Appointment of arbitrators by ineligible persons | Day 2: Party autonomy is ingrained in the Arbitration Act, argues Union

CJI Chandrachud: “Are we entering a minefield?”

In Voestalpine Schienen v Delhi Metro Rail Corporation (2017), the Supreme Court stated that an arbitration panel picked by a single party should be “broad-based” to “instil confidence in the mind of the other party.” Simply put, a broad-based panel is one that is not restricted to persons of certain categories. On day 1, Senior Advocate Neeraj Kishan Kaul had stated that he was not opposed to the idea of a broad-based panel as long as it was not unilaterally appointed. 

Mehta, stated that even the government was interested in promoting a healthy arbitration culture. Going a step further from Voestalpine, he said that independence and impartiality also included “integrity.” He suggested that the process of preparation of the panel must be open to all and not only be broad-based. He recommended that to recruit members to this panel, an advertisement prescribing the parameters could be published, giving everyone a chance to apply and be considered. The Bench however, was wary of several drawbacks that could arise in achieving this.

First, CJI Chandrachud pointed out that a public advertisement could discourage and prevent eminent persons from applying and therefore being selected to the panel. Most national tribunals, he stated, had search-cum-selection committees that would identify and recommend eminent persons. A neutral person, such as the Chief Justice of India, heading the committee would ensure that the appointments were not biased and were made in “good faith.” However, there was no guarantee that such good faith could be maintained in Public Sector Undertakings (PSUs) like the railways. “The devil lies in the fineprint,” the Chief remarked. 

Second, the Chief stated that creating a broad-based panel across sectors could prove a gigantic task for the government as they were dealing with small and large claims ranging from Rs. 10,000 to Rs. 10,00,00,00 across various PSUs. For instance, the Food Corporation of India had a pan-India presence but others like the Western Coalfields were more area specific. Members required on the panel in each case also differed because appointments had to be “skill based.” “Are we entering a minefield?” CJI Chandrachud asked. 

Mehta submitted that certain online platforms offered excellent dispute resolution systems, especially in the banking sector. Later, he gave the example of SAMA, a Bangalore-based platform to facilitate online dispute resolution systems. 

Justice Narasimha: We cannot blurry lines between public and private law

Adding to the Chief’s concerns, Justice P.S. Narasimha pointed out that the discussions in Court over the last two days were “effacing the difference between public law and private law.” Arbitration, he said, fell under the domain of private law. Creating broad guidelines for the appointment of arbitrators, he said, would mean entering into the realm of public administrative law. 

Justice Narasimha stated that party autonomy was paramount in private law. Public law would only be applicable to strike down clauses that were “unconscionable.” “Superimposing” public law principles in private law spheres would be problematic, he continued, that is why countries like England had deliberately kept the two separate. 

CJI Chandrachud added that any decision made by the Court applied not only to PSUs but also private companies and undertakings. He pointed out that the Court did not have the powers to venture into private matters. Any decision it made, would be under Article 142 which gave the Supreme Court discretionary powers to ensure ‘complete justice’. 

How can the Court use Article 142 “to lay down the structural parameters for the composition of arbitrators?” the Chief remarked. “We will be soundly criticised by the business world,” he said. 

Mehta: Party autonomy is ingrained in the architecture of the Arbitration Act

On Day 1, Senior Advocate Gourab Banerji had contended that autonomy to parties to choose arbitrators (under Section 11) could not surpass the principle of equality enshrined in Section 18 of the Act. Equality meant that they had to have an equal say in the appointment process. This could not be achieved when the panel of arbitrators are selected by only one party. 

Mehta responded that arbitration had its roots in Contract law which was by definition, was an act of volition. He contended that the private contractors had “unwittingly” sought to find a neutral provision (Section 18) in the Act which prevented unilateral appointment of the panel. This was incorrect. Rather, the question was whether there is a provision that expressly prohibits the unilateral appointment of the panel if both parties consent to it. 

Contrary to litigation, Mehta stated, in arbitration, parties could customise their strategy per their violation. So rights in an alternative dispute resolution need not be equal but rather whatever the parties mutually agree upon by exercising autonomy. 

He submitted that there was a distinction between maintaining a panel and controlling it. The latter breached the independence of the tribunal but not the former. “I can maintain a panel of neutral arbitrators without ever controlling it,” he said. 

Mehta patiently took bench through various provisions under the Arbitration Act, particularly in Chapter III (which deals with the composition of the arbitral tribunal). According to Section 11(2), Mehta submitted, parties were free to agree on a procedure to appoint arbitrators. 

