Supreme Court Rules Against PSUs’ Unilateral Appointment of Arbitrators to Ensure Neutrality in Arbitration

Keywords: Supreme Court arbitration, PSU arbitration clause, unilateral arbitrator appointment, public-private dispute, arbitration impartiality, Arbitration and Conciliation Act, Chief Justice DY Chandrachud, public sector arbitration panel.

In a significant ruling on Friday, the Supreme Court of India held that Public Sector Undertakings (PSUs) cannot unilaterally enforce arbitration clauses allowing them to select arbitrators solely from their own curated panels in disputes with private parties. The ruling addresses longstanding concerns about impartiality in public-private arbitration and reinforces equal treatment for both parties involved.

Background of the Case

The Supreme Court examined the prevalent practice in PSU contracts where arbitration clauses mandated dispute resolution by arbitrators selected from PSU-managed panels. This practice had raised concerns, as PSUs, often being both a disputing party and the appointing authority, held substantial influence over the choice of arbitrators. Several landmark cases, including TRF Ltd. v. Energo Engineering Projects Ltd. and Perkins Eastman Architects DPC v. HSCC (India) Ltd., highlighted these impartiality concerns. However, inconsistencies in interpretations, notably in cases like Central Organisation for Railway Electrification vs. ECI SPIC SMO MCML and JSW Steel Ltd vs. South Western Railway and Anr., led to the referral of this issue to a Constitution Bench for clarity.

Arguments Presented

The Union of India, represented by Solicitor General Tushar Mehta, argued that PSUs should be allowed to maintain arbitration panels, emphasizing that party autonomy is essential under the Arbitration and Conciliation Act. Mehta drew attention to the Supreme Court’s decision in Voestalpine Schienen GmbH v. Delhi Metro Rail Corp., suggesting that transparent procedures for maintaining arbitrator panels could ensure a fair selection process without compromising neutrality.

On the other side, the respondents argued that unilateral control over arbitrator selection violated the Arbitration and Conciliation Act’s requirements for transparency and independence, as well as Article 14 of the Constitution, which upholds equality before the law. They contended that such control undermines equal participation in the arbitration process, casting doubt on the impartiality of arbitrators chosen solely from PSU-managed lists.

The Supreme Court’s Ruling

A bench led by Chief Justice DY Chandrachud ruled in favor of impartiality and equality in arbitrator appointments, emphasizing that the right to choose an arbitrator cannot be skewed towards one party. The Court clarified that while PSUs may continue maintaining their panels of arbitrators, they cannot enforce these panels as exclusive options for the other party. This requirement, especially in cases involving a three-member tribunal, disrupts the equality of both parties, violating the principles of fairness and impartiality embedded in the Arbitration and Conciliation Act.

Chief Justice Chandrachud noted that requiring private entities to select arbitrators solely from PSU-managed panels compromises independence and neutrality, which are essential to an equitable arbitration process. The ruling further stated that PSUs must allow private parties the freedom to nominate arbitrators outside the PSU-curated list, thereby ensuring fair representation in the tribunal’s formation.

Concurring Opinions

Justice Hrishikesh Roy supported the importance of party autonomy, suggesting that unilateral appointments may still be permissible in exceptional cases, provided the arbitrator is independent and meets statutory qualifications. However, Justice PS Narasimha highlighted that while party autonomy is a pillar of arbitration, maintaining public confidence in the process is paramount. The judiciary must prevent any perception of bias in arbitrator appointments, even if such appointments technically comply with legal standards.

Implications of the Ruling

The Supreme Court’s decision brings clarity and uniformity to arbitration practices involving PSUs, addressing long-standing concerns about impartiality in public-private arbitrations. By limiting the control of PSUs over arbitrator appointments, the ruling strengthens the principles of neutrality and equal participation, enhancing confidence in India’s arbitration framework.

For PSUs and private contractors, this judgment redefines arbitration clauses, requiring greater openness and neutrality in arbitrator appointments. The decision also aligns with India’s efforts to position itself as an arbitration-friendly jurisdiction, reinforcing judicial oversight to ensure fairness in the arbitration process.

In conclusion, the Supreme Court’s ruling underscores that true impartiality and fairness in arbitration must begin with the selection process itself. The ruling reaffirms that, while PSUs can manage lists of arbitrators, they cannot mandate the selection of arbitrators exclusively from these lists, ensuring balanced participation in the formation of arbitration tribunals

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