CENTRAL ORGANISATION FOR RAILWAY ELECTRIFICATION vs M/S ECI SPIC SMO MCML (JV), A JOINT VENTURE COMPANY, 2024
Case Title and Citation: Central Organisation for Railway Electrification v. M/S ECI SPIC SMO MCML (JV) A Joint Venture Company 2024 INSC 857 (8 November 2024)
Factual Background
Section 12(5) of the Arbitration and Conciliation Act, 1996 (Arbitration Act) specifies categories of relationships, listed in the Seventh Schedule, that disqualify a person from being appointed as an arbitrator due to potential conflicts with impartiality. Prior Supreme Court rulings established that a person ineligible to be an arbitrator cannot possess the authority to appoint an arbitrator. Specifically, the TRF Ltd. (2017) and Perkins Eastman Architects DPC (2019) judgments held that an individual with an interest in the outcome of the dispute should not have any role in appointing a sole arbitrator. However, in 2019, the Supreme Court upheld an arbitration clause utilized by the Railways (a government entity) that permitted it to maintain a panel of arbitrators and require the private party to select its nominee from that curated list. The clause also allowed the General Manager of the Railways, who is a disqualified person under the Seventh Schedule, to appoint at least one arbitrator. This earlier decision (CORE, 2019) was later disagreed with by a three-judge bench, which observed that if the appointing authority itself is incapacitated, the resulting appointments may not be valid. Consequently, the issue of the legality of unilateral appointment procedures was referred to a Constitution Bench for definitive resolution.
Issue(s)
- Whether an appointment procedure is legally valid if it allows a party interested in the dispute to unilaterally appoint a sole arbitrator, or to curate a panel of arbitrators and compel the other party to choose its arbitrator exclusively from that panel.
- Whether the principle mandating equal treatment of parties, established in Section 18 of the Arbitration Act, is applicable during the process of appointing arbitrators.
- Whether, in a public-private contract, an appointment process permitting a government entity to unilaterally name a sole arbitrator or a majority of the arbitrators on an arbitral tribunal violates the guarantee of equality under Article 14 of the Constitution.
Decision of the Supreme Court
The Constitution Bench (five judges) of the Supreme Court, by a 3:2 majority, set aside the earlier CORE (2019) decision and upheld the validity of the precedents set by TRF Ltd. and Perkins Eastman Architects DPC. The Court held that clauses in arbitration agreements that allow one party to unilaterally appoint a sole arbitrator or require the other party to select from a panel curated by the first party are impermissible. The bench ruled that the principle of equal treatment of parties is mandatory and applies at the appointment stage.
Reason for the decision
The majority opinion, delivered by Chief Justice Chandrachud, emphasized the mandatory nature of independence, impartiality, and equality in the arbitral process:
- Equality Principle (Section 18): The principle of equal treatment of parties (Section 18) applies at all stages of arbitration, including the appointment of arbitrators. The Arbitration Act ensures procedural equality, which is a requirement for all quasi-judicial bodies under Article 14 of the Constitution. A clause allowing one party to unilaterally appoint a sole arbitrator is exclusive, undermining the other party’s equal opportunity to participate in establishing an unbiased tribunal.
- Unilateral Appointment and Bias: If a person with an interest in the dispute unilaterally names a sole arbitrator, this action creates a real possibility of bias and justifiable doubts regarding the arbitrator’s independence and impartiality. This is impermissible because the appointing party could potentially chart the entire course of the proceedings.
- Curated Panels and Lack of Counterbalance: Even in a three-member panel, mandating the non-curating party to select its arbitrator exclusively from a list provided by the opposing party is a violation of the equal treatment principle. This method restricts the freedom of the disadvantaged party and fails to provide an effective counterbalance to the nominating party’s advantage. For instance, the Railways’ arbitration clause was unequal because the General Manager could appoint balance arbitrators from outside the panel, while the contractor was restricted to the panel.
- Public-Private Contracts (Article 14): In contracts involving government entities, the State must adhere to principles of fairness and non-arbitrariness under Article 14 of the Constitution. Unilateral appointment clauses in such contracts contravene the public policy of India, which demands impartial dispute resolution (the nemo judex rule), and are therefore violative of Article 14.
- Waiver of Ineligibility: The ineligibility arising from bias (the nemo judex rule) can be waived only by an express agreement in writing after the dispute has arisen, as stipulated in the proviso to Section 12(5).
Conclusion
The Supreme Court confirmed that the right to equal treatment in arbitration is mandatory and extends to the appointment process. Clauses that grant one party unilateral control over the selection of arbitrators, whether sole or panel members, are invalidated as they violate Section 18 of the Arbitration Act and fail to meet the standards of independence, impartiality, and non-arbitrariness required by Article 14 of the Constitution in public-private agreements. The Court directed that this ruling concerning three-member tribunals will apply prospectively to appointments made after the date of the judgment to avoid nullifying existing proceedings.
