2024 (11) TMI 542 - SC - Indian Laws

Independence and impartiality of arbitral tribunals under the Arbitration and Conciliation Act 1996 - interplay between party autonomy and independence and impartiality of the arbitral tribunal - unilateral appointment of sole arbitrator, or curation of a panel of arbitrators and mandate that the other party select their arbitrator from the panel - principle of equal treatment of parties applies at the stage of the appointment of arbitrators or not - appointment process in a public-private contract which allows a government entity to unilaterally appoint a sole arbitrator or majority of the arbitrators of the arbitral tribunal is violative of Article 14 of the Constitution. As per Dr. Dhananjaya Y Chandrachud, CJI and Pamidighantam Sri Narasimha - HELD THAT - Following was held a. The principle of equal treatment of parties applies at all stages of arbitration proceedings, including the stage of appointment of arbitrators; b. The Arbitration Act does not prohibit PSUs from empanelling potential arbitrators. However, an arbitration clause cannot mandate the other party to select its arbitrator from the panel curated by PSUs; c. A clause that allows one party to unilaterally appoint a sole arbitrator gives rise to justifiable doubts as to the independence and impartiality of the arbitrator. Further, such a unilateral clause is exclusive and hinders equal participation of the other party in the appointment process of arbitrators; d. In the appointment of a three-member panel, mandating the other party to select its arbitrator from a curated panel of potential arbitrators is against the principle of equal treatment of parties. In this situation, there is no effective counterbalance because parties do not participate equally in the process of appointing arbitrators. The process of appointing arbitrators in CORE 2019 (12) TMI 841 - SUPREME COURT is unequal and prejudiced in favour of the Railways; e. Unilateral appointment clauses in public-private contracts are violative of Article 14 of the Constitution; f. The principle of express waiver contained under the proviso to Section 12(5) also applies to situations where the parties seek to waive the allegation of bias against an arbitrator appointed unilaterally by one of the parties. After the disputes have arisen, the parties can determine whether there is a necessity to waive the nemo judex rule; and g. The law laid down in the present reference will apply prospectively to arbitrator appointments to be made after the date of this judgment. This direction applies to three-member tribunals. As per Hrishikesh Roy, J. HELD THAT - The following are the conclusions - a) Section 18 applies to all stages of arbitration including the stage of appointment of an arbitrator. The Arbitration Act does not provide for any special treatment to the government irrespective of whether the arbitration is by or against the government. b) Unilateral appointment of Arbitrators is permissible as per the legislative scheme of the Arbitration Act. There is a distinction between ineligibility and unilateral appointment of arbitrators. As long as an arbitrator nominated by a party is eligible under the Seventh Schedule of the Act, the appointment (unilateral or otherwise), should be permissible. It is only in cases of a complete lack of consensus that the court should exercise its power under Section 11(6) of the Arbitration Act to appoint an independent and impartial arbitrator as per Section 11(8) read with Section 12 and 18 of the Arbitration Act. At the appointment stage, the scope of judicial intervention is otherwise extremely narrow. c) The independence and impartiality of the arbitrator must be examined within the statutory framework of the Arbitration Act, particularly Section 18 read with 12(5). Public Law constitutional principles should not be imported to arbitration proceedings particularly at the threshold stage of Section 11. As per Pamidighantam Sri Narasimha Following are summarised I. Dispute resolution through arbitration encompasses two independent yet interdependent principles contractual freedom as party autonomy and statutory obligation as duty to constitute an independent arbitral tribunal. II. Party autonomy in making of an arbitration agreement is an essential feature of arbitration. It commences with choosing the members of the arbitral tribunal, extends to the procedure that would apply for its conduct, and concludes with the method by which an award could be challenged before a court. It is thus a brooding and guiding spirit of arbitration. Party autonomy is sufficiently incorporated in the Arbitration Act, along with a restraint on judicial intervention. III. The moment parties choose arbitration over ordinary civil proceedings for dispute resolution, their duty to establish an independent and impartial tribunal arises. The substitution of arbitration in place of civil courts as an exception under Section 28 of the Contract Act is only for a forum and not for contracting out of the most essential feature of a dispute resolution, i.e., independence and impartiality must exist in every forum. This essential feature is the inviolable public policy consideration under Section 23 of the Contract Act from which the parties cannot opt out. Arbitration agreements which are not compliant of this public policy consideration are void under Section 23 of the Contract Act. Thus, there is a statutory incorporation of duties of the parties to the arbitration agreement. IV. If an arbitration agreement is considered by the court as not enabling constitution of an independent and impartial tribunal, any submission that the said agreement is a binding contract, or it is in exercise of party autonomy is not tenable as such an agreement will be against public policy and as such not an enforceable contract. V. In view of the statutory incorporation of these duties, it is not necessary to apply public law principles evolved in constitutional and administrative laws. Sourcing these duty obligations from Contract Act and Arbitration Act is important to maintain the integrity of the party autonomy and restraint of judicial institutions. VI. The power to ensure that the arbitration agreement is compliant of the public policy requirement of establishing an independent and impartial tribunal is always of the Court. This principle is recognised and statutorily incorporated in the Contract Act and the Arbitration Act. It is the duty of the court to ensure that the arbitration agreement inspires confidence and it will enable establishment of an independent and impartial arbitral tribunal. VII. Neither public policy considerations under the Contract Act or the Arbitration Act restrain the parties to the arbitration from maintaining a panel of arbitrators in any manner. However, arbitration agreements enabling one of the parties to unilaterally constitute arbitral tribunal do not inspire confidence of independence and may violate the public policy requirement of constituting an independent and impartial tribunal. The court will, therefore, scrutinise the agreement and hold them to be invalid if it considers it appropriate. VIII. The occasion for the court to examine the constitution of the independent and impartial tribunal under the arbitration clause will arise when one of the parties makes an application under Sections 11, 14 or 34. It is not permissible for the court to give an advance declaration that all such agreements which enable one of the parties to unilaterally constitute the arbitral tribunal would be void per se. No two agreements are the same and it is necessary for the court to examine the text and context of the agreement. IX. All applications pending before the courts challenging the unilateral appointment clauses will be disposed of applying the test as to whether such a clause enables establishment of an independent and impartial tribunal.

