This article examines the judicial approach to the validity of appointing a sole arbitrator and a three-member arbitral tribunal, particularly in the context of Public-Private Partnerships. It also explores the constitutional validity of clauses granting unilateral power to appoint arbitrators, analyzing them through the lens of the principle of Equal Treatment of Parties. Additionally, the article traces key judicial pronouncements and the issues raised, culminating in the landmark CORE II judgment of the Apex Court.
Introduction
The distinguishing factor inherent in arbitration agreements is its flexibility to allow parties to agree to a set of rules governing said arbitration proceedings but most importantly the accommodating attribute granting parties the right and autonomy to choose the arbitrator or arbitral tribunal of their choice. This peculiar aspect of selecting a tribunal allows parties to choose arbitrators with the requisite experience or expertise in the matter or dispute.
Albeit, this autonomy granted by the arbitration act needs to be in line with the spirit of the constitution and principles of natural justice. This follows that such party autonomy must be subject to equal treatment of the parties as envisioned even in Section 18 of the Arbitration Act.
The Law Commission of India in its 246th Report recommended that party autonomy cannot be stretched to disregard the principles of impartiality and independence of the arbitral process, specifically at the stage of constituting an arbitral tribunal.
Following the recommendations of the Law Commission, Parliament enacted the Arbitration and Conciliation (Amendment) Act 2015 to incorporate Section 12(5).
Section 12(5) renders a person whose relationship with the parties falls under any of the categories specified under the Seventh Schedule ineligible for appointment.
The Seventh Schedule to the Arbitration Act divides the specified categories based on three factors:
- Arbitrator’s relationship with the parties or counsel;
- The relationship of the arbitrator to the dispute;
- Arbitrator’s direct or indirect interest in the dispute.
It naturally follows that the following relationships would be covered:
- The arbitrator is an employee, consultant, advisor or has any other past or present business relationship with a party.
- The arbitrator is a manager, director or part of the management, or has a similar controlling influence, in an affiliate of one of the parties if the affiliate is directly involved in the matters in dispute in the arbitration.
Section 12(5) overrides any prior procedure for appointing the arbitrators agreed upon between the parties due to the non obstante clause. However, the proviso to Section 12(5) allows parties to waive the applicability of that provision after the dispute has arisen. It is this proviso that enshrines the true essence of ‘party autonomy’.
No Bar On Appointment Of Retired Government Employees As Arbitrator
In Voestalpine Schienen GmbH v. Delhi Metro Rail Corporation Ltd, the arbitration Clause required the Delhi Metro Rail Corporation (‘DMRC’) to prepare a panel of engineers comprising serving or retired engineers of government departments or public sector undertakings.
The issue before a two-Judge Bench of the Supreme Court was whether the panel of arbitrators prepared by DMRC violated Section 12 of the Arbitration Act.
This Court emphasized that an arbitrator appointed in terms of the agreement between the parties must be independent of the parties. Further, this Court held that Section 12(5) read with the Seventh Schedule does not put an embargo on retired government employees from serving as arbitrators.
The Court noted the deficiencies that the arbitration Clause suffered from, namely:
- The choice given by DMRC to the other party was limited;
- The discretion given to DMRC to curate a panel of five persons gave rise to the suspicion that it “may have picked up its own favourites.”
To remedy the situation, it was held that a choice must be given to both parties to nominate any person from the entire panel of arbitrators.
Person Ineligible To Act As Arbitrator Cannot Nominate Arbitrator- Perkins and TRF Ltd.
In TRF Ltd. v. Energo Engineering Projects Ltd., the arbitration Clause stated that any dispute or difference between the parties in connection with the agreement shall be referred “to sole arbitration of the Managing Director of Buyer or his nominee.
After a dispute arose, the Managing Director of the Respondent appointed a former judge of this Court as the sole arbitrator in terms of the arbitration clause. The issue before the Bench of three Judges was whether the Managing Director was eligible to nominate a sole arbitrator because of Section 12(5) of the Arbitration Act.
The Court distinguished the situation where both the parties appoint their arbitrators from a situation where a person ineligible to be appointed as an arbitrator nominates a sole arbitrator.
The Court relied on the maxim Qui Facit Per Alium Facit Per Se (what one does through another is done by oneself) to hold that a person who becomes ineligible to be appointed as an arbitrator cannot nominate another person as an arbitrator.
It is important to note that this was a case of appointment of Sole Arbitrator by the Managing Director of an interested party.
In Perkins Eastman Architects DPC v. HSCC (India) Ltd. the arbitration clause stipulated that disputes or differences between the parties to the contract “shall be referred for adjudication through arbitration by a sole arbitrator appointed by the CMD HSCC.
