Central Organisation for Railway Electrification vs ECI SPIC SMO MCML (JV) A Joint Venture Company

FACTS

1. A work contract was terminated by the Central Organisation for Railway Electrification (CORE) on 01/ 11/ 2017, on the ground that the Joint Venture company (JV) to which it was awarded – ECL SMO-MCML, had defaulted on certain obligations.
2. On 28/11/ 2017, the Allahabad High Court dismissed the petition filed by the JV directing the dispute to be resolved by arbitration as per the General Contract Conditions (GCC).
3. Section 12 of the Arbitration Act, 1996 permits questioning the appointment of an arbitrator and in 2015, a section 12(5) was inserted stating that no one with a relationship with parties, counsel, or subject matter falling into the Seventh Schedule shall be appointed as an arbitrator.
4. Accordingly, CORE altered two provisions of GCC in 2016 to permit the appointment of an arbitrator if Section 12 (5) is mutually waived off. The panel will consist of three Gazetted Officers not below Junior Administrative Grade (not below provisionally gazetted officer on lien in the scale of pay) in the case of more claim, or of two Railway Gazetted Officers and one retired Railway Officer. The CORE would provide a list of four arbitrators on which the respondents would have to choose two, then the General Manager would choose the third.
5. However, JV did not pick two and instead asked the Allahabad High Court for a sole arbitrator. The Allahabad High Court dismissed the petition by appointing a retired judge as sole arbitrator on 03/ 01/ 2019.
6. A 3-judges bench of the Supreme Court set aside (on 17 / 11 / 2019) the arbitrator appointed by Allahabad HC, holding that the arbitrators were to be appointed in terms of GCC and that a person could not be treated to be ineligible merely for being a retired officer.
7. The Constitution Bench, led by CJI Chandrachud, postponed hearings related to the appointment of arbitrators in Union of India v M/s. Tantia Constructions Ltd. case.
8. The Supreme Court announced a new five-judge bench in June 2023. Attorney General R. Venkataramani was given some time to review a draft report by the Experts Committee. Finally, the case was taken up by the SC for hearing on 30/ 08/ 2024.

ISSUES RAISED

1. Whether an appointment process that allows a party with an interest in a dispute to appoint a sole arbitrator or curate a panel is valid?
2. Whether the principle of equal treatment applies at the stage of appointment?
3. Whether a government entity’s unilateral appointment process of an arbitrator in a public-private contract violates Article 14 of the Constitution?

P.S. Narasimha J. reframed the above issues as:

Whether an arbitration agreement’s appointment process, which allows an interested person (w.r.t the dispute) to unilaterally appoint a sole arbitrator/ curate a panel of arbitrators and thereby, limit the choice of the other party, is valid in law.

CONTENTIONS

Appellant

Key provisions affecting Party Autonomy

• Section 18: Equal Treatment of Parties

This section offers some of the protections of legal parties to avoid bias or prejudice under arbitration.

• Section 12(5): Independence and Impartiality

This section excludes any person who has conflict of interest or which any ineligible person having a connection with the parties involved in the dispute. This principle is upheld by the Supreme Court and further enlarged where disqualified arbitrators cannot appoint another arbitrator showing that parties involving in an arbitration proceeding with vested interest should not be allowed to appoint other arbitrators.

Concerns with Unilateral Appointment of Arbitrators: Apprehension of Bias

The clauses allow one party to appoint a single arbitrator which leads to bias according to a reasonable third party feels. Eminent legal examples are the TRF case and Perkins rule against pre-emptive appointments so as to avoid dictating the tribunal.

Implications of Section 12(5)

Section 12(5) by referring to the TRF and Perkins cases, provides for canons of construction where one arbitration clause will prevail against another clause. The courts have endorsed this principle acknowledging that a person who is barred from becoming an arbitrator cannot nominate another arbitrator because of acquaintance with one party.

Constitutional Considerations

Lombardi SC limited the constitutional interest in arbitration agreements to Article 14 while ruling the unilateral appointment clauses unconscionable.

Possible Consequences in the Fields of Arbitration Clauses

• Reciprocity in Appointments Procedures

The decision making regarding the appointment of arbitrators should be mutual, but its absence is unjust and violates Section 18. The courts have for a long time held a balanced view when deciding the appointment process with concern to arbitration.

Although such broader panels may be recommended as in the case of Voestalpine, such panels may skew the options of one of the parties and erode principles of fairness and neutrality. What is also still absent, however, is an equitable distribution of participation.

Respondent

Key Provisions Supporting the Protection of Party Autonomy

• Section 11(2): Section 11(2) permits the parties to adopt a procedure for the appointment of the arbitrators which guarantees the parties a chance to choose how the appointing process will be done.

• Section 11(8): As indicated by section 11(8), the Supreme Court or High Court’s intervention arises when parties do not use agreed procedures, so as to force courts to uphold parties’ autonomy where appointments of arbitrators are not made in accordance with sections 11(4) to (6).

