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for Railway Electrification v. ECI-SPIC-SMO-MCML (JV),15 (for short ‘CORE’) have been discussed in detail in the respective judgments of my learned Brothers and therefore, only references to the said decisions to support the present opinion are being made.

35. In Voestalpine (supra), the issue before the bench of two judges was whether the panel of arbitrators prepared by DMRC violated Section 12 of the Arbitration Act. It was held that Section 12(5) read with the Seventh Schedule does not bar retired government employees, from serving as arbitrators. It however held that in the case of a government contract where the authority to appoint arbitrators rests with a government entity, it is imperative to have a ‘broad-based’ panel to secure the principle of impartiality and independence of the Arbitrator. It is relevant to note that the basis on which such a panel was upheld in Voestalpine (supra) was that the persons who have been nominated are subject to the rigours of Section 12.

36. In Perkins (supra), the question before the 3-judge bench was whether the Managing Director of the Respondent, who is ineligible to be appointed as an arbitrator under Section 12(5) read with Seventh Schedule, can nominate the sole arbitrator. Therefore, the Court was only concerned with the authority or power of the Managing Director and cannot be understood to conclude that unilateral appointments are impermissible. The distinction between ‘ineligibility’ and ‘unilateral’ appointments must be borne in mind.

37. Similarly, the question before the Court in TRF (supra) was in the context of the ineligibility of the arbitrator and should not be interpreted as conclusively deciding on the impermissibility of unilateral appointments.

38. In CORE (supra), the three-judge bench endorsed an arbitration clause that provided for current and former employees of one party to be appointed by the other party by asserting that such an appointment was balanced by an equal power of selection granted to the other party. As already noted by Justice Narasimha, the Court relied on Union of India Vs. Parmar Construction Company16 and Union of India vs. Pradeep Vinod Construction Company17but did not consider

15 (2020) 14 SCC 712 16 (2019) 15 SCC 682 17 (2020) 2 SCC 464

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that these cases interpreted clause 34 of the General Conditions of Contract (GCC), prior to the 2015 amendment. The prescription for a broad- based panel as set out in Voestalpine (supra) was also not noted. The issue with the arbitration clause in CORE (supra) is that it exemplifies a situation where there may be an imbalance of bargaining power, particularly in contracts involving public sector undertakings or large private corporations. In such cases, one party may wield disproportionate influence over the selection of the arbitrator, undermining the fairness of the arbitration process. This imbalance of power makes it imperative that the appointment process be scrutinized carefully to uphold the principle of equality, as laid down in Section 18 of the Arbitration Act. Therefore, the Court erred in refusing to exercise its power under Section 11(6) to appoint an arbitrator, in such a case of complete lack of consensus between the parties.

39. Concerns about the presumed bias of an arbitrator nominated by the claimant must also be tested against the objective standard of independence and impartiality, provided under the Seventh Schedule of the Arbitration Act. The appointment of arbitrators must scrupulously be made through the consent of the parties. The recourse to Section 11 must not be readily inferred in view of the remedies contained in Sections 12, 13, 14 and 15 of the Act. In any case, the scrutiny on whether to intervene has to be on a case-to-case basis.

40. Arbitration without party autonomy prevailing, will be like a redressal mechanism, without spirit. Liberty for the parties opting for Arbitration without equality being enshrined from the stage of inception to conclusion would be like a soulless process. The Arbitration Act as discussed earlier provides for adequate guard rails to ensure that the arbitrator(s) to be appointed are capable of independently discharging their responsibilities. The Sixth and Seventh Schedule requires the proposed arbitrator(s) to disclose any circumstances that might reasonably affect their impartiality, including relationship with the parties, the counsel or the subject matter of the dispute. In this scenario, since parties opt for the arbitration route to avoid redressal in Court, minimal judicial intervention should be the norm.

41. In my view, all unilateral appointments must not be declared void by way of a declaration of this Court. The 2015 Amendment in Section 12(5) itself provides for a specific waiver i.e. (a) an express consent in writing and (b)the consent must be obtained after the dispute has

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arisen. Therefore, it is abundantly clear that an agreement between the parties(provided it satisfies the specific waiver requirements under Section 12(5)) can effectively cure any concerns about impartiality or independence in such cases.

42. Adequate safeguards are provided within the Arbitration Act to ensure a level playing field as discussed in the preceding paragraphs and therefore to answer the question in this reference, a search within the provisions of the Arbitration Act should first be made. In my view, the obligations of fair treatment should be grounded in the Arbitration Act rather than in the principles of Constitutional or administrative law. The choice of the parties in the agreement should not be disregarded without compelling reasons, through judicial intervention especially when the Arbitration Act provides clear remedies under Sections 12, 13, 14, and 15 of the Arbitration Act. It is only when there is a complete lack of consensus between the parties that the Court’s interference under Section 11 could be justified.

43. Flowing from the above discussion, the following are the conclusions :- a) Section 18 applies to all stages of arbitration including the stage of appointment of an arbitrator. The Arbitration Act does not provide for any special treatment to the government irrespective of whether the arbitration is by or against the government. b) Unilateral appointment of Arbitrators is permissible as per the legislative scheme of the Arbitration Act. There is a distinction between ‘ineligibility’ and ‘unilateral’ appointment of arbitrators. As long as an arbitrator nominated by a party is eligible under the Seventh Schedule of the Act, the appointment (unilateral or otherwise), should be permissible. It is only in cases of a complete lack of consensus that the court should exercise its power under Section 11(6) of the Arbitration Act to appoint an independent and impartial arbitrator as per Section 11(8) read with Section 12 and 18 of the Arbitration Act. At the appointment stage, the scope of judicial intervention is otherwise extremely narrow. c) The independence and impartiality of the arbitrator must be examined within the statutory framework of the Arbitration Act, particularly Section 18 read with 12(5). Public Law constitutional principles should not be imported to arbitration proceedings particularly at the threshold stage of Section 11.

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Judgment

Pamidighantam Sri Narasimha, J.

Contents*

* Ed. Note: Pagination as per the original Judgment.

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A. Introduction

1. The issue before us is whether the appointment process under an arbitration agreement, which allows a party who has an interest in the dispute to unilaterally appoint a sole arbitrator or curate a panel of arbitrators and mandate that the other party select their arbitrator from the panel, is valid in law. Prior to the 2015 Amendment to Section 12 of the Arbitration and Conciliation Act, 1996,1 courts permitted such unilateral constitution of arbitral tribunals by one party. However, post amendment, judgments oscillated between negative and conditional affirmations. This Constitution Bench is called upon to clarify the correct position, essential for dispelling uncertainty. The argument against such an appointment process is based on Sections 12(5) and 18 of the Act, as well as on public law considerations such as equal treatment of parties under Article 14, unfair and unreasonable procedure, and non-arbitrariness.

