[Rishab Chand Jain and Jitya Singh are in the 3rd year and 4th year respectively in B.A. LL.B. (Hons.) programme at the National Law School of India University, Bangalore (NLSIU)]
Party autonomy, impartiality, and independence in appointing arbitrators have always been a tussling point in Indian arbitration jurisprudence. The Indian judiciary has juggled between two differing lines of reasoning. On the one hand, there is the principle of party autonomy, which is considered the hallmark of arbitration, where parties have the freedom to structure their arbitration agreement. On the other hand, the principles of fairness, transparency, and impartiality in the appointment process were brought in with the 2015 amendment to the Arbitration and Conciliation Act, 1996 to mitigate any risk of bias and ensure a balanced tribunal.
Unilateral Appointments in Arbitration: A Legal Dilemma
This contrasting dilemma on the validity of unilateral appointments started with the case of Voestalpine v. DMRC where the petitioner had to select the arbitrators from a list of retired employees. Upholding the validity of such a contract, the Supreme Court held that section 12(5) read with the seventh schedule of the Arbitration Act does not render retired employees ineligible from serving as arbitrators. It held that the mere likelihood of bias cannot invalidate such highly qualified and experienced persons. Conversely, in TRF Ltd v. Energo, the Supreme Court held that an individual rendered ineligible for an appointment as an arbitrator is prohibited from proposing another individual for the position. Relying on the principle of TRF, the Supreme Court in Perkins v. HSCC held that the arbitrator’s impartiality can be ensured only when both parties have equal power to appoint arbitrators. However, the Supreme Court in CORE v. ECI- I again overturned the principle established in TRF and Perkins. The Court ruled that although an individual may not be eligible to serve as an arbitrator, they can still propose a list of potential arbitrators for selection. Further, the risk of bias is counterbalanced by the parties’ choice to select the arbitrators from the list.
This divergence of opinions and uncertainty led to the formation of a larger 5 judges-bench of the Supreme Court inCentral Organisation for Railway Electrification v. ECI SPIC SMO MCML (JV) where the majority of judges held that unilateral appointment in public-private contracts is against the principle of procedural equality as enshrined under Article 14 of the Constitution, and hence void (para 163). However, in holding this, the majority relied on the principle of constitutional law and in the process undermined the minimum judicial interference specially mentioned under section 5 of the Arbitration and Conciliation (Amendment) Act, 2019.
In this context, this post highlights two aspects where the majority faltered: firstly, the majority violated the principle of minimum judicial interference in arbitration law by making unilateral appointments void at the formation stage of arbitral tribunals. The Supreme Court overlooked the procedure established by the Arbitration Act under sections 12 and 13 to invalidate certain appointments. Secondly, the Supreme Court erroneously broadened the scope of section 12(5) read with the seventh schedule to hold that the persons ineligible to be appointed as the arbitrators are also disqualified to appoint the arbitrators. This is a clear instance of judicial overreach and is outside the ambit of the Arbitration Act.
Undermining Autonomy: Judicial Overreach in Arbitration
In light of the recommendations provided in the 246th Law Commission Report, India introduced orange and red lists of the IBA Guidelines on Conflicts of Interest. These non-exhaustive lists give justifiable doubts about the likelihood of bias or impartiality. The question of the likelihood of bias is now decided from the viewpoint of the concerned party and not from the perspective of the arbitrator. Therefore, there are two categories under which the appointment of an arbitrator can be challenged.
First, a challenge to an arbitrator appointed due to legitimate reservations about their impartiality and independence may be initiated under section 12(3) following the procedure specified in section 13. Explanation 1 to section 12(1) read with Schedule 5 (Orange list) of the Act specifies certain situations that give rise to reasonable doubts as to an arbitrator’s independence and impartiality. The second category is under section 12(5) read with the seventh schedule (Red list) which makes such appointments invalid notwithstanding any prior agreement to the contrary. Their mandate inevitably terminates under section 14(1)(a) as they are de-jure incapable of fulfilling their duties.
The difference between both categories lies in the time of challenging the appointment of the arbitrator. In the first category, the appointment itself is not prohibited; however, it may be contested at a later date before the arbitral tribunal. However, the latter category renders the appointment null and void from the outset. The sole inquiry in the application filed with the court under section 14 is whether the arbitrator is classified under one of the categories in the seventh schedule and whether there is an agreement that waives the applicability of section 12 (5) in accordance with the proviso.
In short, the scheme is to file an application under section 11(6) for disqualification of the appointed arbitrator. It is at this stage that the court will examine the validity of the appointment with the help of section 12, coupled with the fifth and seventh schedules. The court examines the facts, circumstances, material, and evidence to determine whether a case is made out to disqualify an appointed arbitrator. The majority in the ruling under consideration overlooked this procedure and made the unilateral appointment altogether invalid even before the filing of the application under section 11(6). The clause does not provide a comprehensive ban acceptable on public policy grounds against unilateral nominations or appointments from a commission controlled by a single party. It simply permits the parties to the agreement to petition the court if they perceive issues with the neutrality or objectivity of arbitrators selected under the accepted procedure.
