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Deborshi Sarkar*
I. INTRODUCTION
Recently, the Hon’ble Supreme Court of India in Central Organisation for Railway Electrification v. M/s ECI SPIC SMO MCML (JV) A Joint Venture Company (CORE II) has held that mandating the appointment of arbitrators from a curated panel maintained by one of the parties is not permissible under the Arbitration and Conciliation Act, 1996 (the A&C act). Previously a three-judge bench of the Hon’ble Supreme Court in Central Organisation for Railway Electrification v. ECI-SPIC-SMO-MCML (JV), (2020) 14 SCC 712 (CORE I) had inter alia upheld the right of one party to unilaterally maintain a panel of arbitrators. Furthermore, the Court had held that former employees/retired senior officials of a party to an arbitration could not be barred from being appointed as an arbitrator. However, this decision in CORE I was referred to a larger bench for consideration in Union of India v. Tantia Constructions Ltd., (2023) 12 SCC 330.
The premise of the decision by the five-judge bench in CORE II lies in the verity that the right of a party to choose an arbitrator from an existing panel is not counter-balanced with the right of the other party to mandate the appointment only from such panel. In upholding such equal treatment of parties, the Court imported the equality principle as postulated under Section 18 of the A&C Act to the appointment of arbitrators. Furthermore, the Court has imported various facets of constitutional principles and administrative law into the framework of the A&C Act.
While the bargaining power concerning the appointment of arbitrators in Private-Public contracts should not remain unchecked, importing such facets of public law into a private dispute settlement mechanism may prove to be counterproductive. Against such a backdrop, the author aims to elucidate and analyse the decision in determining whether a balance could be struck in limiting judicial interference and ensuring the formation of an impartial arbitral tribunal. Furthermore, the author aims to indicate that the present scheme of the A&C Act sufficiently safeguards the settled principles of minimum judicial interference and party autonomy and the decision in CORE II evidently impinges on such principles.
II. STRIKING A BALANCE
In a bid to preserve independence and impartiality of arbitral tribunals against mandatory panel-based appointments, the Court has held that arbitral tribunals have the trappings of a quasi-judicial authority. As a result, the composition of an arbitral tribunal can be tested at the anvil of the principles of natural justice including a real likelihood of bias. Furthermore, in ensuring such independence in the composition, the Court has also applied the principles of non-arbitrariness under Article 14 of the Indian constitution. At this juncture it becomes imperative to analyse whether such heightened degree of scrutiny transgresses other settled principles of arbitration–particularly, minimum judicial interference and party autonomy.
A. Failure to ensure minimum judicial interference?
It is imperative to note that the principle of minimum judicial interference forms the essence of the arbitration as a mode of private dispute resolution. Minimizing the supervisory role of Courts is embedded in the Statement of Objects and reasons of the A&C act and Article 5 of the UNCITRAL Model Law. The majority decision in CORE II is in line with the principle of minimum judicial interference by limiting the powers of the Court to only examine the existence of an arbitration agreement as per Section 11(6-A). However, the import of constitutional principles of equality may render the same ineffective.
When a party approaches the Court under Section 11(6) of the A&C Act for the appointment of an arbitrator, alleging that the impartiality and independence of the tribunal has been compromised in the procedure adopted by the other party, Section 12(5) read with Seventh Schedule comes to the aid of the Court. Section 12(5) read with the Seventh Schedule was introduced through the 2015 amendment and deals with the de jure and de facto ineligibility of an arbitrator. Individuals falling under such ineligibility would not be able to act as an arbitrator. Furthermore, vide the decision of the Hon’ble Supreme of India in TRF, such ineligible persons would also not be able to appoint an arbitrator. This forms the basis for prevention of unilateral appointment of arbitrators in India.
At this juncture, Section 11(8) of the A&C Act casts a duty on the courts to ensure the appointment of an independent and impartial tribunal. Here, the courts are not bound by Section 12(5) read with the Seventh Schedule. Instead, Section 11(8) of the Act purports an increased ambit for ensuring other considerations governing independence and impartiality of appointment of an arbitrator are covered. Further, in such exceptional circumstances, the Court may move forward and appoint an independent arbitrator under Section 11(8) of the A&C Act, against the settled procedure postulated in the arbitration agreement. The same has been upheld in the decision of the Hon’ble Supreme Court of India in Indian Oil Corporation v. Raja Transport Pvt Ltd, (2009) 8 SCC 520.