2. I have considered it necessary to locate the obligations of the parties to constitute an independent and impartial arbitral tribunal within the Indian Contract Act, 1872,2 and the Arbitration Act, and not to apply public law principles evolved in constitutional and administrative laws. This is to ensure party autonomy, coupled with minimal judicial intervention, a foundational principle of dispute resolution through arbitration. When parties choose arbitration over Court proceedings as an exception under Section 28 of the Contract Act, they are under

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a duty to constitute an independent and impartial tribunal as an effective substitute, failing which the arbitration agreement will be void as opposed to public policy under Section 23 of the Contract Act. This obligation is the Second Principle that governs arbitration. Whether the agreement is compliant with the duty to constitute an independent and impartial tribunal and not opposed to the public policy effecting access to justice is always determined by the Court. This is the third principle. There is a clear statutory incorporation of these three principles in the Contract Act and the Arbitration Act. I believe that enduring answers to the questions before this Constitution Bench will lie in the balance between these principles. 2.1 Enquiry into disputes relating to legality and propriety of a contractual clause enabling unilateral appointment of arbitral tribunal arises when an application under Section 11(6) for appointment or under Section 14 of the Arbitration Act for substitution are brought before the Court. It is at this stage that the Court will examine the arbitration clause to ensure independence and impartiality. It will be impermissible for the court to intervene at a stage prior to that, to declare agreements to be void as an advanced ruling. This is to ensure party autonomy, particularly when the Arbitration Act itself enables parties to waive certain mandatory provisions such as Section 12(5) of the Arbitration Act.

B. Access to Justice

3. Access to justice constitutes the very foundation of democratic governance, serving as the linchpin of a fair and equitable society. Our Constitution, in its wisdom, establishes a comprehensive judicial architecture, encompassing the Supreme Court, the High Courts, and subordinate courts as public law and ordinary civil/criminal remedies to safeguard this inalienable right. Furthermore, specialised tribunals and commissions are constituted to adjudicate specific disputes, leveraging expertise and facilitating expeditious resolution, thereby guaranteeing swift and effective justice to all. It is imperative that these judicial remedies are effective. In fact, effectiveness of judicial remedies is a constitutional mission, and it is always a work in progress for the Supreme Court to ensure that the remedies are impartial, readily accessible, financially viable, swiftly administered, and comprehensively tailored.

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4. Beyond the realm of public law and ordinary civil/criminal remedies, as indicated herein above, parties to a dispute may elect to resolve their differences through mutually agreed procedures, crystallised in the form of contractual agreements. It is permissible in law to have such alternative dispute resolution mechanisms through contract. Section 28 of the Contract Act protects these alternative dispute resolution agreements through arbitration between contesting parties, fostering an environment conducive to expeditious and amicable dispute resolution.

C. Arbitration as Substitute Dispute Resolution

5. The Arbitration and Conciliation Act, 1996 provides a simple, efficient, cost-effective, confidential, and a fair dispute resolution remedy by empowering the parties to choose their arbitrators and also the procedure for conduct of the arbitral proceedings. Recognising party autonomy, Section 53 of the Act restrains judicial authorities from intervening with the arbitral remedy except as provided in the Act. The mandate of Section 5 is reflected in a number of judicial decisions of this Court, enabling easy access to arbitration by merely examining the existence of an arbitration agreement between the parties, and at the same time refraining from interfering with the arbitral award on grounds other than manifest arbitrariness or against public policy.4

6. Two inviolable values of Arbitration, party autonomy and an independent and impartial Arbitral Tribunal: Two important values are inviolable for arbitration to be a viable, effective, and at the same time, credible alternative dispute resolution remedy; they co-exist in the duality of freedom and duty. They are the freedom to contract, constitute, and channel arbitration proceedings, i.e., party autonomy on the one hand, and the duty towards constituting an independent and impartial arbitral tribunal on the other. These values are independent, yet interdependent for a credible and effective dispute resolution.5

3 Section 5 of the Act reads: “5. Extent of judicial intervention: Notwithstanding anything contained in any other law for the time being in force, in matters governed by this Part, no judicial authority shall intervene except where so provided in this Part.” 4 Vidya Drolia v. Durga Trading Corporation (2021) 2 SCC 1; M/s Arif Azim Co. Ltd. v. M/s Aptech Ltd. (2024) 5 SCC 313; SBI General Insurance Co Ltd v. Krish Spinning, 2024 SCC OnLine SC 1754 on minimal judicial intervention. 5 These are also recognised as fundamental principles of arbitration law. See Centrotrade Minerals & Metals Inc v. Hindustan Copper Ltd. (2006) 11 SCC 245; Union of India v. Uttar Pradesh Bridge Corporation Limited (2015) 2 SCC 52.

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7. With this introduction, I will now examine the following issues in detail; (i) Party autonomy, as recognised and incorporated in the scheme of the Act; (ii) Constituting an independent and impartial arbitral tribunal, which obligation of parties is distinct from the duty of the arbitrator to be unbiased and neutral; (iii) The obligation of the parties is founded on contract and public policy considerations, without which agreements are void and unenforceable in law; (iv) Apart from the obligations on the parties, the Contract Act and Arbitration Act empower the courts to ensure constitution of an independent and impartial arbitral tribunal; (v) The determination as to whether an arbitral tribunal is independent and objective is examined by the court only when it takes up an application under Section 11(6) or Section 14 of the Arbitration Act.

D. Party autonomy

8. Arbitration is an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them, as provided under Section 7(1) of the Act. Party autonomy is a product of freedom to contract and recognises the freedom of parties to determine the terms of contract. It is said to be the “brooding and guiding spirit in arbitration” and the “grund norm” of arbitration.6 Party autonomy is ingrained as a fundamental principle in the Act. The freedom to enter into such an agreement belongs to the parties7 and this will also include the freedom to determine the law governing the arbitration agreement.8 8.1 Second, parties are free to determine composition of the arbitral tribunal, such as the number of arbitrators,9 the nationality of

6 Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc. (2016) 4 SCC 126. 7 Cox and Kings v. SAP India Pvt Ltd (2024) 4 SCC 1, para 180. 8 Bharat Aluminium Co. (supra). 9 Section 10 of the Act, provided that it is not even number.