Differences Between Appointment and Acting as Arbitrator

Section 12(5) bars persons described in the Seventh Schedule for one to be appointed arbitrators, but the law does not remit those persons from the appointment and curatorship of a panel of arbitrators.

Real and Presumed Ineligibility

While section 12 of the Arbitration Act provides for the disqualification of arbitrators, it is warrants real and identifiable ineligibility w.r.t the arbitrators, so as to lock out only those who have direct conflict of interest.

Affirmative Action Clause: Equal Treatment Under Section 18

Section 18 addresses equality of the parties in an arbitration where full presentation of the case is required. However, equal treatment means that initial appointment procedures are not included in the coverage, but starts after the composition of the tribunal, and aims at fairly treating the disputants during the arbitration process.

Legislative Measures for the Protection of the Structural and Decisional Autonomy

1. Section 12(5): Bar on appointment of any person who is not eligible to be appointed.

2. Mandatory Disclosure: Subsections 12(1) and related schedules require arbitrators to make certain disclosures of circumstances that might reasonably lead to the existence of an imbalance.

3. Challenge Procedures: Section 13 and 14 offer procedure for removing an arbitrator because of bias or conflict of interest.

4. Judicial Review: According to Section 34, a party dissatisfied with the decision given by the arbitrator may challenge the decision in court, where there is any reason for so doing.

Key Case Laws:

• The case of Voestalpine also supported the public sector ethics by permitting former employees be appointed as arbitrators of the panels irrespective of the fact that they had no direct relation to the specific dispute.

• The TRF case was criticized for misapplying the maxim qui facit per alium facit per se because in arbitration appointments, focusing on independent adjudication within established limits.

Application in Non-Banking Financial Companies (NBFCs)

NBFCs usually have clauses in loan contracts providing for independent arbitrator for payment default disputes but the independent arbitrator appointed by the NBFC and the borrower should satisfy all the requirements of section 12.

RATIONALE

Majority Judgement (authored by D.Y. Chandrachud CJI and J.B. Pardiwala and Manoj Misra JJ in support)

Fundamental Concepts of the Arbitration Act

Under the Arbitration Act of 1996, parties can make procedural provisions (s.11(2)), appoint arbitrators, and rules (s.19) in arbitration while limiting autonomy to prohibit bias (s.12(5)), and to provide equal treatment (s.18). It requires appointing of independent arbitrators, expressing doubts (Section 12), and little intervention by the courts (Section 5).

Equality of parties in selection of arbitrators

Section 18 of the Arbitration Act guarantees parities’ equality in arbitration selection, appointment as well as award giving. Nonetheless, exclusive appointments may cause bias in TRF and Perkinson cases the same as in other cases.

Nemo Judex Rule and Doctrine of Bias

Nemo judex in causa sua which means no one should be a judge in his case. Arbitration Act under Sect. 5 following UNCITRAL Model Law, discourages judicial interference in arbitral process; Sect. 18 empowers courts to address ineffective appointment process of arbitrators while Sect.12 deals with voidable arbitration clauses that violates equality; the Act in making arbitration a faster more efficient process than litigation.

Public–Private contracts and Public Policy

The Court highlighted how arbitration might be unfair and how it might have diminishing effects in terms of public confidence whenever the public-private contracts’ arbitration clause is stacked in favour of the party involved.

Minimum Embroilment of the Judiciary

In the case of Arbitration Act, the role of the court is allowed only for the rectification purpose. Chapters such as chapter 11(6) and 34 define the limits within which courts may superintend arbitral tribunals without overstepping their authority. However, the role of judiciary us still vital when the Arbitration was in any procedural bias or prejudice in order to maintain the integrity of the arbitration.

Prospective Overruling

The Court recognized its effects on arbitration agreements and employment of prospective overruling to aver preventive action against completion of distinctive types of arbitrations under former practices, respecting consensual past agreements.

Partial Minority Judgement (Hrishikesh Roy and Parmidighantam S. Narasimha JJ)

The Principles Comprising the Arbitration Act

Justice Roy and Justice Narasimha held that parties can shape arbitration clauses but courts will intervene only when the clauses are unfair or violate statute. Sections like 12(5) and 18 ensure independent arbitrators and they emphasized constitutional provisions like Article 14 should not dominate arbitration agreements.

The Principle of Equality in the Appointment of Arbitrators

The minority agreed with the majority judgement on equality under Section 18, but opposed appointments being automatically set aside if statutory measures succeed. In explaining the use made of panels of decision by public sector bodies, and caution against excessive reliance on the courts, they justified the panel selection.

Principle of minimum judicial interference

Minority, in acknowledgement of the fact that courts have limited function over arbitration (section 5), limited role as to procedural freedom, and the recognition of the parties’ interests, advocates for minimal judicial interference in any way in the arbitration. Any instances of their believing external intrusion to undermine arbitration’s spirit, they argue that such intrusions should be based on internal features of the Act such as challenge provisions sections 12, 13 and 14.

