From Core to Clarity: Sc Clarifies Law on Unilateral Arbitrator Appointments

A five-judge bench of the Supreme Court delivered its judgement resolving the key issues in the case ‘Central Organization for Railway Electrification vs. M/s ECI-SPIC-SMO-MCML (JV)[1] (CORE II),’ Involving the unilateral appointment of arbitrators and facets of impartiality and neutrality of arbitrators. The Court, in this case, invalidated the contract clause that permitted CORE to appoint arbitrators exclusively from a panel consisting of retired railway officials, noting that such a process failed to ensure neutrality or fairness in the tribunal’s composition. It held that the clause breached Section 12(5) of the Arbitration and Conciliation Act, which disqualifies appointments involving close affiliations with a disputing party, and Section 18, which guarantees equal treatment of parties. The Court clarified that while public sector undertakings may create panels of arbitrators, they cannot compel the opposing party to choose an arbitrator solely from that list

Background

The Supreme Court of India addressed disputes regarding the appointment of arbitrators under the Arbitration and Conciliation Act, 1996, as amended in 2015, in a contract dispute between the Central Organisation for Railway Electrification (CORE) and ECI-SPIC-SMO-MCML (JV).

In 2010, a work contract valuing Rs. 165.5 crore was awarded by CORE to ECI-SPIC-SMO-MCML (JV). This was for railway electrification works. The contract incorporated arbitration clauses where, under clause 64 of GCC, the general manager was allowed to nominate arbitrators from a panel of railway officers. The respondent sought the appointment of an arbitral tribunal for resolving disputes between the parties and settling the claims value of Rs. 73.35 crores. In line with clause 63(3)(b) of GCC, the respondent was asked to select any two officers of JA grade from the list of panels provided by the appellant and communicate it to the appellant within 30 days for the constitution of the arbitral tribunal. However, the respondent, instead of replying, filed an arbitration petition before the Allahabad High Court under section 11(6) of the Arbitration and Conciliation Act seeking appointment of a sole arbitrator for the resolution of differences.

Decision of the High Court

The High Court of Allahabad appointed Justice Rajesh Dayal Khare, subject to this consent, as the sole arbitrator for resolving the disputes between the parties and rejected the contention of the appellant that the arbitrator is to be appointed as per the general conditions of the contract. The High Court held that the powers of the court to appoint an arbitrator are independent of the contract. Aggrieved by this Decision, the appellant has preferred an appeal in the Supreme Court before a 3-judge bench of the SC comprising Justice R. Banumati, A.S. Boppanna, and Hrishikesh Roy.

The bench adjudged on the following issues:

1.Whether the High Court could have appointed an independent arbitrator without reference to the clauses of the General Conditions of Contract (GCC)?

2. Whether retired railway officers are not eligible to be appointed as arbitrators under section 12(5) read with schedule VII[2] of the act (w.e.f. 23-10-2015 post amendment)?

3. Whether general manager was eligible to nominate the arbitrator?

Decision of the Supreme Court (CORE 1)

The Supreme Court reiterated that the high court is not justified in appointing an independent sole arbitrator without following the procedure for appointment as prescribed under clause 64(3)(b) of GCC. Emphasizing the ratio of Parmar Construction Co., the Supreme Court held that the appointment should be made per the agreement, and the High Court was incorrect in appointing an independent arbitrator without following the appointment procedure specified in the GCC. Regarding the appointment of a retired officer as an arbitrator, the Supreme Court observed that simply because the panel of arbitrators consists of government employees or former government employees, it does not make such a person ineligible to serve as an arbitrator.

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The SC affirmed the decision of Voestalpine Schienen GmbH, where the Supreme Court noted that ‘the very reason for empanelling these persons is to ensure that the technical aspects of the disputes are properly resolved by utilising their expertise when they act as arbitrators.’ Regarding the eligibility of GM to nominate an arbitrator, the court held that, considering the modified clauses of the GCC, it cannot be said that GM has become ineligible to serve as an arbitrator. The General Manager’s power to nominate an arbitrator is equated by the respondent’s authority to choose any of the two nominees from the four names suggested by the panel of the retired officer. Later, another 3-judge bench of the Supreme Court heard a similar matter in UOI V. Tantia Constructions Ltd[3]., and disagreed with the decision laid down in CORE-1. Matter was referred to a larger bench for consideration of the view taken by the 3-judge bench in CORE-1.

The Reference

The following issues were framed in CORE-II:

(i) Whether an appointment process that allows a party who has an interest in the dispute to unilaterally appoint a sole arbitrator, or curate a panel of arbitrators and mandate that the other party select their arbitrator from the panel is valid in law?