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the arbitrator,10 the procedure for appointment,11 the grounds of challenge, including waiver of challenge,12 the procedure for challenging an appointed arbitrator,13 terminate the mandate of an arbitrator,14 and even the consequences of substitution of arbitrator.15 8.2 Third, the parties have the autonomy to determine the conduct of arbitral proceedings, the procedure to be followed by the arbitral tribunal in the conduct of proceedings,16 the place of arbitration,17 the date of commencement of arbitral proceedings, 18 the language to be used in the arbitral proceedings,19 the time for submitting statements of claim and defence,20 including amendments,21 whether the arbitral tribunal will conduct oral hearings or proceed on the basis of documents and other material,22 in cases of default by a party to communicate statement of claim or defence, or failure to appear at an oral hearing or produce documentary evidence,23 and regarding the appointment of experts by the arbitral tribunal.24 8.3 Fourth, the parties to the arbitration agreement have the freedom to determine the procedure as well as the termination of arbitral proceedings. This will include the determination of the rules applicable for the resolution of the dispute,25 whether the decision will be made by a majority of the members in an

10 Section 11(1). 11 Section 11 (2), subject to Section 11(6). 12 Section 12, including 12(5) proviso. 13 Section 13(1), subject to Section 13(4) 14 Section 15(1)(b). 15 Section 15(3) and 15(4). 16 Section 19(2). 17 Section 20(1). 18 Section 21. 19 Section 22(1). 20 Section 23(1). 21 Section 23(3). 22 Section 24(1). 23 Section 25. 24 Section 26. 25 Section 28.

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arbitral tribunal with more than one arbitrator,26 extension of time limit for the completion of proceedings,27 fast track procedures,28 grant of pendente lite and pre-reference interest,29 and whether the arbitral tribunal can make an additional arbitral award as to claims presented in the arbitral proceedings but omitted from the award.30 8.4 Fifth, the parties can challenge and/or apply for the enforcement of the award. Chapter VII and Chapter VIII set out the recourse available to parties after the arbitral award, for it to be set aside by the courts,31 the finality and enforceability of the award,32 appeals,33 and miscellaneous provisions.34

E. Obligations of parties to the Arbitration Agreement to constitute an independent and an impartial Arbitral Tribunal

9. I will now examine the principles that impinge upon the freedom to contract and limit of party autonomy. Before that, a necessary distinction needs to be drawn for clarity and certainty. 9.1 Distinct duties of Arbitrators and Arbitrating Parties. There are two distinct obligations. The first is the obligation of the parties to the agreement, and the second is the neutrality and objectivity that an arbitrator must maintain. The obligations on the parties to the arbitration agreement to constitute an independent and impartial arbitral tribunal is distinct from the objectivity and impartiality that an arbitrator(s) must himself maintain. The foundation of the former is within the statutory framework, coupled with certain public policy considerations. The latter is simply the duty to act judicially, it is not superimposed by any statute or public policy, but arises because of the very nature of the calling, i.e., to judge what is right and what is wrong.

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Though the constitution of the arbitral tribunal is inextricably connected to the agreement between the parties, core duties of the arbitrator(s) in deciding the case is independent of the contract. The Arbitration Act provisions grounds to challenge appointment of an arbitrator at various stages, including after making of the award. The issue with which we are concerned is not about the arbitrator or the award of the arbitral tribunal, but about the legality of the contractual arbitration clause that enables one of the parties to unilaterally constitute the arbitral tribunal. Clarity about the issue arising for consideration is necessary to focus on the right questions that we must ask.

10. Therefore, to understand the question relating to the legality of the contractual clause, we must get to the first principles that govern arbitration agreements, which in turn takes us to the first principles of law of contract.

11. Freedom of Contract and its limitations under Contract Act. The foundation of the law of contract is in the freedom to contract and its enforceability in law. Sections 2(a), (b), and (d), of the Contract Act define ‘proposal’, ‘promise’ and ‘consideration’, and reflect the autonomy of the parties declaring the terms and conditions and reciprocal promises. Section 2(e) provides that “Every promise and every set of promises, forming the consideration for each other, is an agreement”. Agreements are contracts if they are made by the free consent of parties,35 and free consent36 exists when it is not caused by coercion,37 undue influence,38 fraud39 and misrepresentation.40 Furthermore, agreements attain the status of contracts only if they are made for lawful consideration and with a lawful object.41 The consideration or object of an agreement is lawful only when it is not opposed to public policy. It is here that the duty and obligation of the Court arises as it is the exclusive province of the Court to decide if an agreement is in consonance with public policy or not.

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This position is clear from the text of Sections 10 and 23 of the Contract Act, which are extracted hereinbelow for ready reference; “10. What agreements are contracts.—All agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void. Nothing herein contained shall affect any law in force in India and not hereby expressly repealed by which any contract is required to be made in writing or in the presence of witnesses, or any law relating to the registration of documents.” “23. What considerations and objects are lawful, and what not.—The consideration or object of an agreement is lawful, unless— it is forbidden by law; or is of such a nature that if permitted, it would defeat the provisions of any law; or is fraudulent; or involves or implies injury to the person or property of another; or the Court regards it as immoral, or opposed to public policy. In each of these cases, the consideration or object of an agreement is said to be unlawful. Every agreement of which the object or consideration is unlawful is void.”

12. Public Policy Consideration to Constitute an Independent Tribunal. Under the Contract Act, public policy considerations limit contractual freedom to the extent of declaring an agreement void when the court regards it as opposed to public policy.42 The power of determining the meaning and scope of public policy is of the court.43

13. The public policy principle has been interpreted to mean that parties to a contract cannot agree to terms or to an object which have the

42 Section 23 of the Contract Act. 43 Indian Financial Association of Seventh Day Adventists v. M.A. Unneerikutty (2006) 6 SCC 351, para 17.

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tendency to harm the public good and public interest.44 The freedom of contract is restricted by taking into account the protection and promotion of public welfare, and the larger interest of the community, which must be beyond the parties contracting freedom.45 Courts in India have relied on and applied the public policy principle in the following broad categories of cases: i) where the object is injurious to good government in domestic and foreign affairs; ii) whose object interferes with the proper administration of justice; iii) whose object is injurious to marriage and which promotes sexual immorality; and iv) agreements in restraint of trade.46

14. The limits of public policy considerations for commercial transactions and inapplicability of unconscionability. One of the most significant instances wherein our courts have travelled beyond the above categories of public policy restrictions on contractual freedom is in the case of Central Inland Water Transport v. Brojo Nath Ganguly47 where Court expounded on ‘unconscionability’ as a facet of public policy. This ground is particularly relevant for our analysis as Mr. Banerji has pointed out several US cases wherein arbitration agreements that allow one party to control the pool of potential arbitrators were held to be unconscionable. Therefore, it is necessary to set out the contours of unconscionability under Indian contract law.

