ARBITRATION UPDATE | UNILATERAL APPOINTMENT OF ARBITRATORS

Overview:

In a recent judgment by the Hon’ble Supreme Court of India concerning the Central Organisation for Railway Electrification (CORE) versus M/s ECI SPIC SMO MCML (JV), the Court addressed critical issues surrounding the independence and impartiality of arbitral tribunals under the Arbitration and Conciliation Act, 1996 (“Arbitration Act”). This decision is significant as it reaffirms the principles of party autonomy while ensuring that such autonomy does not compromise the essential standards of impartiality in arbitration proceedings.

Brief background of the case:

 The instant case had arisen out of several appeals which highlighted concerns pertaining to appointment of arbitrators, particularly in public-private contracts. The Law Commission of India had previously emphasized that while parties have the autonomy to choose their arbitrators, this should not override the principles of impartiality and independence, especially during the formation of an arbitral tribunal. Following these recommendations, amendments were made to the Arbitration Act, specifically Section 12(5), which disqualifies individuals with certain relationships to either party from serving as arbitrators.

Issues:

 a)      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?

 b)      Whether the principle of equal treatment of parties applies at the stage of the appointment of arbitrators?

 c)      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?

Held:

In view of the issues mentioned hereinabove, the Hon’ble Supreme Court was tasked with determining whether existing arbitration clauses that allowed one party to unilaterally appoint arbitrators violated these principles. The court underscored that an arbitrator must be independent of the parties involved to prevent any bias or perceived bias. This ruling was rooted in previous judgments, including Voestalpine Schienen GmbH v. Delhi Metro Rail Corporation Ltd1., which established that a limited choice in appointing arbitrators could lead to a lack of confidence in the arbitral process.

Highlights of the judgment:

1.      Independence and Impartiality:

The court reiterated that both independence and impartiality are foundational to arbitration. It stressed that any appointment process must reflect these values to maintain trust in arbitration as a dispute resolution mechanism.

2. Automatic Disqualification:

The instant judgment clarifies that individuals whose relationships fall under specified categories in the Seventh Schedule of the Arbitration Act are automatically disqualified from being appointed as arbitrators, regardless of prior agreements between parties.

3. Broad-based panels:

The Court mandated that in cases involving government entities, there must be a broad- based panel of potential arbitrators to ensure fairness and impartiality. This requirement aims to prevent any perception of favouritism or bias towards one party.

4. Public-private contracts:

The ruling highlighted the unique nature of public-private contracts, emphasizing that when a government entity is involved, there is an increased obligation to uphold impartiality standards due to the inherent power dynamics at play.

5. Prospective Overruling:

The Court also introduced the concept of prospective overruling concerning its decision, indicating that while this ruling would apply moving forward, it would not invalidate past appointments made under previous interpretations of the law.

MHCO Comment:

The Hon’ble Supreme Court's judgment serves as a pivotal reinforcement of arbitration principles in India, balancing party autonomy with necessary safeguards against bias. By insisting on independent and impartial appointment processes for arbitrators, particularly in public contracts, the Court aims to foster a more equitable arbitration environment. This decision not only clarifies existing ambiguities in arbitration law but also sets a precedent for future cases involving similar issues, thereby enhancing the integrity and reliability of arbitration as a preferred dispute resolution mechanism in India.

 This article was released on 25 November 2024.

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us for any assistance.

1 Voestalpine Schienen Gmbh v. Delhi Metro Rail Corporation Limited, (2017) 4 SCC 665