(ii) Whether the principle of equal treatment of parties applies at the stage of the appointment of arbitrators?

(iii) Whether an appointment process in a public-private contract, which allows a government entity to unilaterally appoint a sole arbitrator or a majority of the arbitrators of the Arbitral Tribunal, is violative of Article 14 of the Constitution?

1.Validity of unilateral appointment of arbitrators- When an arbitration clause permits one party to unilaterally appoint a sole arbitrator or curate a panel from which the other party must choose, such a clause is legally valid, although the person appointing is a party interested. The court upheld that it is necessary to locate the obligations of the parties to constitute an independent and impartial arbitral tribunal to ensure party autonomy, coupled with minimal judicial intervention, a foundational principle of arbitration. An independent and impartial tribunal is a must, keeping in mind the principles of fairness. 

2.Interpreting Independence, Impartiality, and Party Autonomy Post-2015 Amendment- It is an established principle of arbitration recognised under section 7(1) of the Arbitration and Conciliation Act, 1996 and the Grundnorm of the arbitration law. Parties are free to determine the law governing the arbitration agreement, composition of the arbitral tribunal, procedure for appointment, termination, the conduct of arbitral proceedings, procedure to be followed by the arbitral tribunal in the conduct of proceedings etc.

3.Reaffirming Section 12(5) Through the Lens of Public Policy and Procedural Fairness: a A statutory bar exists on the appointment of arbitrators who are listed in Schedule VII. The neutrality, independence, impartiality, integrity, and objectivity of an arbitral tribunal are matters of public policy, and the validity of arbitration agreements must be assessed against this standard. The Fifth and Seventh Schedules specify situations where the appointment of certain individuals could compromise the tribunal's independence. These include persons with a close relationship to a party, legal advisors, or those with a financial interest. Such appointments are void ab initio, and the arbitrator is considered de jure disqualified, except when the parties waive disqualification after the dispute arises through an explicit written agreement. Courts have the authority to review whether the appointment process complies with or violates this provision.

4.Power of Court to constitute an Independent Tribunal, and at what stage such power is exercised: Parties' autonomy is not absolute, and it should be balanced against the constitutional mandate of access to justice. Section 11(6) and (8) of the Arbitration and Conciliation Act, 1996, provides authority to the court to override an arbitration agreement’s appointment procedure if it compromises the independence or impartiality of the arbitral tribunal. Courts will intervene at the stage of arbitrator appointment when a party alleges that the agreed procedure compromises neutrality. The judgment notes that the constitutional mandate of access to justice—including impartial arbitral forums—must not be exclusive to the wealthy and powerful. It must also serve: “the common man, the poor and the humble, the butcher, the baker, and the candlestick maker.”[4].This principle reinforces that arbitral processes must be fair in appearance and substance, regardless of whether the tribunal is selected by the State, PSUs, or private parties.

5.Balancing autonomy and impartiality: a distinct perspective: On the opinion of the

Hon’ble CJI. The Hon’ble Chief Justice Dr. D.Y. Chandrachud opined that arbitration agreements must be evaluated within the framework of contract law, emphasizing a distinction between the parties’ duty to form an independent arbitral tribunal and the arbitrator’s duty to act judicially. He cautioned against overextended doctrines of public law principles like equality under Article 14 or the doctrine of bias to the tribunal’s constitution, noting that Section 18 of the Arbitration and Conciliation Act, 1996, applies only to the conduct of arbitral proceedings, not appointments. The CJI highlighted that unilateral appointment clauses should not be pre-emptively declared void, as this could disrupt arbitration in high-volume, small-claim cases like insurance or credit card disputes, and instead advocated for case-by-case judicial scrutiny under Section 11 to ensure independence while respecting party autonomy and the relationships with the appointing authority, such as employment, do not inherently compromise impartiality.

6. Appointment by government in public-private contract:  The Supreme Court reaffirmed the principle the nemo judex rule (no one should be a judge in their own cause), asserting that no individual should act as a judge in their own case, emphasizing that if one party holds disproportionate control over the appointment of arbitrators, it can give rise to an appearance of bias. Particularly in matters involving government bodies, such arbitration clauses are examined through the lens of public policy, especially the constitutional guarantee of equality under Article 14. The Court found that allowing public sector entities the right to appoint arbitrators in disputes with private parties undermines the latter’s right to an impartial and fair adjudicatory process.

The Decision: A Constitutional Bench Perspective

1. Unilateral appointment clauses must be examined case-by-case before pre-emptively declaring unilateral appointment clauses void per se. The Blanket ban of such clauses is inappropriate. No two agreements are the same, and the court must examine the text and context of the agreement.