15. Through the doctrine of unconscionability, this Court in Brojo Nath Ganguly (supra) introduced inequality of bargaining power as a ground to refuse enforcement of unreasonable and unfair contracts that shock the conscience of the court. It has envisaged for this principle to apply in cases where the weaker party does not exercise meaningful choice and must agree to a standard form of contract.48 However, the Court has also circumscribed the applicability of unconscionability and held that it will not apply when parties have equal or almost equal bargaining power, such as in commercial transactions and contracts

44 Gherulal Parekh v. Mahadeodas Maiya (1959) Supp 2 SCR 406, para 23; Central Inland Water Transport Corpn Ltd v. Brojo Nath Ganguly (1986) 3 SCC 156, para 92; Rattan Chand Hira Chand v. Askar Nawaz Jung (1991) 3 SCC 67, para 17; Indian Financial Association of Seventh Day Adventists (supra), para 19; Assistant General Manager v. Radhey Shyam Pandey (2020) 6 SCCC 438, para 72. 45 Pollock and Mulla, The Indian Contract and Specific Relief Acts, vol 1 (14th edn, Lexis Nexis 2013), 524. 46 ibid, 524-566; P. Rathinam v. Union of India (1994) 3 SCC 394, para 93. 47 (1986) 3 SCC 156 48 Brojo Nath Ganguly (supra), paras 89, 92-93.

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between businessmen.49 The inapplicability of ‘unconscionability’ to commercial contracts has been reiterated by this Court in the context of arbitration agreements.50 In view of the settled position, I cannot accept the submissions of Mr. Banerji on this issue.

16. Section 28 of the Contract Act and Access to Justice. Access to justice is a constitutional principle. It provides remedies for redressal of grievances arising out of violation of rights and dereliction of duties. The remedies through ordinary civil courts and tribunals comprise credibility, efficiency, objectivity, expeditious disposal, comprehensiveness as well as financial viability. Prohibiting restraint from accessing these remedies is a public policy.

17. Section 28 of the Contract Act secures access to justice by declaring that agreements in restraint of public law remedies are void. Section 28 is extracted hereinbelow for ready reference; “28. Agreements in restraint of legal proceedings, void.— Every agreement,— (a) by which any party thereto is restricted absolutely from enforcing his rights under or in respect of any contract, by the usual legal proceedings in the ordinary tribunals, or which limits the time within which he may thus enforce his rights; or (b) which extinguishes the rights of any party thereto, or discharges any party thereto, from any liability, under or in respect of any contract on the expiry of a specified period so as to restrict any party from enforcing his rights, is void to the extent. Exception 1.—Saving of contract to refer to arbitration dispute that may arise.—This section shall not render illegal a contract, by which two or more persons agree that any dispute which may arise between them in respect of any subject or class of subjects shall be referred to arbitration, and that only the amount awarded in such arbitration shall be recoverable in respect of the dispute so referred.

49 ibid, para 89. 50 S.K. Jain v. State of Haryana (2009) 4 SCC 357, para 8; ICOMM Tele Limited v. Punjab State Water Supply and Sewerage Board (2019) 4 SCC 401, paras 13-14.

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Exception 2.—Saving of contract to refer questions that have already arisen.—Nor shall this section render illegal any contract in writing, by which two or more persons agree to refer to arbitration any question between them which has already arisen, or affect any provision of any law in force for the time being as to references to arbitration.” Limitations on agreements which restrain access is necessary to secure the constitutional mandate of justice to all by providing access to public law and ordinary civil/criminal remedies from being void. Exceptions 1 and 2 to Section 28 are arbitration agreements and enable substituted dispute resolution, fostering an environment conducive to expeditious and amicable resolution.

18. Access to justice, as provided through ordinary courts and tribunals, can be substituted through other systems and forums. As the substitution is only a replacement of the forum, the essentiality of remedy such as credibility, efficiency, etc. must continue to inhere in the substituted forum as well. In public law remedies, this issue was considered when administrative tribunals were constituted for the first time to substitute ordinary remedies. It was upheld subject to the condition that the tribunals are worthy successors, meaning that they must have the necessary credibility, efficiency and other features that are integral to judicial remedy.

19. Similarly, arbitration being a substituted remedy contracted by the parties, it must also comprise the basic features of a judicious remedy, the most important being an independent and impartial decision-making forum.

20. The question whether the substituted forum continues to inhere the essentiality of a remedy, in order to be compliant with the larger principle of access to justice, is for the court to examine. The Arbitration Act incorporates this principle of public policy in Sections 11, 12 as well as Section 34. It is in this context that I will now proceed to examine Section 12 of the Act.

F. Section 12, subsequent to 2015 Amendment

21. After the amendment, Section 12 of the Act reads: “12. Grounds for challenge.—(1) When a person is approached in connection with his possible appointment

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as an arbitrator, he shall disclose in writing any circumstances,— (a) such as the existence either direct or indirect, of any past or present relationship with or interest in any of the parties or in relation to the subject-matter in dispute, whether financial, business, professional or other kind, which is likely to give rise to justifiable doubts as to his independence or impartiality; and (b) which are likely to affect his ability to devote sufficient time to the arbitration and in particular his ability to complete the entire arbitration within a period of twelve months. Explanation1.—The grounds stated in the Fifth Schedule shall guide in determining whether circumstances exist which give rise to justifiable doubts as to the independence or impartiality of an arbitrator. Explanation 2.—The disclosure shall be made by such person in the form specified in the Sixth Schedule. (2) An arbitrator, from the time of his appointment and throughout the arbitral proceedings, shall, without delay, disclose to the parties in writing any circumstances referred to in sub-section (1) unless they have already been informed of them by him. (3) An arbitrator may be challenged only if— (a) circumstances exist that give rise to justifiable doubts as to his independence or impartiality, or (b) he does not possess the qualifications agreed to by the parties. (4) A party may challenge an arbitrator appointed by him, or in whose appointment he has participated, only for reasons of which he becomes aware after the appointment has been made. (5) Notwithstanding any prior agreement to the contrary, any person whose relationship, with the parties or counsel or the subject-matter of the dispute, falls under any of the categories specified in the Seventh Schedule shall be ineligible to be appointed as an arbitrator:

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Provided that parties may, subsequent to disputes having arisen between them, waive the applicability of this sub- section by an express agreement in writing.”

22. Two categories of challenge under Section 12. The effect of the 2015 Amendment is that there are now two separate categories for the parties to challenge the appointment of an arbitrator. First, a challenge under Section 12(3) to an appointed arbitrator based on justifiable doubts regarding his independence and impartiality, by using the procedure under Section 13. While Section 12(3) itself remains unamended, the insertion of Explanation 1 in Section 12(1), read with the Fifth Schedule, now enlists the circumstances that give rise to justifiable doubts as to an arbitrator’s independence and impartiality. The Fifth Schedule contains 34 entries that have been adopted from the Red and Orange Lists of the IBA Guidelines. A written disclosure on these grounds must be made in the form provided in the Sixth Schedule.51 22.1 The second category is under Section 12(5) which declares certain persons to be ‘ineligible’ to be appointed as arbitrators. These ineligibilities are enlisted in the Seventh Schedule. The provision itself stipulates that such ineligibility is notwithstanding any prior agreement to the contrary. In these situations, the ineligibility of the person to act as an arbitrator is a matter of law and goes to the root of their appointment.52 As they are de jure unable to perform their function, their mandate automatically terminates under Section 14(1)(a), and the appointment need not be challenged before the arbitral tribunal under Section 13. The parties can apply to the court under Section 14(2) for a decision on the termination of the arbitrator’s mandate and appointment of a substituted arbitrator.53 The only way for parties to by-pass such ineligibility, as provided in the proviso, is to enter into an express agreement in writing, subsequent to the disputes having arisen, to waive the applicability of Section 12(5).54

51 HRD Corporation (Marcus Oil and Chemical Division) v. GAIL (India) Ltd. (2018) 12 SCC 471, paras 11- 12; Chennai Metro Rail Ltd v. Transtonnelstroy Afcons (JV) (2024) 6 SCC 211, para 25. 52 Bharat Broadband Network Limited v. United Telecoms Limited (2019) 5 SCC 755. 53 ibid, paras 15-17; HRD Corporation (supra), paras 11-12; Chennai Metro Rail (supra), para 26. 54 ibid.

