Supreme Court Declares Unilateral Appointment of Arbitrators in Public-Private Contracts Unconstitutional

Supreme Court Declares Unilateral Appointment of Arbitrators in Public-Private Contracts Unconstitutional

The Supreme Court has delivered a landmark ruling declaring that the unilateral appointment of arbitrators in public-private contracts violates Article 14 of the Indian Constitution. This decision fundamentally redefines how arbitrators are appointed in such contracts, emphasizing fairness and impartiality throughout arbitration processes.

Key Findings of the Judgment

The judgment, delivered by a Constitution Bench led by Chief Justice DY Chandrachud, along with Justices Hrishikesh Roy, PS Narasimha, Pankaj Mithal, and Manoj Misra, addressed critical questions on the principles of equality and independence in arbitration. While the Bench was united in its views on the unconstitutionality of unilateral appointments, the judges penned separate opinions to address specific facets of the case.

The Issue of Unilateral Arbitrator Appointments

Chief Justice Chandrachud, writing the majority opinion, asserted that the unilateral appointment clauses in contracts infringe upon equal treatment rights. According to him, fairness in arbitration requires that both parties must equally participate in appointing arbitrators. He stated:

> "The principle of equal treatment of parties applies at all stages of arbitration proceedings, including the appointment of arbitrators."

Chief Justice Chandrachud emphasized that while public sector undertakings (PSUs) may empanel potential arbitrators, any contractual clause mandating one party to choose an arbitrator from a panel curated by PSUs compromises impartiality and the principle of fairness. He added that such a clause might create reasonable doubts about the independence and impartiality of the appointed arbitrator.

Detailed Observations by the Bench

Justice Hrishikesh Roy and PS Narasimha, in their separate judgments, offered nuanced perspectives on the unilateral appointment of arbitrators:

- Justice Hrishikesh Roy: Justice Roy concurred with the Chief Justice, emphasizing that Section 18 of the Arbitration and Conciliation Act, 1996—which enshrines equality in arbitration—extends to all stages, including the appointment of arbitrators. He clarified that while unilateral appointments are permissible under certain conditions, such appointments should be assessed within the framework of the Arbitration Act, particularly in cases where there is no consensus.

- Justice PS Narasimha: Justice Narasimha argued that while public policy or the **Contract Act** does not prevent parties from maintaining a panel of arbitrators, the selection must ensure independence and inspire confidence. He reiterated that the judiciary holds the responsibility to validate the impartiality of arbitral tribunals, adding that any contract clause allowing one party to unilaterally appoint an arbitrator may violate public policy, as it disrupts fairness in arbitration.

Implications of the Judgment on Public-Private Contracts

The Court’s verdict underscores that unilateral appointment clauses in public-private contracts create an unequal dynamic favoring one party, often the public sector entity. This lack of balanced participation impedes the creation of an independent and impartial arbitral tribunal.

Prospective Application and Three-Member Tribunals

The Court clarified that this ruling will be applied prospectively to arbitrator appointments made following the date of the judgment. This directive covers both single and three-member arbitral tribunals, ensuring that the new standards for fairness and independence in arbitration are strictly followed in future contracts.

Addressing Bias and Waiver of Alleged Bias

Chief Justice Chandrachud addressed the concept of express waiver under Section 12(5) of the Arbitration Act. This provision allows parties to waive potential bias allegations against a unilaterally appointed arbitrator. However, the Chief Justice specified that such waivers could only be valid once disputes have arisen, empowering the parties to decide on the necessity of waiving the nemo judex principle, which prevents one party from being both judge and arbitrator.

Justice Narasimha added that judicial intervention would be minimal at the stage of arbitrator appointments, with the Court stepping in only where the agreement fails to ensure fairness or does not align with public policy.

Impacts on Future Arbitration Procedures

1. Promoting Equality and Impartiality 

   The judgment ensures that all parties have equal footing in selecting arbitrators, preventing potential biases stemming from unilateral appointments.

2. Strengthening the Integrity of Arbitration 

   By disallowing one-sided appointments, the Court’s ruling fosters **impartiality** and boosts confidence in the arbitration process as a fair method of dispute resolution in public-private contracts.

3. Enhanced Scrutiny of Public-Private Arbitration Clauses  

   Moving forward, public and private entities will need to design arbitration clauses that do not allow one party to unilaterally appoint an arbitrator, thereby adhering to the constitutional and statutory requirements set forth in the Arbitration Act.

4. Judicial Oversight on Impartiality

   The Court affirmed its role in scrutinizing arbitration agreements, asserting its duty to ensure arbitral appointments are fair and inspire public trust.

Conclusion

This Supreme Court ruling on unilateral arbitrator appointments in public-private contracts establishes a benchmark in safeguarding fairness and equality within arbitration. The decision emphasizes that arbitral appointments should inspire confidence in the neutrality of the tribunal, providing a strong framework for future arbitration clauses.

The Court’s reinforcement of impartiality principles under Article 14 and the Arbitration Act signals a significant step forward in protecting parties in public-private agreements, ensuring that arbitration remains an effective and fair mode of dispute resolution.