Appointment of Arbitrators by Ineligible Persons | Judgement Pronouncement: Clauses permitting unilateral appointment of arbitrators invalid, says SC
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 held that arbitration clauses which allow unilateral appointments of arbitrators were invalid. The majority opinion was authored by the Chief on behalf of himself and Justices J.B. Pardiwala and Manoj Misra. Justices Hrishikesh Roy and P.S. Narasimha authored separate, partially dissenting opinions.
The majority held that unilateral clauses in public-private contracts were violative of Article 14 of the Constitution. Justices Roy and Narasimha however, held that principles of equality in arbitration matters were rooted in the Arbitration Act and not in constitutional law.
Equal treatment applies at all stages of arbitration
During the hearings, Senior Advocates Gourab Banerji, Neeraj Kishan Kaul, S. Ravi Shankar and others, appearing for private contractors, had contended that equal treatment of parties enshrined under Section 18 of the Act was crucial to arbitration proceedings and that it applied to all stages of arbitration. Solicitor General Tushar Mehta had argued that Section 18, in Chapter V of the Act, deals with the “conduct of proceedings”, and therefore could not cover arbitrator appointment.
The majority sided with the contractors and held that the principle promoting equal treatment of parties under Section 18 of the Act applied to all stages of the arbitration, including panel appointments. Justice Roy concurred with the majority on this aspect. Justice Narasimha however, noted that there was a “certain difficulty in invoking Section 18 of the Act and applying it as an equality principle mandating equal opportunity to both the contracting parties at the time of constituting the arbitral tribunal.”
PSUs cannot mandate other parties to select arbitrators from curated panel
The majority also held that while Public Sector Undertakings (PSUs) are not barred from proposing a list of potential arbitrators to choose from, they cannot mandate that the other party must choose from the curated panel, as it would breach the principle of equality. The majority also held that one party could not select a sole arbitrator unilaterally.
Justice Roy dissented on this aspect, and held that unilateral appointment of Arbitrators is permissible under the legislative scheme of the Act. He further stated that the Act had sufficient checks and balances to ensure impartiality and independence of the proceedings.
Justice Narasimha emphasised that it was the duty of the Court to ensure that the arbitration agreement “inspires confidence.” While unilateral appointments are not prohibited by the Act “enabling one of the parties to unilaterally constitute an arbitral tribunal does not inspire confidence of independence, and may violate the public policy requirement.” Therefore, the Court can examine them, but only if a party to an arbitration files an application in Court asking for scrutiny.
Applying principles of Constitutional law and public administration to matters of arbitration
The majority, led by CJI Chandrachud, held that unilateral clauses in public-private contracts were violative of Article 14 of the Constitution. Justices Roy and Narasimha voiced reservations against this.
Justice Roy noted that the “Act does not provide for any special treatment to the government irrespective of whether the arbitration is by or against the government.” However, he held that the independence and impartiality of the arbitrator must be examined within the statutory framework of the Act and not be imported from Constitutional law.
Justice Narasimha also held that in matters of arbitration, “it is not necessary to apply public law principles evolved in constitutional and administrative laws.”