The Supreme Court recently held that unilateral appointment of arbitrator by one party is unconstitutional, as it may violate the private party’s right to a fair and impartial tribunal.
On November 8, the Supreme Court ruled in the Central Organisation for Railway Electrification vs. M/s ECI-SPIC-SMO-MCML (JV) regarding the unilateral appointment of arbitrators.
A five-judge Bench considered whether an arbitration clause that allows one party to create a panel of arbitrators from which the other party selects complies with the principle of impartiality under the Arbitration and Conciliation Act of 1996 (Arbitration Act). This decision has major consequences for party autonomy and equality in arbitration agreements, which is contingent on fairness and impartiality.
Not just PSUs even private financial institutions have an arbitration clause in the agreements between them and the parties enabling them to appoint an arbitrator of their choice from among the panel maintained by them.
The arbitration Act does not explicitly permit this, but clearly states that the parties should appoint an arbitrator on their own which was being conveniently used by these entities to appoint an arbitrator from among the panel maintained by them without the express consent of the other party.
The process
Arbitration is private a process by which parties settle their disputes through the intervention of an Arbitrator governed by the Arbitration and Conciliation Act of 1996.
Given the huge backlog of cases in courts, the government has pushed for arbitration as a cost-effective dispute resolution mechanism.
The Expert Committee on Arbitration Law, led by TK Vishwanathan, a former law secretary, was established by the government on June 12, 2023, to examine and recommend reforms to the Arbitration & Conciliation Act, 1996. The committee’s report, submitted on February 7, 2024, recommends implementing systems for faster resolution of arbitration matters and amending the Act.
The government is planning to bring in some more amendments to the Arbitration Act to ease the process.
ACI’s authority
The Act and proposed amendments already recommend that arbitration institutions be recognised by the Arbitration Council of India (ACI). However, designation by courts following ACI recognition dilutes ACI’s authority resulting in duplication of work, and invites unnecessary judicial intervention, all of which violate ADR principles. Therefore, this clause needs to be removed from the Act. Every State has a High Court, and each court has its own administrative system, no matter how efficient it is. The institutions must work tirelessly to become recognised and designated by the courts. A single statutory authority, such as the ACI, is adequate to govern the formation and operation of arbitration institutions.
The proposed amendments must clarify the procedure of appointing arbitrators and classify it into three modalities. One is the process of appointing arbitrators by the parties themselves, rather than from a panel maintained by one interested party, followed by the appointment of arbitrators by neutral arbitration organisations, and ultimately by the courts if the other two fail.
Allowing neutral arbitration institutions to appoint arbitrators will help to address the challenges of unilateral arbitrator appointment, reduce the additional burden on courts to appoint arbitrators, and eliminate arbitrators’ bias in awards issued by arbitrators appointed by financial institutions.
The writer is Former International Senior Advisor, UNDP