Summary
A five-judge Constitution Bench, by majority (Chandrachud CJI for himself, Pardiwala and Manoj Misra JJ), held that the equal-treatment principle in Section 18 of the Arbitration and Conciliation Act, 1996 applies at the stage of appointing arbitrators, so a clause letting one party unilaterally appoint a sole arbitrator, or forcing the other party to pick its nominee from a panel curated by a PSU, is invalid; unilateral appointment clauses in public-private contracts also violate Article 14. Voestalpine and CORE were disapproved, TRF and Perkins upheld, and the ruling on three-member tribunals made prospective. Roy J and Narasimha J wrote separate opinions declining to import public-law principles and to declare such clauses void in advance.
Issues
- Whether an appointment procedure that lets a party interested in the dispute unilaterally appoint a sole arbitrator, or curate a panel and require the other party to choose its arbitrator from it, is valid.
- Whether the principle of equal treatment of parties under Section 18 applies at the stage of appointment of arbitrators.
- Whether a clause in a public-private contract allowing a government entity to unilaterally appoint a sole arbitrator or a majority of the tribunal violates Article 14.
- Whether the law declared should operate prospectively.
Provisions considered
- Section 18, Arbitration and Conciliation Act, 1996Majority: equal treatment is a mandatory, non-derogable principle that binds parties as well as tribunals and applies at all stages, including constitution of the tribunal; unilateral sole-arbitrator clauses and compulsory selection from a one-sided curated panel violate it. Narasimha J disagreed that Section 18 governs the appointment stage. (¶¶ 52, 55, 67, 68, 72, 75, 129, 132)
- Section 12 (sub-sections (1), (3) and (5) with the proviso) and the Fifth and Seventh Schedules, Arbitration and Conciliation Act, 1996Section 12(5) overrides prior agreements and makes Seventh Schedule categories automatically ineligible; doubts under Section 12(3) are tested by real likelihood of bias from a fair-minded, informed observer's view. The proviso's express written waiver after disputes arise also lets parties waive objection to a unilaterally appointed arbitrator. (¶¶ 42, 45, 47, 48, 114, 115, 116, 120, 121, 122, 123)
- Section 11 (sub-sections (2), (6) and (8)), Arbitration and Conciliation Act, 1996Party autonomy to agree on an appointment procedure under Section 11(2) is subject to mandatory provisions, and Section 11(8) obliges the appointing court to secure an independent and impartial arbitrator. (¶¶ 34, 35, 37, 38, 72)
- Section 4 and Section 34(2)(a)(v), Arbitration and Conciliation Act, 1996Waiver under Section 4 extends only to derogable provisions, so parties cannot proceed in derogation of mandatory ones; an award may be set aside where the composition of the tribunal conflicts with a non-derogable provision. (¶¶ 26, 27, 28, 31, 32)
- Article 14, Constitution of IndiaIn public-private contracts the State must act fairly and non-arbitrarily, including in designing arbitration procedures; a unilateral appointment clause lets the government control the tribunal, breaches the nemo judex rule and is arbitrary. Roy J and Narasimha J considered constitutional principles should not be imported. (¶¶ 70, 145, 146, 161, 162, 163)
- Sections 16, 23 and 28, Indian Contract Act, 1872Majority: the unconscionability doctrine of Brojo Nath Ganguly generally does not apply to commercial arbitration agreements, but non-arbitrariness still binds government contracts. Narasimha J located the parties' duty to constitute an independent tribunal in Section 23 public policy, read with Section 28. (¶¶ 17, 139, 140, 143, 144)
- Section 34(2)(b), Arbitration and Conciliation Act, 1996Public policy of India includes natural justice and basic notions of justice, which cover bias; the nemo judex rule thus forms part of public policy in arbitration. (¶¶ 156, 157, 158, 159, 160, 163)
- Article 142, Constitution of IndiaUsed to apply the ruling on three-member tribunals prospectively, to arbitrator appointments made after the judgment, to avoid unsettling completed and pending arbitrations. (¶¶ 166, 167, 168)
Held
- Party autonomy under the Act is limited by its mandatory provisions, identified from their text and context; equality of parties and independence and impartiality of the tribunal are such mandatory standards, and they prevail over a conflicting arbitration agreement. (¶¶ 25, 28, 31, 32, 57)
- Arbitral tribunals perform a quasi-judicial function, and equality of parties and an independent, impartial process are concomitant; the principle of equal treatment therefore applies at all stages of arbitration, including appointment of arbitrators. (¶¶ 61, 63, 68, 72, 73, 75, 169)
- The test for arbitrator bias in India is the real likelihood or reasonable apprehension of bias judged from the standpoint of a fair-minded and informed person; Seventh Schedule categories involve automatic disqualification without inquiry into actual bias. (¶¶ 103, 107, 108, 109, 115, 116, 120)
- A clause allowing one party to unilaterally appoint a sole arbitrator gives rise to justifiable doubts as to independence and impartiality and excludes the other party from equal participation; TRF and Perkins were upheld. (¶¶ 127, 128, 129, 168, 169)
- PSUs may maintain panels of potential arbitrators, but an arbitration clause cannot compel the other party to select its arbitrator from a panel curated by one side, as there is then no effective counter-balance. The CORE clause, which also let the General Manager pick the contractor's nominee, appoint the rest from within or outside the panel and name the presiding arbitrator, is unequal and prejudiced in favour of the Railways. Voestalpine and CORE were disapproved. (¶¶ 131, 132, 133, 135, 136, 137, 168, 169)
- Unilateral appointment clauses in public-private contracts are arbitrary and violate Article 14, besides the equality principle under the Act, since government must ensure the arbitral process it designs is fair to the other party. (¶¶ 161, 162, 163, 169)
- Parties may, after disputes arise, expressly waive in writing the nemo judex objection to a unilaterally appointed arbitrator, applying the principle of the proviso to Section 12(5); a PSU may offer a choice from its curated list if the other party so waives. (¶¶ 121, 122, 123, 137, 169)
- Consistent with minimal judicial interference, the referral court under Section 11 only examines the existence of an arbitration agreement; whether an appointment clause offends the equality principle needs detailed consideration and may be decided by the arbitral tribunal under competence-competence. (¶¶ 164, 165)
- The law declared applies prospectively to arbitrator appointments made after the date of the judgment, and this direction applies to three-member tribunals. (¶¶ 166, 168, 169)
- In separate opinions, Hrishikesh Roy J agreed that Section 18 applies at the appointment stage but held that unilateral appointment of an eligible arbitrator is permissible, that courts should intervene under Section 11(6) only on complete lack of consensus, and that public-law principles should not be imported (Roy J, para 43). P.S. Narasimha J located the duty to constitute an independent tribunal in Section 23 of the Contract Act and Section 12, held that unilateral clauses may be invalidated case by case on applications under Sections 11, 14 or 34, and declined an advance declaration that all such clauses are void (Narasimha J, para 56).
Result
Reference answered by majority in the terms stated: equal treatment applies at the appointment stage; unilateral sole-arbitrator clauses and compulsory selection from one-sided curated panels are invalid; unilateral appointment clauses in public-private contracts violate Article 14; post-dispute express waiver permitted; ruling on three-member tribunals prospective from the date of judgment; pending applications disposed of.