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23. The difference between these categories is important to bear in mind. In the former situation, there is no bar to the appointment itself, but the appointment may later be challenged before the arbitral tribunal. On the other hand, in the latter situation, the Act places an express bar on the appointment of certain ‘ineligible’ persons as arbitrators, notwithstanding any prior agreement to the contrary. Their appointment is invalid from the very beginning, and in the application before the court under Section 14, the only question is whether the arbitrator falls under one of the categories of the Seventh Schedule and whether there is an agreement waiving the applicability of Section 12(5) in accordance with the proviso.55

24. At this stage, it may be relevant to note that the entries of the Seventh Schedule are common with the first 19 entries of the Fifth Schedule. This Court in HRD v. GAIL (supra) has noted that the purpose of such overlapping entries is to ensure that the disclosure under the Sixth Schedule encompasses disclosure on entries contained in the Seventh Schedule. Otherwise, the parties will be put at a disadvantageous position as they will not have access to such information.56 Since this is the purpose of identical entries, it follows that if any of the entries in the Seventh Schedule applies, then the consequence under Section 12(5), rather than Section 12(1) read with Section 12(3), will ensue.

25. Public policy consideration in Section 12(5). The neutrality, independence, impartiality, integrity, and objectivity of an arbitral tribunal are matters of public policy, and the validity of arbitration agreements must be tested against this touchstone. The object and purpose of Section 12(5) is to secure the independence and impartiality of the arbitral tribunal by placing a restriction on the choice of the parties in appointing certain persons as arbitrators, who are declared as “ineligible” under the Seventh Schedule. Section 12 is therefore a statutory incorporation of the public policy principle of access to justice that I have delineated hereinabove, and the Fifth and Seventh Schedules enlist the situations when the appointment of certain persons could and would conflict with the independence of the tribunal. The courts can examine whether an appointment

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procedure accords or violates this provision. Therefore, the court will be guided by Section 12 of the Act, read with the Fifth and Seventh Schedules, to determine whether arbitration agreements providing for unilateral appointments and panel appointments are opposed to the public policy duty on the parties to appoint an independent tribunal.

26. The next important question is the stage at which the court will exercise its power and jurisdiction to examine whether the arbitration agreement is in consonance with Section 12 and the broad public policy principle of constitution of an independent and impartial tribunal. I will now consider this question.

G. Power of the Court to Constitute an Independent Tribunal and the stage at which the power is exercised

27. Power of the Court to ensure that the agreement is not only independent and impartial but also seems independent and impartial. 27.1 When a party to the arbitration agreement alleges that the core principle of the remedy is compromised in the procedure prescribed under the agreement by filing an application under Section 11(6), it is at this stage that the court will examine it. The provisions of Section 12, coupled with the Fifth and Seventh Schedules, will come to the aid of the court in coming to the conclusion on whether the arbitral tribunal maintains the sanctity of a credible remedy.

28. Section 11(8): Section 11(8) of the Arbitration Act recognises the power of the court to appoint an arbitrator de hors the arbitration agreement to secure the independence and impartiality of the arbitral tribunal, and consequently to ensure that public policy is protected. Sections 11(6) and 11(8) reads: “11. Appointment of arbitrators – … (6) Where, under an appointment procedure agreed upon by the parties,— (a) a party fails to act as required under that procedure; or (b) the parties, or the two appointed arbitrators, fail to reach an agreement expected of them under that procedure; or

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(c) a person, including an institution, fails to perform any function entrusted to him or it under that procedure, a party may request the Supreme Court or, as the case may be, the High Court or any person or institution designated by such Court to take the necessary measure, unless the agreement on the appointment procedure provides other means for securing the appointment. *** (8) The Supreme Court or, as the case may be, the High Court or the person or institution designated by such Court, before appointing an arbitrator, shall seek a disclosure in writing from the prospective arbitrator in terms of sub- section (1) of section 12, and have due regard to— (a) any qualifications required for the arbitrator by the agreement of the parties; and (b) the contents of the disclosure and other considerations as are likely to secure the appointment of an independent and impartial arbitrator.”

29. Section 11(8) comes into play when the court is required to secure the appointment of the arbitrator on an application by the parties under sub-sections (4), (5), or (6). We are concerned with sub- section (6) here, as it applies when the parties have determined an appointment procedure but it fails due to the failure of one of the parties, the appointed arbitrators, or the entrusted arbitral institution. In such cases, the court will appoint the arbitrator upon an application from the parties, and while doing so, it shall have due regard to the qualifications required of the arbitrator by the agreement and other consideration as are likely to secure the appointment of an independent and impartial arbitrator, as provided under sub- section (8).

30. While the general rule is that the court may adhere to the appointment procedure in the agreement in view of party autonomy, it is not bound by this procedure.57 Rather, Section 11(8) allows the Court to weigh

57 Indian Oil Corporation v. Raja Transport Pvt Ltd (2009) 8 SCC 520, para 45; North Eastern Railway v. Tripple Engineering Works (2014) 9 SCC 288, paras 5-8.

