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Informist, Friday, Nov. 8, 2024

--SC: One party can't unilaterally appoint panel of arbitrators

--CONTEXT: SC on validity of unilateral nominations to panel of arbitrators

NEW DELHI – The Supreme Court on Friday held that the unilateral appointment of a panel of arbitrators in public contracts violates Article 14 of the Indian Constitution. One party to an arbitration agreement cannot unilaterally appoint the panel of arbitrators, the court said.

A Bench led by Chief Justice of India D.Y. Chandrachud said that the principle of equal treatment of parties applies at all stages including at the appointment process of arbitrators. An arbitration clause cannot mandate a party to select an arbitrator from a curated panel and thus such a unilateral clause cannot be there, said the court, adding that it was against principles of equal treatment of parties. A detailed order is awaited. 

The top court also said that its ruling will apply prospectively to arbitrator appointments to be made in the future.

The case has its genesis from an arbitration agreement in a contract between Central Organisation for Railway Electrification and ECI-SPIC-SMO-MCML, a joint venture. According to the agreement, the Central Organisation for Railway Electrification had to nominate a panel of four individuals for their appointment to an arbitral tribunal. Thereafter, the joint venture would choose two names from the panel. The third member of the arbitral tribunal was to be given by the general manager of the Central Organisation for Railway Electrification.

After a dispute arose between the parties, the Central Organisation for Railway Electrification nominated four panelists. However, the joint venture moved the Allahabad High Court seeking appointment of an arbitrator under Section 11 of the Arbitration and Conciliation Act, 1996. The high court appointed an arbitrator and accepted the joint venture's argument that the panel of arbitrators appointed by the Central Organisation for Railway Electrification was composed of retired railway officers who were ineligible to be arbitrators.

In 2019, a three-judge Bench of the top court rejected the high court's order and said that the selection did not adhere to the agreement between the parties. The top court ruled that a person who cannot be an arbitrator, a general manager in that case, can appoint an arbitrator. The court said it was permissible for the panel of arbitrators to be nominated unilaterally. In 2021, another three-judge bench in a different case did not agree with the top court's 2019 reasoning. Consequently, the issue was referred to a five-judge Constitution Bench.

The private contractors have argued that Section 12(5) of the Arbitration Act along with its Seventh Schedule, makes a person ineligible to be appointed as an arbitrator if their relationship with the parties or counsel falls within the categories specified in the Seventh Schedule. In this case, the general manager was ineligible to serve as an arbitrator in a dispute due to an apparent conflict of interest, and therefore could not appoint an arbitrator, said the private contractors.

The private contractors said the unilateral appointment of arbitral panels was contrary to the principle of equality under the Arbitration Act and contravened public policy. The public sector units said if the Arbitration Act intended that an ineligible person could not appoint an arbitrator, it would have made that clear under Section 12(5) of the Act.  End

Reported by Surya Tripathi

Edited by Ashish Shirke

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