This non-observance of procedure by the majority has two broad implications. Firstly, it breaches the principle of party autonomy. A balance is necessary between party autonomy and an impartial and independent arbitral tribunal. Nevertheless, this must be based on section 12 of the Arbitration Act, which establishes sufficient guidelines for addressing potential conflicts or biases. Arbitration is fundamentally based on the principle of party autonomy. In principle, parties are free to agree on how they wish to appoint a tribunal and an arbitral tribunal is established because the parties have agreed to arbitrate specific disputes rather than litigate them in a court. An outright ban on unilateral appointment of arbitrators violates this principle and consequently discourages arbitration as a dispute resolution mechanism.
Secondly, the majority breaches the extent of judicial intervention. The Indian Arbitration Act is designed on the Model Law mechanism. Nevertheless, it is crucial to note that the Parliament’s inclusion of a non-obstante clause in section 5 (‘Notwithstanding anything contained in any other law,’) represents a substantial departure from model law, emphasizing that the courts should exercise restraint and that other laws should not be used as the basis for the court’s intervention in the agreed-upon arbitral process. In ad-hoc arbitration, the parties are permitted to select the arbitrator in accordance with the procedure that has been established between them. The court’s intervention is anticipated only when “a party fails to act as required under that procedure,” as outlined in section 11(6) of the Act. However, the term “failure to act” should not be interpreted as a licence for the courts to intervene, particularly during the section 11 stage. This stage does not permit the court to issue an advance ruling that all arbitration clauses that permit unilateral appointments are null and void. This expansive interpretation by the judiciary at the section 11 stage amounts to judicial overreach, undermining the intent of minimal court intervention under the Arbitration Act.
Judicial Overreach in the Interpretation of Section 12(5) of the Arbitration Act
The Supreme Court while holding that unilateral appointments in public-private contracts are void also held that a person ineligible for being appointed as the arbitrator is also disqualified from nominating other arbitrators. This is a judicial overreach and overrides the provisions of the Arbitration Act. Section 5 read with the fifth and seventh schedules of the Act bars certain persons from being appointed as arbitrators due to conflict of interests; however, these provisions do not put any restriction on the appointing authority. The Act does not mention that the appointing authority should also be a neutral party. If the legislature had intended to have such a clause, it would have been explicitly mentioned in the Arbitration Act.
This contrasts with nations like Germany (section 1034(2)) and the Netherlands (section 1028(1)), where the law has specifically stipulated that a party may petition the court to select an arbitrator if an arbitration agreement disadvantages one party over the makeup of the arbitral tribunal. The correct position in India would be to file an application under section 11(6) to challenge the impartiality of the arbitrator. However, the court went one step ahead and made the appointing authority as also ineligible even before the formation of the arbitral tribunal. Courts should refrain from establishing any categories of ineligibility for arbitrator appointments unless explicitly prescribed by the legislature in the statute. The Supreme Court in Chennai Metro Rail rejected the challenge to the arbitrator’s eligibility under section 12(5) on a ground that is not listed in the seventh schedule. The Court held that once the Parliament has established a statutory scheme that specifies the de jure ineligibility of specific individuals to serve as arbitrators, the court is prohibited from deviating from this framework and introducing additional grounds, as this would introduce uncertainty into the arbitration process.
Conclusion And Way Forward
The standard process is to carry out a fact-check to assess the possibility of partiality in any arbitration agreement under section 11(6) of the Act. However, the Court did not conduct any factual inquiry and merely accepted a blanket prohibition on such appointment procedures in India. A categorical prohibition fails to consider scenarios in which such a clause may not be the result due to an imbalance in the bargaining power. In this scenario, the vitiation of such clauses in arbitration agreements that have been meticulously negotiated between sophisticated parties may constitute a substantial violation of party autonomy.
The decision aligns with the GOI Guidelines of June 2024, which express disappointment with arbitration in public procurement contracts. The Guidelines deprecate routine arbitral practice because of unsatisfactory experiences and suggest alternatives. This shift combined with the decision of the court may deter further state-owned entities from entering arbitration in public-private contracts. This has challenges for encouraging arbitration as the preferred method for dispute resolution.
A more effective approach to reconcile the principle of party autonomy with the necessity for equity in the arbitration process may involve conducting a fact-based investigation into the bargaining powers of the parties. Courts need to be more cautious before outrightly making such contracts void as this approach falls outside the scope of Arbitration Act.
– Rishab Chand Jain & Jitya Singh
