Central Organisation for Railway Electrification vs M/s ECI SPIC SMO MCML (JV) A Joint Venture Company

Held: [Per Dhananjaya Y Chandrachud, CJI for himself and J.B. Pardiwala and Manoj Misra, JJ.] The possibility of bias is real in situations where an arbitration clause allows a government company to unilaterally appoint a sole arbitrator or control the majority of the arbitrators – Since the government has control over the arbitral tribunal, it can chart the course of the arbitration proceedings to the prejudice of the other party – Resultantly, unilateral appointment clauses fail to provide an effective substitute for judicial proceedings in India – Further, a unilateral appointment clause is inherently exclusionary and violates the principle of equal treatment of parties and procedural equality – Unilateral appointment clauses in a public-private contract fail to provide the minimum level of integrity required in authorities performing quasi-judicial functions such as arbitral tribunals – Therefore, a unilateral appointment clause is against the principle of arbitration, that is, impartial resolution of disputes between parties – It also violates the nemo judex rule which constitutes the public policy of India in the context of arbitration – Therefore, unilateral appointment clauses in public-private contracts are violative of Article 14 of the Constitution for being arbitrary in addition to being violative of the equality principle under the Arbitration Act. [Paras 162, 163] – [Per Pamidighantam Sri Narasimha, J. (dissenting)] One cannot, as an advance ruling, give a declaration that all arbitration clauses enabling unilateral appointments are null and void at this stage – A priori declaration that arbitration agreements that prescribe unilateral appointment procedures are invalid can lead to many problems in the day-to-day working of arbitral remedies – Particularly for institutions involving multiple transactions such as insurance claims, credit card defaults, etc. involving large number of cases but each claim may be of small sum – Our declaration of law substantially covers domestic arbitration, it will not be confined to high and international commercial arbitration – There could also be situations where the unilateral constitution of the panel of arbitrators could have credible members with respect to which no one can have an objection – Rather than declaring that all such agreements are void, it would be better to strengthen the remedial mechanisms available under the Act. [Paras 54.4 and 54.5] – [Per Hrishikesh Roy, J. (dissenting)] All unilateral appointments must not be declared void by way of a declaration of this Court – The 2015 Amendment in s.12(5) itself provides for a specific waiver i.e. (a) an express consent in writing and (b) the consent must be obtained after the dispute has arisen – Therefore, it is abundantly clear that an agreement between the parties (provided it satisfies the specific waiver requirements u/s.12(5)) can effectively cure any concerns about impartiality or independence in such cases – Adequate safeguards are provided within the Arbitration Act to ensure a level playing field – A search within the provisions of the Arbitration Act should first be made – The obligations of fair treatment should be grounded in the Arbitration Act rather than in the principles of Constitutional or administrative law – The choice of the parties in the agreement should not be disregarded without compelling reasons, through judicial intervention especially when the Arbitration Act provides clear remedies u/ss.12, 13, 14, and

15 of the Arbitration Act – It is only when there is a complete lack of consensus between the parties that the Court’s interference u/s.11 could be justified. [Paras 41, 42]

Arbitration and Conciliation Act, 1996 – Whether the principle of equal treatment of parties applies at the stage of the appointment of arbitrators:

Held: [Per Dhananjaya Y Chandrachud, CJI for himself and J.B. Pardiwala and Manoj Misra, JJ.] Independence and impartiality of arbitral proceedings and equality of parties are concomitant principles – The independence and impartiality of arbitral proceedings can be effectively enforced only if the parties can participate equally at all stages of an arbitral process – Therefore, the principle of equal treatment of parties applies at all stages of arbitral proceedings, including the stage of the appointment of arbitrators. [Para 75] – [Per Pamidighantam Sri Narasimha, J. (concurring)] The text and the context of Section

18 as is evident from the scheme of the Act eschews application of Section 18 at the time of appointment – This is clear through two factors: first, through the placement of Section 18 in Chapter V, on ‘Conduct of arbitral proceedings’, which comes after Chapter III on ‘Composition of arbitral tribunal’; and second, through the wording of Section 18, which makes it clear that the obligation to treat the parties with equality is on the arbitral tribunal, rather than the parties to the arbitration agreement – The later portion of Section 18, which mandates that “each party shall be given a full opportunity to present his case”, further fortifies this view. [Para 54.3] – [Per Hrishikesh Roy, J. (concurring)] The principle of equality u/s.18 of the Arbitration and Conciliation Act,1996 applies at all stages of the proceedings including the stage of appointment of arbitrators – The Arbitration Act does not provide special or different treatment to government or government undertakings involved in arbitration. [Para 2]

Arbitration and Conciliation Act, 1996 – Application of Principle of Equal Treatment of Parties – Appoitment of Arbitrators: Held: [Per Dhananjaya Y Chandrachud, CJI for himself and J.B. Pardiwala and Manoj Misra, JJ.] The principle of equal treatment of parties applies at all stages of arbitration proceedings, including the stage of appointment of arbitrators. [Para 169(a)] Arbitration and Conciliation Act, 1996 – Does Arbitration Act prohibit PSUs from empanelling potential arbitrators: Held: [Per Dhananjaya Y Chandrachud, CJI for himself and J.B. Pardiwala and Manoj Misra, JJ.] The Arbitration Act does not prohibit PSUs from empanelling potential arbitrators – However, an arbitration clause cannot mandate the other party to select its arbitrator from the panel curated by PSUs. [Para 169(b)] Arbitration and Conciliation Act, 1996 – Unilateral clause in the appointment of arbitrators:

