Introduction
The recent five-judge Constitution Bench decision in Central Organisation for Railway Electrification v. ECI-SPIC-SMO-MCML, led by former Chief Justice D.Y. Chandrachud, invalidating unilateral appointment clauses in arbitration agreements, marks a significant development in Indian arbitration jurisprudence. While the judgment reinforces the ideals of impartiality and equality in arbitration, its reasoning, particularly the invocation of constitutional principles in private contractual matters, warrants a critical examination. This article delves into the legal underpinnings, evaluates the implications of the decision, and critiques the practical and doctrinal concerns it raises.
Background
The Bench was tasked with examining the validity of unilateral appointment clauses in light of Section 18 of the Arbitration and Conciliation Act, 1996 (“the Act”), which ensures equal treatment of parties, and Article 14 of the Constitution, which guarantees equality before the law. The key findings of the majority and dissenting opinions can be summarized as follows:
- The majority, led by former Chief Justice Chandrachud, held that unilateral appointment clauses in public-private contracts not only violate the equality principle enshrined in Section 18 of the Act but also violate Article 14 of the Constitution. While holding so, the majority heavily relied on the public law doctrines of arbitrariness and bias.
- The majority clarified that while Public Sector Undertakings (“PSUs”) can maintain and propose a list of arbitrators, they cannot mandate the other party to select arbitrators exclusively from this list.
- The judgment applies prospectively to appointments made post-judgment, ensuring that existing arbitration agreements are not retroactively invalidated. However, the prospective overruling is limited to only three-member tribunals.
Justices Hrishikesh Roy and P.S. Narasimha dissented partially, arguing that principles of equality in arbitration stem from the Act rather than the Constitution. Justice Roy opined that statutory safeguards in the Act suffice to ensure fairness, while Justice Narasimha cautioned against the blanket application of public law principles to arbitration.
Legal Inconsistencies in the Judgment
The conflation of Constitutional and Arbitration Law
The majority’s reliance on Article 14 of the Constitution to invalidate unilateral clauses represents a doctrinal shift, extending constitutional principles into the domain of private law. Arbitration is fundamentally a consensual, party-driven mechanism designed to operate independently of public law principles, as reaffirmed by prior Supreme Court decisions such as Perkins Eastman Architects DPC v. HSCC (India) Ltd. and TRF Ltd. v. Energo Engg. Projects Ltd.
While the Court’s intent to uphold fairness is laudable, importing Article 14 into arbitration agreements disregards the contractual autonomy of parties. On the one hand, the majority observed that the Act does not make any distinction between purely private arbitrations and public-private arbitrations; on the other hand, it erroneously elevated public-private arbitrations to a higher pedestal by asserting that such arbitrations involve a “public element”. This erroneous distinction resultantly led to the unwarranted import of public law principles, such as non-arbitrariness and bias, within the framework of appointment of arbitrators—issues that could have been adequately addressed by the governing principles of arbitration and contract law. The dissent’s emphasis on addressing impartiality within the framework of the Act, particularly under Sections 12 and 18, aligns better with established arbitration jurisprudence and avoids overstepping into legislative territory.
Limited Scope of Section 18 of the Act
The judgment’s interpretation of Section 18 of the Arbitration Act is equally significant. While the section ensures equal treatment of parties during arbitration proceedings, the Court extended this principle to the appointment process itself. This broad interpretation aligns with the judgment’s emphasis on fairness but has been criticized for exceeding the statutory text. On a plain reading, Section 18 does not explicitly govern appointments of arbitrators, which are instead regulated by Sections 11 and 12 of the Act. The placement of these provisions within the scheme of the Act is essential. Section 18 is placed under Chapter V of the Act titled “Conduct of Arbitral Proceedings”, whereas, the provisions governing the appointment of arbitrators fall under Chapter III titled “Composition of Arbitral Tribunals”. The clear language of Section 18 coupled with its placement within the Act makes it difficult to agree with the observation of the majority that the principle of equal treatment of parties applies at all stages of arbitration proceedings, including the stage of appointment of arbitrators.
Interestingly, Justice Narsimha noted that there are two distinct obligations— first, the obligation of the arbitrating parties to appoint an independent arbitrator, and second, the obligation of the arbitral tribunal to act judicially and treat the parties with equality. He observed that Section 18 is concerned with the latter obligation, and therefore, it cannot be attached to the arbitrating parties at the stage of appointment of arbitrators.
Undermining Party Autonomy
Party autonomy is the cornerstone of arbitration, allowing parties to tailor dispute resolution mechanisms to their needs. By invalidating unilateral appointment clauses outright, the judgment curtails this autonomy. The dissent’s nuanced approach, permitting judicial scrutiny of such clauses on a case-by-case basis under Section 12(5), better preserves the balance between fairness and autonomy.
Advance Ruling and Judicial Overreach
Pursuant to the recommendations of the 246th Report of the Law Commission, the 2015 Amendments to the Act introduced Section 12(5) and Schedule VII which provided for de jure ineligibility of arbitrators in case they fell within one of the categories prescribed therein. Therefore, the courts at the stage of 11(6) appointments are required to examine the independence and impartiality of the arbitrators on a case-to-case basis on the touchstone of Section 12 read with Schedules V and VII.