Nemo Judex Rule and Doctrine of Bias

The proponents of the Nemo Judex Rule are the minority which sees rebalancing by way of disclosure requirements and challenge mechanisms, Fifth and Seventh Schedules. On point of unilateral appointments violating Article 14, they reject procedural natural justice and independence. Unilateral appointments in respect of the fairness and independence are implausible prior to the like similar cases such as the TRF and Perkins cases.

DEFECTS of LAW

1. Lack of clarity about the scope of party autonomy

Party autonomy is promoted by the Arbitration Act, 1996 but its limits are not clear, especially with regard to selection of arbitrators. Because of this lack of prohibited, judicial interventions and different interpretations like TRF Ltd. and Perkins.

• Application of equality principle (section 18) with ambiguity

While the law encourages a level and fair arbitral proceeding (section 18), it does not require the law, in any specific manner, to appoint arbitrators.

• Lack of adequate protections for independence and impartiality

Whilst disqualifying individuals with conflicts of interest, the Act does not rule out party representation during the path by which selection is conducted, as such panels could be biased by vested interest or control.

• Inconsistencies in precedents

In TRF Ltd., Perkins, and CORE, judicial interpretations have increased uncertainty around how appointments are made in cases like those, and CORE ruled these panels are fair, but subsequent rulings question how fair they are.

• Deficiency of recognition for public private contractual dynamics.

Despite lacking a truly adequate procedure in the law for addressing arbitration challenges in such public-private contracts when the government frequently exercises considerable arbitrary power, they may exhibit procedural imbalances and lack in faithfulness and in confidence when the government entities substantially dominate the arbitrators’ appointment.

• Over reliance upon judicial intervention

Courts tend to correct procedural flaws with arbitrator appointments, in contravention of the Arbitration Act’s minimal judge interference principle because of the absence of tough statutory standards.

INFERENCE

1. Evolving Perceptions about Appointment of Arbitrator

The case brings out the converse and the more general question whether the Arbitration and Conciliation Act must give priority to party autonomy or need to be subordinate to mandatory provisions under section 12(5) and section 18, especially where a landmark judgement points in a different direction as in TRF Ltd. and Perkins and Voestalpine.

• Opposing Judicial Approaches

Majority judgment states the fairness and equality of an arbitrator appointment and automatic invalidation of unilateral appointment clauses

The minority judgment proposes party autonomy and procedural flexibility with statutory safeguards and no bias. Thus, it emphasizes more on a contextual application of equality w.r.t unilateral appointment clauses.

• Practical Impacts of Public-Private Contracts

The case is a wakeup call on how difficult are public private contracts where government entities tend to dominate the arbitration processes and how they should be reformed to protect private parties from undue influence.

• Lack of Legislative Clarity

Both majority and minority opinions identify legal ambiguities in the law with respect to party autonomy, equality principles, and judicial intervention, which must be corrected legislatively to avoid inconsistent arbitrator appointments.

• Jurisprudence and Future of Arbitration

The difference between the judicial philosophies in India is shown by contrast: the majority pursues fairness as well as public confidence, basing it on stricter standards of impartiality, and the minority prefers minimal judicial interference.

Prospective overruling is the primary tool that the majority judgment employed to avoid the invalidation of ongoing or completed arbitrations, as it seeks to minimize disruption, and to foster a clearer precedent for the future.

REFERENCES

Central organisation for railway electrification vs ECI SPIC SMO MCML (JV) A Joint Venture Company MANU/SC/1190/2024, 2024 INSC 857

Websites:

1. Unilateral appointment of arbitrators case: An issue for public or private law? (2024) Supreme Court Observer. Available at: https://www.scobserver.in/journal/unilateral-appointment-of-arbitrators-case-an-issue-for-public-or-private-law/#:~:text=The%20Court%20concluded%20that%20a,a%20question%20of%20contract%20interpretation. (Accessed: 19 December 2024).

[1] TRF Ltd. v. Energo Engineering Projects Ltd. MANU/SC/0755/2017: 2017 INSC 577: [2017] 7 SCR 409

[2] Perkins Eastman Architects DPC v. HSCC (India) Ltd. MANU/SC/1628/2019: 2019 INSC 1285: [2019] 17 SCR 275

[3] Lombardi Engineering Limited v. Uttarakhand Jal Vidyut Nigam Limited MANU/SC/1210/2023: [2023] 13 SCR 943

[4] Voestalpine Schienen GmbH v. Delhi Metro Rail Corporation Ltd. MANU/SC/0162/2017: [2017] 1 SCR 798

[5] Central Organisation for Railway Electrification v. ECI-SPIC-SMO- MCML (JV) A Joint Venture Company MANU/SC/1758/2019: 2019 INSC 1394: [2019] 16 SCR 1234

[6] Voestalpine Schienen GmbH v. Delhi Metro Rail Corporation Ltd. MANU/SC/0162/2017: [2017] 1 SCR 798

[7] TRF Ltd. v. Energo Engineering Projects Ltd. MANU/SC/0755/2017: 2017 INSC 577: [2017] 7 SCR 409