Held: [Per Dhananjaya Y Chandrachud, CJI for himself and J.B. Pardiwala and Manoj Misra, JJ.] A clause that allows one party to unilaterally appoint a sole arbitrator gives rise to justifiable doubts as to the independence and impartiality of the arbitrator – Further, such a unilateral clause is exclusive and hinders equal participation of the other party in the appointment process of arbitrators. [Para 169(c)]

Arbitration and Conciliation Act, 1996 – Mandating the other party to select its arbitrator from a curated panel of potential arbitrators is against the principle of equal treatment of parties: Held: [Per Dhananjaya Y Chandrachud, CJI for himself and J.B. Pardiwala and Manoj Misra, JJ.] In the appointment of a three-member panel, mandating the other party to select its arbitrator from a curated panel of potential arbitrators is against the principle of equal treatment of parties – In this situation, there is no effective counterbalance because parties do not participate equally in the process of appointing arbitrators – The process of appointing arbitrators in Central Organisation for Railway Electrification v. ECI-SPIC-SMOMCML (JV) A Joint Venture Company [2019] 16 SCR 1234 is unequal and prejudiced in favour of the Railways. [Para 169(d)]

Constitution of India – Art. 14 – Arbitration and Conciliation Act, 1996 – Whether unilateral appointment clauses in public-private contracts are violative of Article 14 of the Constitution:

Held: [Per Dhananjaya Y Chandrachud, CJI for himself and J.B. Pardiwala and Manoj Misra, JJ.] Unilateral appointment clauses in public-private contracts are violative of Article 14 of the Constitution. [Para 169(e)]

Arbitration and Conciliation Act, 1996 – Arbitration and Conciliation (Amendment) Act 2015 – s. 12(5) – Application of s.12(5) where the parties seek to waive the allegation of bias against an arbitrator appointed unilaterally by one of the parties: Held: [Per Dhananjaya Y Chandrachud, CJI for himself and J.B. Pardiwala and Manoj Misra, JJ.] The principle of express waiver contained under the proviso to Section 12(5) also applies to situations where the parties seek to waive the allegation of bias against an arbitrator appointed unilaterally by one of the parties – After the disputes have arisen, the parties can determine whether there is a necessity to waive the nemo judex rule. [Para 169(f)] Arbitration and Conciliation Act, 1996 – The present judgment applies prospectively and to three-member tribunals: Held: [Per Dhananjaya Y Chandrachud, CJI for himself and J.B. Pardiwala and Manoj Misra, JJ.] The law laid down in the present reference will apply prospectively to arbitrator appointments to be made after the date of this judgment – This direction applies to three-member tribunals. [Para 169(g)]

Arbitration and Conciliation Act, 1996 – Two independent yet interdependent principles:

Held: [Per Pamidighantam Sri Narasimha, J.] 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. [Para 56(I)]

Arbitration and Conciliation Act, 1996 – Arbitration agreement – Party Autonomy:

Held: [Per Pamidighantam Sri Narasimha, J.] 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. [Para 56(II)]

Arbitration and Conciliation Act, 1996 – Contract Act, 1872 – s.23 – Statutory incorporation of duties of the parties to the arbitration agreement:

Held: [Per Pamidighantam Sri Narasimha, J.] 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. [Para 56(III)] Arbitration and Conciliation Act, 1996 – When an arbitration agreement is not enabling constitution of an independent and impartial tribunal:

Held: [Per Pamidighantam Sri Narasimha, J.] 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. [Para 56(IV)] Arbitration and Conciliation Act, 1996 – Contract Act, 1872 – Statutory incorporation of duties – Necessity to apply public law principles:

Held: [Per Pamidighantam Sri Narasimha, J.] 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. [Para 56(V)] Arbitration and Conciliation Act, 1996 – Duty of the Court: Held: [Per Pamidighantam Sri Narasimha, J.] 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. [Para 56(VI)]

Arbitration and Conciliation Act, 1996 – Maintaining a panel of arbitrators:

Held: [Per Pamidighantam Sri Narasimha, J.] 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. [Para 56(VII)] Arbitration and Conciliation Act, 1996 – No two agreements are the same and it is necessary for the court to examine the text and context of the agreement:

Held: [Per Pamidighantam Sri Narasimha, J.] 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. [Para 56(VIII)] Arbitration and Conciliation Act, 1996 – Test of establishment of an independent and impartial tribunal:

Held: [Per Pamidighantam Sri Narasimha, J.] All applications pending before the courts challenging the unilateral appointment clauses will be disposed of applying the test as to whether such a clause enables establishment of an independent and impartial tribunal. [Para 56(IX)]

Arbitration and Conciliation Act, 1996 – s.18 – Applicability of: Held: [Per Hrishikesh Roy, J.] 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. [Para 43(a)]

Arbitration and Conciliation Act, 1996 – Unilateral appointment of Arbitrators is permissible as per the legislative scheme: Held: [Per Hrishikesh Roy, J.] 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 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. [Para 43(b)]

Arbitration and Conciliation Act, 1996 – Independence and impartiality of the arbitrator – Examination of: Held: [Per Hrishikesh Roy, J.] The independence and impartiality of the arbitrator must be examined within the statutory framework of the Arbitration Act, particularly Section 18 read with section 12(5) – Public Law constitutional principles should not be imported to arbitration proceedings particularly at the threshold stage of Section 11. [Para 43(c)]