral court at the stage of Section 11 would only determine the existence of an arbitration agreement and the validity of the arbitration clause, along with the procedure for arbitrator appointment, will be decided by the arbitral tribunal.
Divergent Voices
The judgment in CORE II has two differing opinions penned by Justice P.S. Narasimha and Justice Hrishikesh Roy, apart from the majority opinion discussed above.
Justice Narasimha has ruled that Section 18 cannot be invoked at the stage of appointment of arbitrators as it only provides for the obligation of the tribunal to treat the parties equally during arbitral proceedings. Justice Roy, on the other hand, concurs with the majority judgement on the principle of equality, as set out under Section 18 of the Arbitration Act, which applies at all stages of the arbitration proceedings, including at the stage of appointment of arbitrators.
Both Justice Roy and Justice Narasimha differ with the majority view on the invocation of the principles of constitutional law, in the context of the doctrine of equality in the realm of arbitration. Justice Narasimha advocates for an approach based on contractual principles over public law principles. They also underscore the importance of minimal judicial intervention as envisioned by Section 5 of the Act. Both agree that the court shall decide on a case-to-case basis on whether an arbitration clause runs afoul of the principles of independence and impartiality. However, while Justice Narasimha stated that such a decision can be rendered by the concerned court on an application made under Sections 11, 14 or 34 of the Act, Justice Roy relies on available remedies under Sections 12, 13, 14 and 15 of the Act, to reiterate that the court’s interference under Section 11 of the Act should be minimal.
It is propounded by both Justice Roy and Justice Narasimha that unilateral appointment is not per se invalid as per the Arbitration Act. Interpreting Section 12(5) of the Act, Justice Roy stated that nullifying all unilateral appointments would defeat the legislative intent of the Arbitration Act. Similarly, Justice Narasimha stated that such an a priori declaration that all unilateral appointment clauses are invalid would lead to problems for institutions dealing with high volumes of transactions with smaller sums of money, e.g. insurance claims.
Way Forward
The Court has expressly directed that the judgment would operate prospectively vis-à-vis three-member tribunals. Thus, ongoing arbitrations with three-member tribunals would remain unaffected and this judgment does not hamper their continuity or enforcement of the resultant award. On the other hand, the fate of sole arbitrator appointments remains unclear since the prospective operation direction is limited to three-member tribunals. To prevent upheaval, ongoing arbitrations with sole arbitrators should also be exempt from the application of this judgment. However, the lack of explicit instructions from the Court has left room for ambiguity.
The Court has also acknowledged the importance and utility of maintaining a panel of arbitrators, especially by the public sector undertakings. The Court, however, has cautioned that the other party cannot be mandated to select arbitrator(s) from the panel. In effect, the other party should have a choice to either choose its arbitrator from the panel or go beyond it. The scope of waiver specified under Section 12(5) has been broadened, allowing parties to agree in writing to a unilateral appointment of arbitrator(s) after a dispute has arisen between them.
Moving forward, parties should draft arbitration clauses in a manner that does not indicate that one party has the power to unilaterally appoint the arbitrator(s). The authority of the party should not be exclusive and while there can possibly be a panel of arbitrators, it should be broad based, and the other party should not be mandated to choose from such panel. As a matter of best practice, equality of parties should be apparent from the wording of the arbitration clauses stipulating the appointment procedure.
[1] 2024 INSC 857; Civil Appeal Nos. 9486-9487 of 2019.
[2] 2021 SCC OnLine SC 271.
[3] 2022 SCC OnLine SC 1973.
[4] (2020) 14 SCC 712.
[5] The dispute arose out of a work contract that contained an arbitration clause which prescribed for the nomination of a three-member panel. The Appellant was obligated to send names of at least four empanelled railway employees out of which the Respondent was allowed to choose two names. The Appellant had an obligation to appoint at least one of the arbitrators from the two chosen names. The Appellant had the power to appoint other members of the tribunal, including the presiding arbitrator, without consulting the Respondent. While contending that the appointment procedure prescribed in the arbitration clause was invalid, the Respondent approached the Allahabad High Court for appointment of arbitrators under Section 11 of the Act. The application was allowed by the High Court. On appeal in CORE I, the Supreme Court set aside the orders of the High Court and upheld the validity of the arbitration clause.
[6] Section 12(1)(b) read with Schedule V; Section 12(5) read with Schedule VII of the Arbitration Act.
[7] (2017) 8 SCC 377.
[8] (2020) 20 SCC 760.
[9] Report of the Expert Committee to examine the working of the Arbitration law and recommended reforms in the Arbitration and Conciliation Act 1996 to make it alternative in the letter and spirit, Ministry of Law and Justice.
[10] Draft Arbitration and Conciliation (Amendment) Bill, 2024, Department of Legal Affairs.