Supreme Court rules against Unilateral Appointment of Arbitrator by PSUs
The Constitutional bench, on November 8, 2024, delivered a landmark judgment on the unilateral appointment of arbitrators by the public sector in public contracts. The ruling arose from the matter of Central Organisation For Railway Electrification Vs M/S ECI SPIC SMO MCML (JV) A JOINT VENTURE.
Background of the Case:
The dispute arose from the contract awarded by Central Organisation for Railway Electrification to ECI SPIC SMO MCML, for railway electrification. The contract had an arbitration clause allowing one party to unilaterally appoint an arbitrator or mandating the opposite party select the arbitrator from a curated panel. The major concern was whether these practices contravened Article 14 of the Indian Constitution, which guarantees equality before the law.
Major Findings:
Violation of Article 14: The Hon’ble Supreme Court observed that the unilateral appointment clauses violate Article 14 of the Indian Constitution as they weaken the principal of equality and fairness in arbitration proceedings. Such clauses create an imbalance in the power dynamics between PSUs and private contractors.
The Nemo Judex Rule:
The Apex Court discussed the nemo judex rule, which means "no one should be a judge in their own cause." This principle states that if one party has greater control over appointing an arbitrator, it can create a perception of partiality. The judgment made it clear that even perceived partiality can disqualify an arbitrator, supporting the need for a fair process in appointing arbitrators.
Public-Private Contracts
In cases involving public-private contracts, the Hon’ble Supreme Court emphasized that, to maintain the private parties’ trust regarding impartiality of the arbitrators, there should be a diverse panel of arbitrators to choose from. The judgment mandates that government entities must create broad panels of qualified individuals from various backgrounds to ensure fairness in arbitration.
Future applications:
The Apex Court decided that the ruling would apply prospectively to the three-member arbitrator appointments made after the date of this judgment, therefore avoiding disturbance of current commercial arrangements.
The Supreme Court's decision is based for the several purpose:
1. Strengthening Trust: This decision aims to reinforcing independence and impartiality, and to enhance trust in arbitration as a dispute resolution mechanism.
2. Guidance for Future Cases: The judgment provides crystal-clear guidelines on the process of appointment of arbitrator, particularly in public contracts, ensuring that all parties feel secure in the arbitration process.
3. Encouraging Fair Practices: The judgment emphasises on avoiding bias and encourages fair practices in arbitration, making it more attractive for both domestic and international stakeholders.
Conclusion
The Supreme Court's ruling in Central Organisation for Railway Electrification vs. M/S ECI SPIC SMO MCML (JV) marks a crucial moment and a turning point in Indian arbitration law. This ruling provides and covers the importance of maintaining an independent and impartial arbitration process. As India continues to develop its arbitration system, this judgment will likely lead to greater confidence among investors and businesses regarding dispute resolution mechanisms. In summary, this judgment not only clarifies existing legal standards but also sets new benchmarks for future arbitration practices in India, ensuring justice remains central to resolving disputes effectively as PSUs adapt to these new legal standards.
Author: Anupriya Dixit, Associate with Pratap & Co.