As a result, reading principles of Public Law in ensuring the fair constitution of an Arbitral Tribunal renders the scheme vulnerable to baseless allegations challenging the impartiality of the arbitrator. It would now be open to the parties to allege that the independence and impartiality of the arbitral tribunal have been compromised on grounds that the procedure is manifestly unfair or arbitrary. This would in turn be counterproductive to the scheme of minimum judicial interference as enshrined under Section 11(6-A) of the A&C Act. In such cases, a party looking to delay proceedings could file baseless objections against appointments, leading to unnecessary judicial intervention to safeguard the requirement under Section 11(8) of the A&C Act. This tactic can effectively halt the arbitration process, leading to avoidable delays in resolution- a problem exacerbated by the broader issue of judicial backlog in India. Thus, such a consideration is antithetical to the very scheme of the A&C Act which is meant to ensure minimum judicial interference. When parties opt for arbitration particularly in commercial matters to avoid redressal in courts, minimum judicial interference should serve as the norm.
Inter alia owing to the adjudicatory functions performed by an arbitral tribunal, the Court accorded the status of quasi-judicial authorities to an arbitral tribunal. As a result, the Court held that an arbitral tribunal would be susceptible to the facets of public law including but not limited to principles of natural justice, prevention of arbitrariness as enshrined under Article 14 of the Indian Constitution, and the doctrine of bias. The Court in the present ruling has in no uncertain terms held that:
“81. We recognize that arbitration is a private dispute settlement mechanism. Yet, it is statutorily subject to the principles of equality and fairness contained under the Arbitration Act. Section 18 of the Arbitration Act mandates the equal treatment of parties and fairness in arbitral proceedings as a mandatory principle governing the conduct of arbitration. Thus, the resolution of disputes arising in a private contractual relationship is subject to certain inherent principles which a quasi-judicial body like an arbitral tribunal is required to adhere to. Resolution of private disputes following the minimum statutory standards of equality and fairness is essential not only in the interest of justice, but also to uphold the integrity of arbitration in India.”
Such a finding exposes the constitution of arbitral tribunals qua the appointment clauses in arbitration agreements to the writ jurisdiction of constitutional courts. Furthermore, such appointment clauses in public-private contracts can also be alleged to be arbitrary and violative of Article 14 of the Indian Constitution. Such a scenario would undeniably be antithetical to the very fabric and essence of the legislation intended to reduce judicial intervention as highlighted by the Hon’ble Supreme Court of India in Interplay Between Arbitration Agreements under A&C Act, 1996 & Stamp Act, 1899, (2024) 6 SCC 1.
B. Are all panels unilaterally curated a party barred under the A&C Act?
In setting the seal on fair and impartial appointment of arbitrators, the Court has held that the equality principle in Section 18 of the A&C Act is sacrosanct and applies to the stage of appointment of arbitrators as well. Drawing such an inference, the Court held that notwithstanding the size of an arbitral tribunal, when one party is mandated to select their nominees from a curated pool of arbitrators, such party is denied equal participation in the appointment procedure. Furthermore, the Court held that, in such a scenario, the right of the parties is not counterbalanced, leading to the apprehension of predisposition in favour of one of the parties. In other words, the Court has effectively put a blanket prohibition on agreements postulating appointment of arbitrators from a panel unilaterally maintained by the other party. As a result, it becomes imperative to examine whether all forms of panel-based appointments can be barred merely on a presumption that retired officials/former employees on the curated panel may have a predisposition in favour of the party maintaining such panel.
The Hon’ble Supreme Court of India in Perkins inter alia held that a person barred under the seventh schedule would be ineligible to act as an arbitrator and would also be ineligible to appoint an arbitrator. Furthermore, the Court went ahead to effectively bar all forms of unilateral appointment on the verity that a person who has an interest in the outcome or decision of the dispute must not have the power to appoint an arbitrator. However, it is imperative to note that such a finding must be differentiated on facts in the present case owing to the appointment of arbitrators from an existing panel. In such panel-based appointments, there exists a difference between the unilateral appointment of arbitrators and their ineligibility.
In panel-based appointments, the right of a party to unilaterally curate a panel of arbitrators is tested on the anvil of the degree of control the party has in influencing the appointment process. In other words, when the number of arbitrators in an existing pool is comparatively low, the extent of discretion to be exercised by the other party in choosing a nominee arbitrator diminishes. Such limited discretion evidently creates room for suspicion that the impartiality or independence of the tribunal may have been compromised by the party maintaining the panel. However, a broader panel for the other party to choose an arbitrator from essentially counterbalances the right of such party in choosing an arbitrator from such panel. Along the same lines, the Hon’ble Apex Court in Voestalpine Schienen GmbH v. Delhi Metro Rail Corpn. Ltd., (2017) 4 SCC 665 (Voestalpine) upheld the panel-based appointment clause in an arbitration agreement when the size of the pool was increased from five to thirty-one arbitrators. In other words, the party was given a choice to appoint its nominee arbitrator from an existing pool of thirty-one arbitrators as maintained by the other party.