The introduction of a de jure ineligibility is essentially a legislative function and where legislatures saw it fit to ban unilateral appointments; they have done so explicitly. This is clear from the 2015 Amendments as well as the recently introduced Draft Arbitration and Conciliation (Amendment) Bill, 2024.
The majority has given an advance ruling that every unilateral appointment is invalid for the lack of impartiality and fairness. Therefore, effectively the court has introduced a de dure ineligibility where there was none. The courts can now set aside every unilateral appointment irrespective of the fact that the arbitrator was otherwise eligible, not being disqualified under Schedule VII of the Act. Justice Narsimha in his dissent pointed out that such an advance ruling prohibiting all unilateral appointments is unwarranted and the correct stage at which the courts should comment on the independence and impartiality of the arbitrators is when the parties have filed an application for appointment under Section 11(6) or challenge under Section 14 of the Act.
Practical Challenges arising from the Judgment
Increased Litigation and Administrative Burden on Judiciary
The judgment, by invalidating unilateral clauses, is likely to lead to a surge in Section 11 applications for court-appointed arbitrators. One of the parties to arbitration may always approach the court asserting procedural inequality in the appointments. This not only increases litigation but also shifts the responsibility of ensuring fairness from arbitration mechanisms to an already overburdened judiciary. Such a shift undermines the core objective of arbitration—efficient and expeditious dispute resolution.
Impact on Public-Private Contracts
Public-private contracts often involve unequal bargaining power, where the government or PSU drafts the terms. While the judgment seeks to address this imbalance, it may inadvertently deter PSUs from engaging in arbitration due to concerns over prolonged appointment disputes and increased litigation. It may be noted the Union Ministry of Finance has recently issued Guidelines for Arbitration and Mediation in Contracts of Domestic Public Procurement advising PSUs to prioritize mediation and, if necessary, seek adjudication through courts instead of arbitration. The guidelines raised concerns about the absence of adequate safeguards in the selection of arbitrators. This judgment could further discourage PSUs from incorporating arbitration clauses in their commercial contracts.
Uncertainty in Pending Arbitrations
The judgment applies prospectively to the appointment of three-member tribunals and not to the appointment of sole arbitrators. This may result in increased challenges to the ongoing arbitrations where the sole arbitrator was appointed unilaterally. It may be argued that even in cases of panel-based arbitrators, the prospective application from the date of the Supreme Court’s judgment creates an artificial distinction. In cases where tribunals were appointed from a curated panel shortly before the judgment but the proceedings have not yet commenced, parties may seek to challenge such appointments. This could lead to applications before the High Courts or the Supreme Court to invalidate those arbitration proceedings and reappoint tribunal members in line with the decision, leading to procedural delays and increased costs.
Lack of Clarity on Curated Panels
While the majority permits PSUs to propose curated panels, it restricts mandatory selection from such panels. This creates ambiguity about the permissible boundaries of panel-based appointments, necessitating further judicial clarification.
Alternative Approaches and Recommendations
Strengthening Statutory Safeguards
Instead of declaring unilateral clauses unconstitutional, the Court could have emphasized strict enforcement of Sections 12 and 13 of the Act, which address impartiality and bias. For instance, mandating robust disclosures under the Fifth and Seventh Schedules could achieve fairness without undermining party autonomy.
Case-by-Case Examination
Justice Narasimha’s suggestion to evaluate unilateral clauses on a case-by-case basis ensures a balanced approach. Courts could invalidate such clauses only when specific evidence of bias or unfairness exists, avoiding blanket invalidations.
Promoting Institutional Arbitration
Encouraging parties to adopt institutional arbitration rules, which typically provide for neutral appointment procedures, could mitigate concerns about unilateral appointments. For instance, institutions like the Singapore International Arbitration Centre and the London Court of International Arbitration ensure impartial appointments through their frameworks.
Conclusion
Justice Chandrachud’s judgment represents a pivotal moment in Indian arbitration law, reinforcing ideals of impartiality and equality. However, its overreliance on constitutional principles, expansive interpretation of Section 18, and disregard for party autonomy raise significant legal and practical concerns. A more restrained approach, grounded in statutory safeguards and case-specific scrutiny, would better serve the twin objectives of fairness and efficiency in arbitration. Moving forward, legislative and institutional reforms could provide the clarity and balance necessary to address the issues surrounding unilateral appointments.
(This post has been authored by Tejas Hinder and Priyam Indurkhya, Editors at The Contemporary Law Forum)
CITE AS: Tejas Hinder and Priyam Indurkhya, ‘CRITIQUING JUSTICE CHANDRACHUD’S VIEW ON UNILATERAL APPOINTMENTS IN ARBITRATION: LEGAL AND PRACTICAL CHALLENGES’ (The Contemporary Law Forum, 28 December 2024) <https://tclf.in/2024/12/28/critiquing-justice-chandrachuds-view-on-unilateral-appointments-in-arbitration-legal-and-practical-challenges/↗date of access.