The Court also held that the appointment of arbitrators is subject to judicial review based on the principle of equality.

New Delhi (ABC Live): On November 8, 2024, the Supreme Court of India ruled in Central Organization for Railway Electrification vs. M/s ECI SPIC SMO MCML (JV) (Civil Appeal Nos. 9486-9487 of 2019) that the principle of equality applies to all parties throughout the arbitration process. The Court also held that the appointment of arbitrators is subject to judicial review based on the principle of equality.

Case Summary:

The Central Organization for Railway Electrification (CORE) had a work contract with ECI-SPIC-SMO-MCML, a joint venture company (JV). On November 1, 2017, CORE terminated this contract, citing the JV's failure to fulfill certain obligations. The JV challenged the termination in the Allahabad High Court, which noted that the contract included an arbitration clause in the General Conditions of Contract (GCC). On November 28, 2017, the High Court dismissed the petition, directing both parties to settle the dispute through arbitration as outlined in the GCC, which called for a three-member arbitral tribunal.

Relevant Legal Provision:

Section 12 of the Arbitration and Conciliation Act, 1996 (the Act) provides grounds for challenging an arbitrator's appointment. A 2015 amendment introduced Section 12(5), which prohibits the appointment of arbitrators with certain relationships to the parties or subject matter (listed in the Seventh Schedule). This prohibition can be waived if agreed upon by both parties.

Modifications to the GCC:

Following the 2015 amendment, CORE updated two GCC provisions in 2016:

• Section 64(3)(a) applied if Section 12(5) was waived, allowing the General Manager to appoint a sole arbitrator if the claim was under ₹1 crore. If higher, a panel of three officers would be formed.
• Section 64(3)(b) applied if Section 12(5) was not waived, mandating a panel of three retired senior railway officers as arbitrators.

Per the GCC, CORE was to provide the JV with a list of four nominees, from which the JV would select two. The General Manager would then appoint a third arbitrator.

Allahabad HC Appoints Sole Arbitrator:

CORE offered the JV a list of arbitrators twice, but the JV declined to select any, instead petitioning the Allahabad High Court to appoint a sole arbitrator, arguing that CORE's nominees were retired officers and thus ineligible under Section 12(5). CORE countered that the GCC process should be followed. On January 3, 2019, however, the High Court appointed a retired judge as sole arbitrator.

Supreme Court Intervention (2019):

CORE appealed to the Supreme Court, challenging the High Court's decision. A three-judge Supreme Court bench set aside the High Court’s appointment, ruling that the GCC’s appointment process must be respected, and that retired officers could not be deemed ineligible solely based on their retirement status. The Court clarified that the High Court’s decision was inappropriate, as the GCC allowed the JV to choose two arbitrators, thus balancing the General Manager’s role in the process.

Reference to a Larger Bench:

In Union of India v. M/s Tantia Constructions Ltd. (2021), a different Supreme Court bench disagreed with the prior judgment in Central Railway, referring the case to a larger bench in 2022.

On June 26, 2023, a five-judge Constitution Bench was constituted to examine the matter. Subsequent hearings were postponed as the Union Government’s Expert Committee reviewed the Act’s provisions. By August 28, 2024, after further deliberations, the bench, led by CJI Chandrachud, concluded the hearings and reserved judgment on August 30, 2024.

While delivering the judgment on November 8, 2024, the four judges out of Five judges  lead by CJI ruled :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.

Whereas Justice Narasimha in his separate judgment ruled that

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.

To read the judgment of the Supreme Courtclick here