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other considerations regarding the qualifications of the arbitrator under the agreement, or to secure the independence and impartiality of the arbitrator, and in that light, appoint a person as an arbitrator by deviating from the procedure in the agreement.58 When “there is material to create a reasonable apprehension that the person mentioned in the arbitration agreement as the arbitrator is not likely to act independently or impartially… then the Chief Justice or his designate may, after recording reasons for not following the agreed procedure for referring the dispute to the named arbitrator, appoint an independent arbitrator in accordance with Section 11(8) of the Act.”59

31. In such an exceptional situation, the court can deviate from the appointment procedure provided in the agreement on the basis of material that indicates that the named arbitrator is not likely to act independently or impartially. It must also record the reasons for the same.60 The following principles laid down in Indian Oil Corporation (supra) summarise the position: “48. In the light of the above discussion, the scope of Section 11 of the Act containing the scheme of appointment of arbitrators may be summarised thus: … (vi) The Chief Justice or his designate while exercising power under sub-section (6) of Section 11 shall endeavour to give effect to the appointment procedure prescribed in the arbitration clause. (vii) If circumstances exist, giving rise to justifiable doubts as to the independence and impartiality of the person nominated, or if other circumstances warrant appointment of an independent arbitrator by ignoring the procedure

58 Northern Railway Administration, Ministry of Railway, New Delhi v. Patel Engineering Company (2008) 10 SCC 240, paras 12-14; North Eastern Railway (supra), paras 5-8. 59 Indian Oil Corporation (supra), para 45. Also see Ace Pipeline Contracts (P) Ltd. v. Bharat Petroleum Corpn. Ltd. (2007) 5 SCC 304, para 20; Uttar Pradesh State Bridge Corporation (supra), para 16. 60 See Denel (Proprietary) Limited v. Bharat Electronics Limited (2010) 6 SCC 394; Bipromasz Bipron Trading SA v. Bharat Electronics Ltd. (2012) 6 SCC 384; Denel (Proprietary) Limited v. Ministry of Defence (2012) 2 SCC 759 as examples of cases where the named arbitrator was not appointed on the basis of material that raised justifiable doubts regarding his independence and impartiality. Also see Rajasthan Small Industries Corporation Limited (supra), para 22 as an example for a case where the Court upheld the appointment of the named arbitrator as there was no material to show that a party has reason to believe that the arbitrator had not acted independently or impartially.

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prescribed, the Chief Justice or his designate may, for reasons to be recorded ignore the designated arbitrator and appoint someone else.”

32. Therefore, the power of the court to ensure the appointment of a neutral tribunal is not restricted to Section 12(5). Rather, Section 12(5) guides the court when it examines whether an arbitration agreement violates public policy of constituting an independent and impartial tribunal. In such cases, the court will not adhere to the procedure to the agreement, as the same becomes unenforceable, and will proceed to appoint an independent arbitrator. Further, Section 11(8) reifies and concretises the power of the court as it enables the court to undertake an examination on a case-to-case basis, based on the material and the evidence in each case, whether the independence or impartiality of the arbitrator is compromised.

33. What must be noted is that the court exercises the discretion under Section 11(8) while adjudicating on the facts in each case. However, the provision does not, in any manner, impose a blanket prohibition that is justifiable on a public policy consideration against unilateral appointments or appointments from a panel maintained by one party. All it does is that it leaves it open for the parties to the agreement to apply to the court if there are concerns regarding the neutrality or objectivity of arbitrators appointed through the agreed upon procedure. The court will then examine the facts, circumstances, material, and evidence in every application before it, to determine whether a case is made out to appoint an arbitrator de hors the agreement, but such ruling will be specific to that case rather than a declaration prohibiting such agreements altogether.

34. Assertions that a person’s freedom to contract is grounded only in common law and statute, are ostensible at best. The freedom of speech and expression engrafted in Article 19(1)(a) of the Constitution and significantly, the freedom to carry on occupation, trade and business Article 19(1)(g) read with the constitutional right to property under Article 300A, do provide a substantial foundation for a constitutional basis for the ‘freedom to contract’. The statutory framework governing contract laws, statutory restrictions on what contracts are lawful, what contracts are void and what considerations are lawful do have significant constitutional moorings. Sections 23 to 30 of the Contract Act reflect constitutional colours, when they

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declare that agreements in restraint of trade, agreements in restraint of legal proceedings, agreements restraining marriage etc are void. Similarly, this Court has employed constitutional tools from Part III and Part IV of the Constitution to breathe fresh life into the term “public policy” in the context of Section 23 of the Contract Act.61

35. This constitutional re-conceptualisation of contract law is not without relevance in the case. The freedom to contract out of traditional court based remedies and to opt for arbitral remedies is informed and regulated by constitutional considerations. To this end, what subject matters are arbitrable and how remedies are to be designed within the universe of arbitration, are informed not only by considerations of freedom to contract, but also a larger constitutional responsibility to provide access to justice. ‘Party autonomy’ encapsulated within a larger freedom to contract must tempered with a person’s right to access justice and corresponding duty on the State to provide access to justice.

36. Access to justice in this context is not a mere avenue for dispute redressal. It means access to timely, efficacious, and equitable system for dispute resolution. Arbitration though is often referred to as an alternative form of dispute resolution, it has, in practice evolved into a substituted form of dispute resolution. Therefore, arbitral remedies too must withstand constitutional scrutiny and provide access to arbitral tribunals that are not just independent and impartial, but also seem independent and impartial. In this scheme, it matters not whether the tribunal and its composition is decided by the State, PSUs, other State actors, or private entities. The underlying principle is that when party autonomy is exercised to appoint members to the arbitral tribunal, members who are so appointed are not just independent, but must also seem to be independent.

37. This constitutional concern for access to justice which is not only in fact unbiased and fair, but also seems and appears unbiased and fair, is far more relevant to people who do not at present find place in the arbitration universe that is predominantly populated by big businesses, the mega-affluent contractors, and the millionaires. Access to justice, and by implication effective arbitral remedies are

61 Brojo Nath Ganguly (supra); Delhi Transport Corporation v. DTC Mazdoor Congress (1991) Supp (1) SCC 600.

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equally relevant for “the common man, for the poor and the humble, for those who have businesses at stake, for the “butcher, the baker and the candlestick maker’”.62

H. Precedents of this Court on Section 12(5) after its amendment

38. The substantial argument before us is that a unilateral or panel- based appointment process is invalid under Section 12(5) read with the Seventh Schedule. I will now deal with the case-law on Section 12(5), to examine how this Court has interpreted this provision and the public policy consideration to declare certain kinds of arbitration agreements as being violative of Section 12(5). For the sake of brevity and focus, the principles and main holding of each judgment may be stated as follows: I. First, it is important to note that Section 12(5) of the Act is a mandatory and non-derogable provision, which overrides the arbitration agreement between the parties that prescribes a person who is ineligible to act as an arbitrator. However, the proviso enables parties to waive its applicability through an express agreement in writing between them, subsequent to the dispute.63 II. In Voestalpine,64 a division bench of this Court upheld the validity of an arbitration agreement that mandates appointment of arbitrators from a panel maintained by the Delhi Metro Rail Corporation (DMRC). The Court held that a panel comprising serving or retired engineers of government departments or PSUs does not fall foul of the Fifth or Seventh Schedule as they do not have any connection with DMRC and bias or real likelihood of bias cannot be attributed to such highly qualified and experienced persons.65 Rather, the purpose of empanelling them is due to their technical expertise.66 Nevertheless, the Court held that to inspire confidence in the panel, DMRC must

62 Bidi Supply Co v. Union of India, 1956 SCR 267. 63 Haryana Space Application Centre v. Pan India Consultants Private Limited (2021) 3 SCC 103, para 18. 64 Voestalpine Schienen GMBH v. Delhi Metro Rail Corporation (2017) 4 SCC 665. 65 ibid, paras 24 and 25. 66 ibid, para 26.

