Background:
This dispute arose out of a railway electrification contract between the Central Organization for Railway Electrification (“CORE”) and M/s ECI-SPIC-SMO-MCML (JV). This contract included an arbitration clause (Clause 64(3)(b) of the Indian Railways General Conditions of Contract), which stipulated that any dispute arising out of this contract would be resolved by a panel of arbitrators selected and approved by the General Manager of the Railways. It was further specified that the panel was to consist of retired railway officers. This arrangement, despite allowing the contractor to nominate two arbitrators from a list provided by CORE, allowed the General Manager to retain the authority to appoint all arbitrators, including the presiding arbitrator. This clause was challenged by the contractor, alleging that it would deny their right to an impartial tribunal.
Judicial Background:
In 2019, a three-judge bench of the Supreme Court in Central Organisation for Railway Electrification v. ECI-SPIC-SMO-MCML (JV)[1] (“2019 CORE”), upheld the appointment of arbitrators from a panel of retired railway officers. However, this position adopted by the Supreme Court was later criticized by a concurrent bench in Union of India v. M/S Tantia Constructions Limited[2] (“Tantia Constructions”), which requested for a referral of the 2019 CORE judgement to a larger bench of the Apex Court. Further, it is also noteworthy that the decision of the Supreme Court in 2019 CORE diverged from previous landmark rulings of the Supreme Court, including Voestalpine Schienen GmbH v. Delhi Metro Rail Corporation[3], wherein it was established that imposing a requirement of selection of arbitrators from a government-curated panel of arbitrators cannot satisfy the requirements specified under Section 12(5) of the Arbitration & Conciliation Act (“A&C Act”) and opined that a broad-based panel is a prerequisite in order to ensure neutrality. Additionally, the Supreme Court, in Perkins Eastman Architects DPC v. HSCC (India) Ltd[4], had ruled that unilateral appointment of a sole arbitrator was invalid.
It is in this background that the recent judgement of the Supreme Court assumed even greater importance.
Decision of the Supreme Court:
The Supreme Court, in the CORE judgement examined several fundamental principles of arbitration law.
1. Contours of Party Autonomy
The Supreme Court, upon a detailed examination concluded that while party autonomy is fundamental to arbitration, such exercise of autonomy is limited by the need to ensure neutrality and fairness in the proceedings. This requirement to ensure impartiality is enshrined under Section 12(5) of the A&C Act. It is considering this position that the Court opined that while the parties to an arbitration agreement are free to structure their arbitration agreements, such autonomy cannot be misused by the parties to disproportionately strengthen one party’s influence over the composition of the tribunal. The Court further relied upon an examination of Section 18 of the A&C Act to hold that equal treatment of parties is non-negotiable, especially with respect to appointment of arbitrators. The Court concluded that it is a component of party autonomy to not vest disproportionate power on one party to decide the composition of the tribunal. The Court held that this fundamental principle would strike at the legality of the contractual arrangement in the present case, which restricted the choice of selection of arbitrators to a panel selected by the General Manager of the Railways, which was itself a party to the agreement.
2. International Standards:
The Court further examined established international standards, including the IBA Guidelines on Conflict of Interest in International Arbitration as well as UNCITRAL Model Law on International Commercial Arbitration and held that Indian law needs to be aligned with such international standards, which emphasize on granting parties to an arbitration equal power in deciding the arbitrators and the mandatory requirement to guarantee impartiality at all stages.
Conclusion:
In striking down the clause of the contract which permitted CORE to select arbitrators from a panel exclusively composed of retired railway officers and constituted by the General Manager of the Railways, the Supreme Court crystallized the law in India with respect to ensuring impartiality in appointment of arbitrators.
[1] Central Organisation for Railway Electrification v. ECI-SPIC-SMO-MCML (JV), (2020) 14 SCC 712.
[2] Union of India v. Tantia Construction (P) Ltd., (2011) 5 SCC 697.
[3] Voestalpine Schienen Gmbh v. Delhi Metro Rail, 2017 SCC 4 665.
[4] Perkins Eastman Architects Dpc v. Hscc (India) Ltd., 2019 SCC OnLine SC 1517.