The Bench of two Judges held that the test to determine the possibility of bias is directly relatable to the interest the person appointing an arbitrator has in the outcome of the dispute.
The Court held that a person having an interest in the dispute “cannot and should not have any role in charting out any course to the dispute resolution by having the power to appoint an arbitrator.
TRF (supra) and Perkins (supra) both dealt with a situation where a person who was rendered ineligible in terms of Section 12(5) was making an appointment of a sole arbitrator.
The reason is clear that whatever advantage a party may derive by nominating an arbitrator of its choice would get counter-balanced by equal power with the other party. But, in a case where only one party has a right to appoint a sole arbitrator, its choice will always have an element of exclusivity in determining or charting the course for dispute resolution. Naturally, the person who has an interest in the outcome or decision of the dispute must not have the power to appoint a sole arbitrator.
Ineligible Person Can Nominate Arbitrator Based On Facts Of Case- CORE-I
In Central Organisation for Railway Electrification v. ECI-SPIC-SMO- MCML (JV), the Arbitration clause prescribed that the Arbitral Tribunal shall consist of a panel of three retired railway officers not below the rank of SAO officer. For this purpose, the Railways will send a panel of at least four names of retired railway officers out of which the Contractor shall nominate two names.
Thereafter, the General Manager shall appoint at least one out of them as the contractor’s nominee and will, also simultaneously appoint the balance number of arbitrators either from the panel or from outside the panel, duly indicating the “presiding arbitrator” from amongst the three arbitrators so appointed.
The two issues arose for consideration before the court..Firstly, whether the appointment of retired railway employees as Arbitrators was valid.Settling the first issue, the Court relied on the precedent set in Voestalpine case (Supra) wherein the apex court had held that Section 12(5) read with the Seventh Schedule did not bar the appointment of former employees as Arbitrators. Secondly, whether the General Manager can be vested with the power to appoint arbitrators.
The Apex court at the outset clarified that the law laid down in TRF (supra) & Perkins (Supra) will not be applicable in the instant case considering the facts in the aforementioned cases dealt with the power of the Manager of a party to appoint the “Sole Arbitrator” in arbitration proceedings.
Whilst in the present case was a scenario wherein instead of ‘Sole Arbitrator’, an arbitral tribunal comprising 3 arbitrators were to be constituted.
The Court held that the law laid down in TRF (supra) and Perkins (supra) was not applicable because “the right of the General Manager in formation of Arbitral Tribunal is counterbalanced by respondent’s power to choose any two from out of the four names and the General Manager shall appoint at least one out of them as the contractor’s nominee.”
Point of Reference: What led to CORE II
It was the case of Union of India v. Tantia Constructions Limited wherein the court doubted the correctness of the CORE-I judgment and referred the matter to a larger bench. The court while disagreeing with view taken by the Supreme Court in CORE-I held that once the appointing authority itself is incapacitated from referring the matter to arbitration, it does not then follow that notwithstanding this yet appointments may be valid depending on the facts of the case.
Finally, the following issues were formulated to be determined by the Apex Court in CORE II:
- Whether an appointment process which allows a party who has 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.
Whilst answering the issues, Court arrived at the following conclusions:
- The principle of equal treatment of parties applies at all stages of arbitration proceedings, including the stage of appointment of arbitrators;
- 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;
- 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;
- Unilateral appointment clauses in public-private contracts are violative of Article 14 of the Constitution;
- The principle of 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 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.
Conclusion
The discussion makes it clear that the unilateral appointment of an arbitrator is prohibited, as arbitration clauses granting one party the exclusive power to appoint an arbitrator violate the principle of party autonomy. While the Supreme Court in Perkins (supra) and TRF Ltd.(supra) had settled the law by holding that arbitration clauses allowing unilateral appointment were invalid—and that individuals ineligible to act as arbitrators could not nominate arbitrators—the issue arose again in CORE-I. In that case, the Supreme Court distinguished Perkins (supra) and TRF Ltd.(supra)., holding that an arbitration clause permitting the General Manager of the Railway to nominate an arbitrator was valid because the other party also had the autonomy to choose two arbitrators from a panel. However, this issue was conclusively settled in CORE-II, where the Supreme Court effectively overruled CORE-I. The Court further held that one party cannot be compelled to nominate an arbitrator from a panel curated by the government, as it hinders equal participation in the arbitration process. Additionally, arbitration clauses in public-private contracts have been deemed violative of Article 14 of the Indian Constitution.
1 2024 INSC 857
2 [2017] 1 SCR 798
3 [2017] 7 SCR 409
4 [2019] 17 SCR 275
5 2019: INSC:1394