The Court in CORE II has held that in a three-member panel, mandating the other party to nominate an arbitrator from an existing panel curated by the other party is against equal treatment of parties. However, it is imperative to note that the scheme of the A&C Act does not bar the appointment of arbitrators from a panel unilaterally curated by one of the parties. Such a consideration runs afoul of the scheme of the A&C Act. Furthermore, such a consideration undeniably impinges on the larger principle of the autonomy of the parties to chart a procedure of appointment of arbitrators in their agreement. What must be ensured is that the settled parameters of de jure and de facto ineligibility of arbitrators as postulated in Section 12(5) of the A&C Act are maintained. In other words, the existing panel must not constitute individuals who are barred under the seventh schedule. Thereby, retired government employees or senior officers on the existing panel with no objective connection to the party maintaining the panel would not be barred under the seventh schedule from being appointed as an arbitrator.
Therefore, the test of independence and impartiality in cases of panel-base appointments in a three-member arbitral tribunal must be done based on the broadness of the panel as decided in Voestalpine. In appointments from broad based panels, there is no misapprehension that principles of impartiality and independence would be discarded at any stage of the proceedings, specially at the stage of constitution of the Arbitral Tribunal. As a result, the rights of the parties are effectively counter balanced. Putting a blanket ban on panel-based appointments effectively renders the application of the seventh schedule otiose by declaring all such members of the panel ineligible. Ineligibility must only be rooted in the seventh schedule as per the scheme of the A&C act.
However, the appointment clauses like in CORE I (leading to the present ruling) with a comparatively narrower panel may rightfully result in an imbalance of rights in between the parties leading to an apprehension of bias. In CORE I the appointment clause in a three-member arbitral tribunal facilitated the Railways to maintain a panel of only four retired officials out of which the other party had to appoint two nominee arbitrators. Furthermore, the Railways then had the right to pick one of such nominee arbitrators and appoint the balance arbitrators. Mandating the appointment of arbitrators from such narrow panels evidently casts a doubt on the eligibility of arbitrators. Conversely, an illustration of a broad-based panel in a three-member arbitral tribunal is grounded in Voestalpine. In Voestalpine the appointment clause facilitated the appointment of nominee arbitrators of both the parties and the umpire arbitrator from an existing panel of five arbitrators. However, pursuant to the directions of the Hon’ble Supreme Court in ensuring a broad-based panel, a list of thirty-one arbitrators was provided to the other party for the selection of a nominee arbitrators by them.
Therefore, the Court must on a case-to-case basis scrutinize the independence and impartiality of the tribunal through the lens of ensuring equal bargaining powers in between the parties. The presence of equal bargaining power to the subjective satisfaction of the Court counterbalances the rights of the parties preventing any disproportionate influence over the selection of the arbitrator. Such an approach would not impinge on party autonomy and at the same time would put a check on agreement lacking complete consensus of parties. Furthermore, such a limited scope of scrutiny read with the with the seventh schedule for determination of de jure ineligibility rightly constrains the judicial burden of determining other considerations as postulated under Section 11(8) of the A&C Act. This interpretation is efficaciously in line with Section 5 of the A&C Act to limit the extent of judicial interference.
Also, as pointed out in the dissenting opinion in the present judgment, there may be certain inherent difficulties in invoking and reading the equality principle in Section 18. Section 18 is placed under Chapter V of the A&C Act on “Conduct of Arbitral Proceedings” which comes after the Chapter on “Composition of Arbitral Tribunals”. Furthermore, the text of the provision stating, “and each party shall be given a full opportunity to present his case” is also indicative of the fact that the application of the provision was intended after an arbitral tribunal had been constituted.
III. CONCLUDING REMARKS
Drawing inference from the scheme of the A&C Act, it can safely be inferred that the existing mechanism provide adequate checks on maintaining the public policy of arbitration in India. The protection of independence and impartiality in the constitution of an arbitral tribunal is deeply rooted in the scheme of the A&C Act. At this juncture, importing principles of constitutional law may prove to be antithetical to the very intent of the legislature. Furthermore, the A&C Act does not bar appointment clauses where a panel of arbitrators is unilaterally maintained by one of the parties. In a bid to preserve such party autonomy, the scheme of the A&C Act limits the application of Section 18 to “each party shall be given a full opportunity to present this case” i.e., a post-appointment stage. A blanket ban in contravention to such scheme of the act may lead to problems in the day-to-day working of arbitral remedies particularly for institutions involving multiple transactions such as insurance claims, credit card defaults, etc. Similarly, such a banket finding on the objectivity of retired senior officers acting as arbitrators is not in consonance with the scheme of the Act.
*Associate at Chambers of Mr. Rishabh Sancheti (Advocate, Supreme Court of India)
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