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not further limit Voestalpine’s choice from the panel to a list of 5 persons prepared by it. Voestalpine and the two appointed arbitrators must have full freedom to make their choice from the entire panel.67 Further, the Court also observed that the panel must be broad-based and comprise members of other professions and expertise such as engineers from the private sector, judges, lawyers, accountants, etc.68 III. In TRF Limited,69 a three-judge bench of this Court considered the validity of an arbitration clause which provided that the Managing Director of the respondent would act as the arbitrator or nominate the sole arbitrator. The issue before the Court was whether the Managing Director, who is ineligible to act as an arbitrator under Section 12(5) read with the Seventh Schedule, can nominate the sole arbitrator.70 The Court answered this question in the negative by relying on various judgments on delegation of authority and the maxim “qui facit per alium facit per se” (what one does through another is done by oneself).71 Thus, the Court extended the ineligibility to act as an arbitrator under Section 12(5) to also include the ineligibility to appoint the sole arbitrator. However, while doing so, it did not test whether the nominee arbitrator is himself ineligible under Section 12(5), nor did it source its decision in any other provision of the statute that restricts the authority of a person who is ineligible to be an arbitrator to appoint the arbitrator. Further, no reasonable apprehension or justifiable doubt was raised regarding the nominated arbitrator’s independence and impartiality to warrant an appointment by the court de hors the arbitration agreement under Section 11(8) of the Act. IV. Subsequently, in Perkins,72 the Court interpreted and relied on the ruling in TRF (supra) while considering an arbitration agreement where the Chairman and Managing Director (CMD) of the respondent could appoint the sole arbitrator. It held that

67 ibid, paras 27 and 28. 68 ibid, paras 29 and 30. 69 TRF Limited v. Energo Engineering Projects Limited (2017) 8 SCC 377. 70 ibid, paras 50, 53. 71 ibid, paras 50-54. 72 Perkins Eastman Architects DPC v. HSCC (India) Limited (2020) 20 SCC 760.

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even if the arbitration agreement does not provide for the CMD to act as an arbitrator, as was the case in TRF (supra), he remains incompetent to nominate the arbitrator, which stems from his interest in the outcome of dispute, thereby creating a possibility of bias.73 The Court held that the ineligibility to appoint is a result of operation of law, as a person who is ineligible to act as an arbitrator must not have an exclusive role in charting the course of dispute resolution by appointing the arbitrator.74 However, in cases where both parties can nominate an arbitrator of their choice, the advantage to any one party would get counter-balanced.75 The problems in the reasoning in TRF (supra), i.e., the absence of a statutory source for ineligibility to appoint, and justifiable doubts regarding the nominated arbitrator’s independence and impartiality to warrant a court appointment de hors the agreement, are not addressed even in Perkins (supra). V. A three-judge bench in CORE76 interpreted the arbitration clause 64(3)(b) of the GCC in railway contracts, which provides for appointment of a three-member arbitral tribunal from a panel of retired officers maintained by the Railways. The General Manager, Railways would send a list of at least four names, from which the other party must suggest at least two names as its nominee. The General Manager would then appoint one of these two persons as the contractor’s nominee, and appoint the balance arbitrators, including the presiding arbitrator, from within or outside the panel. The Court held that appointment of arbitrators must be as per the arbitration agreement,77 and that appointment from a panel of retired officers is not prohibited under Section 12(5) of the Act.78 It held that the rulings in TRF (supra) and Perkins (supra) will not apply to the present case

73 ibid, para 20. 74 ibid, para 21. 75 ibid. 76 Central Organisation for Railway Electrification v. ECI-SPIC-SMO-MCML (JV) (2020) 14 SCC 712. Hereinafter referred to as “CORE”. 77 ibid, para 22. The Court relied on Union of India v. Parmar Construction Company (2019) 15 SCC 682 and Union of India v. Pradeep Vinod Construction Co (2020) 2 SCC 464. 78 ibid, para 26. The Court relied on Voestalpine (supra) and Govt. of Haryana PWD Haryana (B and R) Branch v. G.F. Toll Road (P) Ltd (2019) 3 SCC 505.

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as the advantage accruing to the Railways through appointing their arbitrator is counter-balanced by the contractor’s right to choose two names from the list, out of which the General Manager will appoint at least one of them as the contractor’s nominee.79 There are three noteworthy aspects of this reasoning: first, that the Court relies on Parmar Construction (supra) and Pradeep Vinod Construction (supra) while ruling on adherence to the appointment procedure in the agreement, but does not consider that these cases interpreted Clause 64 of the GCC prior to the amendment in law and the arbitration clause pursuant to the 2015 Amendment. Second, the Court does not deal with the prescriptions for a panel-based appointment that were set out in Voestalpine (supra) – that the other party must have freedom to make its choice from the complete panel rather than a limited list, and that the panel must be broad-based. The panel in CORE (supra) does not meet these criteria, but has been upheld by the Court. Further, CORE (supra) does not overrule or doubt TRF (supra) and Perkins (supra), but only differentiates its facts and in fact, relies on the counter-balancing exception set out in these judgments. VI. In Glock Asia-Pacific Limited v. Union of India,80 the Court appointed an independent arbitrator under Section 11 as the arbitration agreement provided for a person ineligible under Section 12(5) read with clause 1 of the Seventh Schedule to act as the arbitrator. Subsequently, in Lombardi Engineering Limited v. Uttarakhand Jal Vidyut Nigam Limited,81 the Court cited and followed Perkins (supra) to appoint an independent arbitrator, as the arbitration agreement therein was similar to that in Perkins (supra).

39. This Court has also interpreted entries of the Fifth and Seventh Schedules of the Act, and has set out their contours in various cases. The following principles can be culled out from the judgments: I. In HRD v. GAIL (supra), this Court held that a broad commonsensical approach must be adopted while interpreting

79 ibid, paras 37-38. 80 (2023) 8 SCC 226. 81 (2024) 4 SCC 341, see paras 85-91.