2. Equality between parties is fundamental to arbitration, particularly in the context of appointing arbitrators. Drawing on Section 18 of the Arbitration Act, which requires fair treatment of both sides during the arbitral proceedings, the Court affirmed that this standard must also apply at the stage of tribunal formation. It held that no party should have exclusive control over the selection or composition of the arbitral panel in a way that could place the other party at a disadvantage. Ensuring a balanced appointment process allows for equal involvement from both parties and helps safeguard against potential bias.

3. The autonomy of the party and the statutory duty to constitute an independent arbitral tribunal are two independent yet coexisting principles of arbitration. Party autonomy allows parties to choose their arbitrators and procedures. Yet this autonomy cannot override the public policy mandate under Section 23 of the Contract Act, which prohibits agreements that undermine neutrality in dispute resolution. The court must ensure that the agreement of arbitration inspires confidence and establishes an independent and impartial arbitral tribunal.

4. All the pending cases on unilateral appointments will be heard considering whether the arbitration clause enables the constitution of an independent and impartial tribunal, ensuring a prospective ruling.

5. The Court need not apply public law doctrines like Article 14 as the Contract Act and Arbitration Act sufficiently ground the obligation to constitute a neutral tribunal.

 

Precedents

1.  In TRF’s[5] case, the Supreme Court examined the validity of unilateral appointments under Section 11(6) of the Arbitration and Conciliation Act. The case involved the appointment of a Managing Director who had a stake in the dispute as the sole arbitrator. As per the Seventh Schedule of the Act, individuals in such positions are disqualified from serving as arbitrators due to potential conflicts of interest. The Court held that any arbitrator appointment made by a person barred under Section 12(5) is likewise invalid. This decision established a key precedent against unilateral appointments in arbitration.  

2. In Perkins[6], The Supreme Court reiterated that the appointment of a sole arbitrator, unilaterally, is invalid. Once a person is rendered ineligible by law to act as an arbitrator, they cannot appoint any other person as an arbitrator.

3. In Voestalpine[7], The Supreme Court considered whether a panel of arbitrators selected by a government entity for public contracts met the requirements of Section 12(5) of the Arbitration Act. The Court stressed that to maintain neutrality, the panel must be broad-based and offer genuine choice to the opposing party.

Conclusion

The Apex Court's judgement in CORE II decides to balances the values of fairness and impartiality and their limitations, which is the path to preserve the sanctity and constitutional values of public policy and the right to a fair tribunal. Post the contradictory decisions in CORE-I and Tantia, the decision brings clarity and a way forward.

The current ruling provides a straightforward approach to the Arbitration Act, particularly regarding sections 12(5) and 18, in consonance with the inherent value of Article 14. The court insisted on case-specific judicial scrutiny of cases before imposing a blanket ban on the unilateral appointments. This was a move forward to strike a balance between maintaining efficiency in commercial arbitration and ensuring fair and accessible justice to people.

Considering this new ruling, the government contract and the institutional arbitrations should look for a new way out for their dispute resolution clauses. Particularly, public sector undertakings should take an easy path of not giving too much control over appointments. They should adopt and focus on a broad-based, transparent, and neutral path that allows the inclusion of all parties. Before this, it was like a cemented brick wall, which was being asked to move politely. However, this judgement has made a gate through the wall to balance the convenience of fairness and create a neutral process inviting genuine participation. The legislative viewpoint could be helpful through additional guidance through clear standards for panel appointments to promote consistency in the procedure and reduce legal disputes over arbitrator neutrality. This judgement affirms that Arbitration as a substitute for conventional courts must be visibly effective and unbiased for all.

Author: Arushi Sharma, in case of any queries please contact/write back to us via email to chhavi@khuranaandkhurana.com or at  Khurana & Khurana, Advocates and IP Attorney.

[1] ‘Central Organization for Railway Electrification vs. M/s ECI-SPIC-SMO-MCML (JV)[1] 2024 SCC OnLine SC 3219

[2] The Seventh Schedule enlists a series of relationships that make a person ineligible to be an arbitrator. The 2015 amendment also   provided that the parties could mutually agree to waive this provision.

[3] UOI V. Tantia Constructions Ltd, (2023) 12 SCC 330

[4]  Bidi Supply Co v. Union of India, 1956 SCR 267

[5] TRF Ltd v. Energo Engg. Projects Ltd (TRF) (2019) 5 SCC 755

[6] Perkins Eastman Architects DPC v HSCC (India) Ltd (2020) 20 SCC 760

[7] Voestalpine Schienen GmbH v. DMRC (2017) 4 SCC 665