Can Ineligible Persons Appoint Arbitrators? Supreme court Examines PSU Practices and Arbitration Reforms

By Legal Wires 11 Minutes Read

The Supreme Court of India, on August 28, 2024, commenced a crucial hearing on a significant matter concerning arbitration law. The question before the Constitution Bench revolves around whether a person who is ineligible to be appointed as an arbitrator can nevertheless appoint an arbitrator. This issue gains particular importance given the common practice of public sector undertakings (PSUs) curating panels of arbitrators from which appointments are made.

The Constitution Bench, led by Chief Justice of India DY Chandrachud, along with Justices Hrishikesh Roy, PS Narasimha, Pankaj Mithal, and Manoj Misra, is deliberating on this contentious issue. The debate centers on the perception of independence and impartiality in the arbitration process, especially when one of the parties controls the appointment of arbitrators. The outcome of this hearing is expected to have a significant impact on the future of arbitration in India, particularly in cases involving PSUs and private parties.

Key Issue: Appointment of Arbitrators by Ineligible Persons

• The Supreme Court is examining the legality of arbitration clauses that allow for the appointment of arbitrators from a panel unilaterally curated by one of the disputing parties, typically a public sector undertaking (PSU).
• The Chief Justice of India (CJI) emphasized the importance of both parties perceiving the arbitration process as fair and independent. He remarked: “Independence at the stage of composition is a matter of perception. Because when you are entering into a judicial proceeding, the arbitration is a substitute to a judicial proceeding, so when parties are entering upon arbitration, it is their perception of an independent adjudicator or lack of independence which is crucial. Because there must be a condition which fosters a sense of confidence in the process.”
• The CJI further clarified that this perception is distinct from any objective test of bias, stating: “The independence at the stage of composition is not a subjective test that someone would or would not be biased, but the perception of the party must be of (having) an independent arbitrator.”

Arguments Presented by the Respondents

• Senior Advocate Gaurab Banerji, representing a private joint venture company, argued that a panel unilaterally controlled by one party, such as a PSU, would violate Section 11(8) and Section 12 of the Arbitration and Conciliation Act, 1996. He stated: “An appointment made amongst a panel curated by only the PSU (Public Sector Undertaking) would not be independent and impartial.”
• Section 11(8) requires courts or designated authorities to ensure that the appointed arbitrator is independent and impartial, while Section 12 outlines the grounds for challenging an arbitrator’s appointment.
• Banerji emphasized that when a private party is involved in arbitration with a PSU, having a unilaterally appointed panel creates doubt about the impartiality of the process. He proposed that the solution lies in having an independent panel curated by an independent institution, stating: “The solution is an independent panel by an independent institution, that is why we are crying hoarse that we should have institutional arbitration.”
• He further pointed out that the issue is not with the individual arbitrators on the panel but with the process of how the panel is curated. He questioned: “The problem is not the individuals in the panel, the problem is, who makes the panel?”

Judicial Observations and Concerns

• Justice PS Narasimha highlighted the need for clear criteria to evaluate the independence of arbitrators at the stage of composition, asking: “The problem is what are the criteria, what are those principles on the basis of which we will be determining there is lack of independence here.”
• Banerji responded by asserting that the very existence of a pre-selected list curated by one party indicates a lack of independence. He argued that arbitration should involve a mutually appointed third party to resolve disputes, and unilateral appointments undermine this principle, leading to what he termed an “unloved and unappreciated panel.”

Legal Precedents Cited

• Senior Advocate NK Kaul, also appearing for the respondents, referred to the Perkins Eastman Architects DPC vs. HSCC (India) Ltd. case, where the Court held that a person ineligible by law to be an arbitrator cannot appoint an arbitrator, as it would lead to an element of exclusivity in dispute resolution.
• In the Perkins case, the Court had invalidated a clause that allowed the Chairman and Managing Director of a company to unilaterally appoint a sole arbitrator. The Court held that a person with an interest in the dispute’s outcome should not have the power to appoint an arbitrator.
• This ruling built on the earlier decision in TRF Limited vs. Energo Engineering Projects Limited, where the Court had similarly invalidated a clause that allowed the Managing Director of a company to act as an arbitrator or nominate another person as an arbitrator.

Push for Institutional Arbitration

• Senior Advocate NK Kaul advocated for institutional arbitration to address the crisis of confidence arising from unilateral panel appointments. He argued that independent arbitration institutions could ensure the neutrality and impartiality of the arbitration process.
• The CJI questioned whether a curated panel of arbitrators, if compliant with Section 12(5) and the 7th Schedule of the Arbitration and Conciliation Act, 1996, could still be objectionable. Kaul responded with the principle that “what you cannot do directly, you cannot do indirectly either.”
• Justice Narasimha raised a practical concern, noting that PSUs, like the Railways, frequently face arbitration requests, necessitating a maintained panel of arbitrators. He warned that doing away with the current system could lead to administrative difficulties. However, Kaul clarified that his objection was not to the existence of a panel but to its unilateral creation by one of the parties, which he argued undermines the equality principle.

CJI’s Commentary on the Reality of Arbitration in India

• The CJI acknowledged the Indian reality of arbitration where private parties might influence the appointment process in non-transparent ways, compromising the process’s integrity. He remarked: “Absent a transparent procedure, a lot of contractors, what they do is completely breach the integrity of the process by having the appointing authority appoint people of their choice. That happens through the backdoor. That’s the Indian reality.”

Additional Arguments by Intervenors

• Other intervenors in the case argued that the unilateral appointment clauses violate the public policy test, create skewed incentives for arbitrators to favor the appointing party, and undermine the equality principle under Section 18 of the Act.
• They further contended that absolute equality in the appointment process is essential to ensure fairness during arbitration and that the concept of equality under Section 18 is distinct from the independence and impartiality required under Section 12.

Background of the Case

• The references in this case arise from two matters: Central Organisation for Railway Electrification v. M/s ECI SPIC SMO MCML (JV) A Joint Venture Company and JSW Steel Limited v. South Western Railway & Anr.
• The central issue is whether a person who is ineligible to be an arbitrator can appoint one. This question has been debated in previous cases, including TRF Ltd. v. Energo Engineering Projects Ltd. in 2017 and Perkins Eastman Architects DPC v. HSCC (India) Ltd. in 2020.
• The Supreme Court had previously permitted appointments by an ineligible person in the Central Organisation for Railway Electrification v. ECL-SPIC-SMO-MCML (JV) case, a ruling that was later challenged and referred to a larger bench.

Future Proceedings

• The Constitution Bench will continue hearing arguments from the Union of India and other parties on subsequent dates. It is noteworthy that this hearing follows a deferral requested by the Attorney General of India, R Venkataramani, as a sixteen-member expert committee constituted by the Ministry of Law and Justice is currently reviewing possible reforms to the Arbitration and Conciliation Act, 1996.

CENTRAL ORGANISATION FOR RAILWAY ELECTRIFICATION vs. M/S ECI SPIC SMO MCML (JV) A JOINT VENTURE COMPANY C.A. No. 009486 – 009487 / 2019

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