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The Supreme Court of India has delivered a landmark ruling on the validity of unilateral clauses for arbitrator appointment in public-private contracts. In a judgment delivered on Friday, the court declared such clauses to be in violation of Article 14 of the Indian Constitution, which guarantees the right to equality. The ruling has far-reaching implications for the legal framework governing public-private partnerships in India.
The court's decision stemmed from the case of Central Organisation for Railway Electrification (CORE) vs M/s ECI SPIC SMO MCML (JV). The dispute arose from a work contract between CORE and a joint venture (JV) that contained an arbitration clause allowing CORE to nominate a panel of four individuals for an arbitral tribunal. The JV was then allowed to choose two names from the panel, while the third member was to be appointed by CORE's general manager.
The issue was brought to the attention of the Supreme Court when the JV challenged the panel of arbitrators nominated by CORE, claiming that they comprised retired railway officers who were ineligible to be arbitrators. The Allahabad High Court initially appointed a sole arbitrator, but the Supreme Court's 2019 ruling reversed this decision, allowing for the unilateral nomination of the panel. However, a subsequent three-judge bench of the Supreme Court in 2021 disagreed with this ruling, leading to the formation of a five-judge Constitution Bench to address the issue.
In its latest ruling, the five-judge bench emphasized the principle of equal treatment of parties in arbitration proceedings, arguing that the unilateral appointment of arbitrators by one party violates this principle. The court held that the Arbitration Act does not prohibit public sector undertakings (PSUs) from forming panels of potential arbitrators, but it cannot mandate the other party to choose its arbitrator from such a panel.
The judgment highlights the potential for bias and impartiality when one party has sole control over the selection of arbitrators. The court recognized that a unilateral clause hinders equal participation in the appointment process, leading to justifiable doubts about the independence and impartiality of the chosen arbitrator. This ruling underscores the importance of ensuring fair and balanced procedures in arbitration proceedings.
The Supreme Court's decision will apply prospectively to all future arbitrator appointments in public-private contracts. While this ruling only directly affects arbitration clauses in public-private contracts, it sets a significant precedent for ensuring fairness and equality in all arbitration proceedings. The court's emphasis on the need for equal participation in the selection process is likely to have far-reaching implications for arbitration practices across various sectors in India.
Source: SC holds unilateral arbitrator appointment clauses in public-private contracts invalid