Summary

Issues Involved:

1. Validity of unilateral appointment of arbitrators or curated panel of arbitrators by one party.
2. Applicability of the principle of equal treatment at the stage of appointment of arbitrators.
3. Constitutionality of unilateral appointment clauses in public-private contracts.

Detailed Analysis:

1. Validity of Unilateral Appointment of Arbitrators:

The judgment addresses whether a party with an interest in a dispute can unilaterally appoint a sole arbitrator or curate a panel from which the other party must select an arbitrator. The court emphasizes that party autonomy, a fundamental principle of arbitration, is subject to limitations, particularly concerning the independence and impartiality of arbitrators. The Arbitration and Conciliation Act, 1996, through its 2015 amendment, introduced Section 12(5), which renders certain individuals ineligible to be appointed as arbitrators based on their relationship with the parties or the subject matter of the dispute. The court highlights that this provision is mandatory and cannot be derogated by prior agreement, though parties can waive its applicability post-dispute through an express agreement. The court concludes that unilateral appointment clauses violate the principle of independence and impartiality, as they create a reasonable apprehension of bias.

2. Principle of Equal Treatment at the Stage of Appointment:

The court examines whether the principle of equal treatment, enshrined in Section 18 of the Arbitration Act, applies to the appointment stage. It asserts that equality is a fundamental principle that permeates all stages of arbitration, ensuring that both parties have an equal say in the appointment of arbitrators. The court underscores that an arbitration clause allowing one party to unilaterally appoint a sole arbitrator or curate a panel inherently violates this principle, as it restricts the other party's ability to participate equally in the appointment process. The court stresses that equal treatment is essential to maintaining the integrity and fairness of the arbitral process.

3. Constitutionality of Unilateral Appointment Clauses in Public-Private Contracts:

The court addresses the constitutionality of unilateral appointment clauses in public-private contracts, particularly under Article 14 of the Constitution, which guarantees equality before the law. It holds that such clauses are inherently arbitrary and violate the equality clause under the Arbitration Act. The court reasons that allowing a government entity to unilaterally appoint a majority of the arbitrators in a public-private contract undermines the impartiality and independence of the arbitral process. The judgment emphasizes that public policy considerations necessitate that arbitration agreements in public-private contracts adhere to principles of fairness and non-arbitrariness to ensure a level playing field for all parties involved.

Conclusion:

The court concludes that unilateral appointment clauses in arbitration agreements are invalid as they contravene the principles of independence, impartiality, and equal treatment of parties. It emphasizes the necessity of maintaining the integrity of the arbitral process by ensuring that both parties have an equal opportunity to participate in the appointment of arbitrators. The judgment also underscores the importance of adhering to constitutional principles in public-private contracts to prevent arbitrariness and ensure fairness. The court's decision is applied prospectively to avoid disrupting existing arbitration proceedings, particularly those involving three-member tribunals.