Banerji had argued that the principle of equality was also endorsed under Section 11(8)(b) of the Act,which could not be derogated from. This provision states that the Supreme Court or High Courts shall have regard to considerations that “are likely to secure the appointment of an independent and impartial arbitrator,” before making appointments. 

Mehta agreed with Banerji. However, he pointed out that Section 11(8)(b) would only come into the picture when a party failed to appoint arbitrators under other subsections of the provision. 

The right to enter into an agreement which prescribes the procedure of the appointment for the arbitrators, Mehta said, was a crucial indicator of party autonomy under the Act. Therefore, the wording of Section 11(8) was not enough to prevent the autonomy enshrined under Section 11(2). 

Mehta also pointed out that several other provisions such as Section 4 (waiver of rights to object), Section 12 (grounds for challenge), Section 14 (failure or impossibility to act), used language that made it clear that these provisions were derogable or could be waived if the parties so decided. Non-derogable aspects of the Act included not having an even number of arbitrators or appointing ineligible persons as arbitrators. If these were derogated from, then the Court could set aside such processes. But, largely, the Act was “party autonomy driven”. 

Mehta: Section 18 is incurred only after the commencement of arbitration proceedings

Banerji had contended that unilateral selection of panel members was contrary to Section 18 of the Arbitration Act which mandated the equal treatment of both parties. Mehta responded that Section 18 fell under Chapter V of the Act which dealt with the “conduct of proceedings.” Mehta contended that this argument was out of context as Section 18 does not deal with the appointment of arbitrators (which was found under Chapter III of the Act). 

Banerji had submitted that Section 18 applied even at the stage of appointing arbitrators because of Section 21 of the Act which states that an arbitral dispute is deemed to have commenced on the day a dispute is requested to be referred for arbitration by the respondent. Mehta argued that the reliance of Section 21 was misplaced. This provision was only to ensure that a date of proceeding could be set “unless otherwise agreed by the parties.” Exercising autonomy, parties could agree that the date of arbitration commence when the tribunal first assembled. 

After lunch, Mehta took the Court through some international case laws which recognised that the unilateral appointment of an arbitration panel did not breach the impartiality of the proceedings. 

Lastly, he argued that other jurisdictions which wanted to prevent the unilateral appointment of panels, made it clear in their respective legislations. These included countries like Spain, Estonia, Russia, Netherlands, Poland and Germany. The Indian legislature would have made it clear in the language of the Act if they intended to prohibit unilateral appointments, he said. 

PSUs: ‘Perception’ based challenges are not sustainable in law

After Mehta, other Counsel representing various PSUs and Non-Banking Financial Institutions, who are typically the ones constituting the unilateral panel of arbitrators, made brief submissions. They mostly adopted Mehta’s arguments with a few additions. 

ASG Nataraj, appearing for the Central Organisation for Railway Electrification, submitted that there was a clear distinction in the Act between appointing arbitrators and acting as arbitrators. The statutory prohibitions to ensure impartiality were applicable to those already appointed and acting as arbitrators, but not to the appointment itself. 

Senior Advocate Arvind Kamat representing the Bengaluru Metro Rail Corporation Ltd. highlighted that enlisting a name in the panel of arbitrators, did not necessarily constitute their appointment—that choice still remained with the other party. He argued that a challenge to the appointment of the panel could not be “perception-based,” but on the basis of actual bias or partiality. Lastly, he stressed that there is a four-tier check and balance system under the Arbitration Act to ensure the impartiality and independence of arbitrators. There checks were: 

1.  Section 12(5) and the Seventh Schedule ensured that certain persons sharing certain relationships with the parties were ineligible to be appointed as arbitrators. 
2. Section 12 prescribes that arbitrators must mandatorily disclose their details to avoid bias. 
3. Any partial act of the arbitrator was subject to challenge
4. Any improper award passed by the arbitrator could also be challenged and set aside.

Senior Advocate Guru Krishna Kumar appearing for Sundaram Finance pointed out that Kaul’s solution to institutionalise arbitration in order to ensure independence would not be practical in non-metropolitan cities which did not have institutionalised arbitration centres. 

ASG Madhavi Divan appearing for Mahindra and Mahindra Finance stated that Sections 12, 13 and 14 of the Act created a “comprehensive scheme” for appointments and that not taking them into account would cause devastating impacts. 

Arguments will resume on 30 August 2024 at 2:00 pm.