Background:
In a landmark ruling involving unilateral arbitration clauses in arbitration agreements within public-private contracts and principles of Article 14 of the Constitution, a five-judge bench comprising of Dr. DY Chandrachud (“CJI”), Hrishikesh Roy, JB Pardiwala, PS Narasimha and Manoj Misra, JJ., held that unilateral appointment clauses in public-private contracts are violative of Article 14 of the Constitution of India. The bench addressed the legality of such clauses, especially when they allow one party (often a public sector entity) to have predominant control over the arbitrator appointment process. The ruling aimed to clarify whether unilateral appointment clauses align with the principles of equality and impartiality enshrined in the Arbitration and Conciliation Act, 1996 (“Act”) and the Constitution of India.

Factual Matrix:
Certain disputes arose between the Central Organisation for Railway Electrification (“CORE”) and ECI-SPIC-SMO-MCML (Joint Venture) (‘ECI’) when ECI did not complete the work within the prescribed period under the Contract. Consequently, the contract was terminated by CORE as per Clause 62 of the General Conditions of the Contract (“GCC”). After the contract was terminated, ECI was seeking to invoke an arbitration as per the provisions of the contract. Aggrieved by the termination of Contract, ECI-SPIC filed a petition before the Allahabad High Court, which was dismissed vide Order dated 28.11.2017 and the High Court directed ECI to avail the alternative remedy by invoking the arbitration clause. Accordingly, ECI requested CORE for the appointment of an Arbitral Tribunal for resolving the disputes between the parties and settle the claims value of Rs.73.35 crores. Since CORE had sent two lists comprising of Railway Electrification Officers of JA Grade and four retired Railway officers, respectively, calling upon the ECI to select any two arbitrators for the constitution of tribunal. However, ECI did not send any reply and filed an application before the High court under Section 11 of the Act seeking the appointment of a sole arbitrator.

That the Section 11 filed by ECI was decided on 03.01.2019, wherein the High Court appointed Justice Rajesh Dayal Khare, a retired judge of the Allahabad High Court as a sole arbitrator to adjudicate the disputes between the parties. However, ECI, aggrieved by the appointment, preferred a Special Leave Petition to appeal before the Court. The major contention raised by ECI before the Court was that when a General Manager is himself ineligible of being nominated as an arbitrator, he cannot further nominate others to be in the panel of arbitrators. However, the contention was rejected by the Court. It had been held that the General Manager can appoint an arbitrator.

Analysis by the Bench:
The majority opinion penned by Chief Justice Dr. D.Y. Chandrachud, Justice JB Pardiwala and Justice Manoj Misra analysed the principles of arbitration law, particularly on the fact that parties’ equality applies at all stages of an arbitrator’s appointment. The Court ruled that PSUs are not necessarily prohibited from empanelling potential arbitrators, but the other party cannot be mandated to select the arbitrator from the curated lists compiled by PSUs. Furthermore, a unilateral appointment clause is in violation of the principle of Nemo judex in causa sua (no one should be a judge in their own case) which is in violation of the public policy of India in the context of arbitration. In terms of unilateral arbitration clauses, one party can exercise its’ discretion and the other has justifiable doubts as to the independence and impartiality of the arbitrator. It was further held that the process of appointment of arbitrators by CORE was violative of the principle of “equal treatment of parties” laid down in Section 18 of the Act. Unilateral appointment clauses in public-private contracts are also violative of Article 14 of the Constitution. Furthermore, the Indian Contract Act, 1872 (“Contract Act”) accounts for unconscionability under Section 16 relating to undue influence. It provides that a contract induced by undue influence is unconscionable. Furthermore, the judgement also cites jurisprudence from US courts that have consistently held that an arbitration agreement which provides for the unilateral formation of a panel of arbitrators by one of the parties is inherently inequitable and unconscionable. It has been held that an arbitration agreement that allows one of the parties to unilaterally control the arbitral tribunal conflicts with the “fundamental notions of fairness” and does not meet the “minimum levels of integrity which we must demand of a contractually structured substitute for judicial proceedings.”

Justice P.S. Narasimha, vide his separate judgement, concurred with the majority opinion but nuanced his reasoning by distinguishing arbitration law from constitutional and administrative law principles. He opined that while public law doctrines like equality and fairness are relevant, their application in arbitration law must remain within the statutory framework. Justice Narasimha highlighted the need for judicial restraint in arbitrator appointments, emphasizing that party autonomy under Section 11(2) of the Act allows parties to agree on procedures for appointment unless these blatantly contravene statutory principles. He pointed out that the arbitration clause in question provided procedural safeguards, such as the contractor's ability to nominate arbitrators from a panel, which mitigated concerns of dominance and bias. This approach aligns with the broader principle of minimal judicial interference to maintain the efficiency and credibility of the arbitral process.

Justice Hrishikesh Roy concurred with the majority opinion that the principal treatment of parties under Section 18 of the Act is applicable at all stages of the proceedings including the stage of appointment of arbitrators. However, Justice Roy echoed the sentiment that the independence of arbitrators is a fundamental aspect of arbitration and that any appointment mechanism must withstand scrutiny under the “real likelihood of bias” test. He further opined that the moment parties choose arbitration over ordinary civil proceedings for dispute resolution, their duty to establish an independent and impartial tribunal arises. In addition to the aforesaid, it has been held that 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 with this public policy consideration are void under Section 23 of the Contract Act. Thus, there is a statutory incorporation of the duties of the parties to the arbitration agreement.

Concluding Remarks:
The Supreme Court’s ruling represents a pivotal moment for Indian arbitration law. By invalidating unilateral appointment clauses in public-private contracts, the Court sought to safeguard fairness and impartiality in arbitral proceedings. This judgement reinforces the emphasis on party equality and autonomy, setting a standard for arbitration agreements in both the public and private sectors. In the future, arbitration agreements will require that the arbitrator appointment process necessitates both parties’ equal participation, avoiding any undue advantage to one party.

The decision also emphasizes the need for judicial restraint by ensuring that fairness obligations are sufficiently provided within the Contract Act. Ergo, by relying on these statutes rather than public law principles, the judgement preserves party autonomy while ensuring that arbitration remains an impartial alternative to litigation. Therefore, this ruling strikes a balance between judicial oversight and contractual freedom, fostering a pro-arbitration environment that is fair, equitable, and reflective of India’s public policy values.

By - Swetalana Rout