Appointment of arbitrators by ineligible persons | Day 1: Unilateral appointment of panel violates equal treatment, argue private contractors
Appointment of Arbitrators by Ineligible PersonsJudges: D.Y. Chandrachud CJI, Hrishikesh Roy J, P.S. Narasimha J, J.B. Pardiwala J, Manoj Misra J
Today, a five-judge Constitution Bench led by Chief Justice D.Y. Chandrachud commenced hearing the case to decide if a person who is ineligible to be an arbitrator can appoint one. The bench also heard arguments on the validity of the unilateral creation of a panel from which arbitrators can be selected.
Back in 2019, in Central Organisation for Railway Electrification (CORE) v M/s ECI-SPIC-SMO-MCML (JV) a three-judge bench of the Supreme Court had set aside the Allahabad High Court’s appointment of an arbitrator, stating that it had to be done as per the General Conditions of Contract (GCC) between the two parties.
The GCC allowed CORE, the appellant, to nominate a panel of four people, from whom the respondents could pick two out of the three arbitrators to form a tribunal. The third person would be picked by the General Manager of CORE, who is ineligible to be an arbitrator himself according to Section 12(5) of the Arbitration Act. The Court noted that since the “respondent has been given the power to select two names from out of the four names of the panel, the power of the appellant nominating its arbitrator gets counter-balanced by the power of choice given to the respondent”.
There are two questions before the bench in the present matter. First, whether a person who themselves cannot be an arbitrator can appoint one. Second, whether it is permissible for the panel of arbitrators to be nominated unilaterally.
The current reference emerges from Union of India v M/s. Tantia Constructions Ltd. (2021), in which another three-judge bench disagreed with the reasoning in Central Organisation.
Today, Senior Advocates Gourab Banerji, Neeraj Kishan Kaul, S. Ravi Shankar and others, appearing for private contractors, argued against the unilateral appointments and nominations of arbitrators. They contended that such appointments were opposed to the principle of equality enshrined under the Arbitration Act and were contrary to public policy.
Further, they submitted that independence in the appointment process was paramount, especially when the state is a party. Kaul also submitted that institutional arbitration could help solve the concerns of independence in the appointment process.
Unilateral appointment breaches the principle of equal treatment
Banerji, opening the arguments for the day, contended that according to Section 18 of the Arbitration Act, both parties to an arbitration had to be treated equally.
Section 18 falls under Chapter V of the Arbitration Act which deals with “Conduct of Arbitral Proceedings”. Justice Hrishikesh Roy asked how this provision could be invoked at the stage of appointing the panel (when the process of arbitration had not commenced yet). Banerji contended that according to Section 21, the process of arbitration commences when a request for arbitration is made.
Equal treatment under Section 18, Banerji argued, meant that the process of appointing the panel had to be independent and impartial. This independence, the Chief added, had to be not just present but also “perceived” to be present. Banerji agreed, saying that independence was of “paramount consideration”.
Banerji went on to argue that neutrality had to be visible prima facie. Justice P.S. Narasimha added that independence and impartiality was “not a matter of degree” but had to exist in its “absoluteness”. Justice Roy summarised Banerji’s argument as follows: one party’s choice of arbitrators cannot be limited to the “offerings” laid out by the other side.
The 246th Law Commission Report
To back his argument that unilateral appointment of the panel was contrary to Section 18, Banerji relied on the 246th Law Commission Report, which was the basis for the 2015 Amendments to the Arbitration Act. Here’s one of the parts of the Report that Banerji read out in court:
“Since the principles of impartiality and independence cannot be discarded at any stage of the proceedings, specifically at the stage of constitution of the arbitral tribunal, it would be incongruous to say that party autonomy can be exercised in complete disregard of these principles—even if the same has been agreed prior to the disputes having arisen between the parties. There are certain minimum levels of independence and impartiality that should be required of the arbitral process regardless of the parties’ apparent agreement.”
A person ineligible to be an arbitrator de jure cannot appoint another
After lunch, Kaul commenced his arguments by submitting that a person ineligible to be an arbitrator could not appoint another person either.
To support his argument, he relied on Sections 12(5) and 14(1)(a) of the Arbitration Act. Section 12(5) states that a person is ineligible to be an arbitrator if he falls under any relationship enumerated under the Seventh Schedule of the Arbitration Act. If he becomes ineligible under Section 12(5), his ineligibility was de jure i.e. in law.
Section 14(1)(a) states that a mandate of an arbitrator shall terminate and he shall be substituted by another arbitrator, “if he becomes de jure or de facto unable to perform his functions.” Reading Sections 12(5) and 14(1)(a) together, Kaul submitted, leads to the conclusion that if a person was ineligible by law to be appointed as an arbitrator, it followed that they would not be in a position to appoint another person as an arbitrator.
In support of his argument, Kaul relied on Bharat Broadband Network Ltd. v United Telecoms Ltd. (2019). In this case, while describing the interplay between the two sections, the Court had noted that “…Section 14(1)(a) of the Act gets attracted inasmuch as the arbitrator becomes, as a matter of law, unable to perform his functions under Section 12(5)….”
A “crisis of confidence” cannot be justified
Adding to Banerji’s arguments, Kaul submitted that independence in appointing the panel was so crucial that it did not matter if the members of the panel were eligible or ineligible to be appointed as arbitrators under Section 12(5) and the Seventh Schedule.
They could be the most impartial and qualified members, but the fact that only one side had a say in constituting the panel to choose them, created a “crisis of confidence”.
Justice Narasimha interjected to point out that, in certain contexts, like the railways in this case, the number of arbitration claims and adjudications were countless, so it was perhaps easier to have a stock of eligible persons ready and choose from amongst them. Kaul responded that he was not opposed to having a panel of persons on stand-by, but it was imperative that both parties have a say in the composition of such a panel.
The Chief Justice acknowledged that it was important for both parties to have confidence in the tribunal. However, he questioned if a panel nominated by one side would be improper even when neither side had a “crisis of confidence” in its members. Kaul responded by saying that in such a case, the perception of independence would still be breached because one side had no say. “What is sauce for the goose, is sauce for the gander,” he said, implying that both sides had to have a say in the process.
Central Board did not counterbalance party rights
In Perkins Eastman Architects DPC v HSCC (India) Ltd (2019), the bench had noted that “whatever advantage a party may derive by nominating an arbitrator of its choice would get counterbalanced by equal power with the other party.”
Kaul stated that in Central Board (2019) the counterbalancing justification given by the bench was not in tune with the one envisioned in Perkins. In Central Board, Kaul stated, one party had more of a say in the appointment process. Justice Narasimha added that the result was such that the choice was not absolute. It was a situation where one party said “you can pick any colour as long as it is black.” Kaul agreed.
Towards the end of the day, other counsel on the petitioners’ side made quick submissions. Ravi Shankar submitted that the autonomy of the parties had to “sustain the public policy test.” Advocate Rohan Talwar submitted that unilateral appointments to the panel could grant skewed incentives to the panellists. Lastly, another counsel submitted that if “absolute equality was not possible” during the stage of appointments, it was not possible during the entire process either.
Solicitor General Tushar Mehta will open arguments tomorrow, that is 29 August 2024.