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the entries of the Schedules, such that they are not unduly enlarged or restricted.82 It rejected the submission that an expansive view must be taken to remove even the remotest likelihood of bias since the grounds for challenge of an award have been narrowed after the 2015 Amendment.83 Rather, it held that since the entries in these Schedules are based on the Red and Orange Lists of the IBA Guidelines, they must be interpreted as per the principles contained in these Guidelines. The standard to be adopted is that a reasonable third person who has knowledge of the relevant facts and circumstances would conclude that there is a likelihood of the arbitrator being influenced by factors other than the merits of the dispute.84 II. In Jaipur Zila Dugdh Utpadak Sahkari Sangh v. Ajay Sales & Suppliers85 and in Ellora Paper Mills v. State of M.P.,86 this Court has held that the purpose of Section 12(5) and the Seventh Schedule is to ensure the neutrality, independence, and impartiality of the arbitral tribunal.87 Further, in Jaipur Zila (supra), the Court held that the Seventh Schedule must be read as a whole, considering its object and purpose.88 III. This Court in Chennai Metro Rail Ltd. (supra) rejected a challenge to the arbitrator’s eligibility under Section 12(5) on a ground that is not enumerated in the Seventh Schedule. Once the Parliament has devised a statutory scheme prescribing the de jure ineligibility of certain persons to act as an arbitrator, the Court must not deviate and add to these grounds, as it would create uncertainty in the arbitration process.89

40. After reviewing prior precedents and in view of what I have held about party autonomy, it can be said that the 2015 Amendment to Section 12, specifically the insertion of Section 12(5) and the Seventh Schedule, incorporates the overarching public policy consideration

82 HRD v. GAIL (supra), para 20. 83 ibid. 84 ibid. 85 (2021) 17 SCC 248. 86 (2022) 3 SCC 1. 87 Jaipur Zila Dugdh (supra), para 14. 88 ibid, paras 16-17. 89 Chennai Metro Rail (supra), para 41.

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that binds the contracting parties to constitute an independent and an impartial arbitral tribunal as a credible and an effective substitute to ordinary courts and tribunals established to provide access to justice. In furtherance of this objective, the court will not be bound by the procedure for constitution of the arbitral tribunal in the arbitration agreement.

I. International Perspective

41. Having noted the perspective of this Court on the duty of the parties to appoint an independent tribunal after the 2015 Amendment, and before concluding, it is necessary to examine the international perspective on the issue. I must caveat that consideration of foreign laws and judgments of foreign jurisdiction do not have a direct bearing on the interpretation of our laws. At the most they grant us a perspective and nothing more. Further I will demonstrate that there is no single, universal standard on this issue; rather, each country has taken a different stance based on its own laws, policies, legal culture, and dispute resolution framework. Consequently, there is no uniform application or consistency in legal principles on this matter. Therefore, while foreign laws and precedents may provide insights, they should be referenced cautiously, acknowledging that differences in context may make direct reliance inappropriate.

42. Legislative framework of certain foreign jurisdictions. Internationally, party autonomy is highly valued in appointing arbitrators and composing arbitral tribunals. For example, the New York Convention90 (Article V(1)(d)) permits refusal of award recognition if the tribunal’s composition deviates from party agreement, underscoring the primacy of party autonomy. The UNCITRAL Model Law also upholds party autonomy as a core principle in tribunal composition. Similarly, Section 591 of Federal Arbitration Act of US accords primacy to appointment

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procedure as agreed to between the parties. The arbitration agreement must be in accordance with Section 2 which requires the same to be, “valid, irrevocable, and enforceable, save upon such grounds as exists at law or in equity for the revocation of any contract.” This has been used by US courts to source ‘unconscionability’ as a ground to test the validity of an arbitration agreement.92

43. Article 2 of Geneva Protocol on Arbitration Clauses93 provides that “the constitution of arbitral tribunal, shall be governed by the will of the parties and by the law of the country in whose territory the arbitration takes place.” Article 1028 of Code of Civil Procedure, Netherlands provides that in case the arbitration agreement gives one of the parties to the dispute a privileged position in appointing arbitrators, then, the other party may, despite the agreement, request the relevant court to appoint an arbitrator. Similarly, Section 1034 of German Code of Civil Procedure stipulates that if in the arbitration agreement, one of the parties has a preponderant right in so far as composition of the arbitral tribunal is concerned, thereby putting the other party at a disadvantage, then such latter party can request the court to appoint an arbitrator in derogation of the appointment procedure agreed upon. Article 15(2) of Spanish Arbitration Act, 2003, though enables the parties to freely agree on the procedure for the appointment of arbitrator, makes the same subject to an obligation to ensure that there is no violation of principle of equal treatment.

44. The Estonian Code of Civil Procedure, vide Section 721 also in similar terms provides that if in the arbitration agreement, one party has been given economic or other advantage in the formation of an arbitral tribunal which is materially damaging to the other party, such party may make a request to the court for the appointment.

45. Article 3, Annexure 1 of ‘European Convention Providing a Uniform Law on Arbitration’ states that an arbitration agreement is invalid if it gives one party a privileged position in matters of appointment.

46. The analysis of foreign legislations shows that while party autonomy is recognised in appointment and composition of an arbitral tribunals, certain national laws explicitly prohibit unilateral appointments that

92 Perry v. Thomas, 482 US 483 (1987); Harold Allen’s Mobile Home Factory Outlet, Inc. v. Butler, 825 So.2d 779,783-85 (Ala. 2002) 93 Geneva Protocol on Arbitration Clauses, Sept. 24, 1923, 27 L.N.T.S. 158.

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disadvantage one party. Where legislatures saw it fit to ban such appointments, they have done so explicitly, embedding unilaterality as a vitiating factor in the statute, not leaving it to judicial interpretation. This legislative clarity ensures that unilaterality is a codified breach of an arbitral tribunal’s integrity, removing any ambiguity or scope for discretionary judgment.

47. Judicial pronouncements of certain foreign jurisdictions. Judicial pronouncements across jurisdictions have adopted differing views. Gary Born94 has surveyed numerous foreign precedents in this regard and has referred to decisions of the Swiss Federal Tribunal95 and Paris Cour d’Appel96 (Paris Appellate Court), which hold that the composition of the arbitral tribunal is a matter of party autonomy and the appointment, removal, and replacement of arbitrators must be as per the agreement. The Court of Cassation (France), in one of its decisions,97 has upheld an arbitration agreement where one party provides a list of potential arbitrators from which the other party must choose an arbitrator.

48. However, at the same time, there are pronouncements which frown upon unilaterality in matters of appointment of arbitrator/arbitral tribunal. For instance, in one Swiss decision,98 it has been held: “The Federal Tribunal…has developed principles, under which conditions an arbitral tribunal sufficiently safeguards impartial and independent adjudication. The most important of these principles….is that no party may have a preponderant influence on the appointment of the tribunal.” (emphasis supplied)

49. American Courts have also dealt with this issue. Despite there being no express statutory proscription against unilaterality in matters of appointment, in one of its decisions, the Massachusetts District Court remarked that “both the parties to a dispute must have an equal right to

94 Born (supra), 1878. 95 Judgement of 26 November 2002, DFT 4P_129/2002. 96 Philipp Bros. v. Icco, 1990 Rev. 880,883; Raffineries de Petrole d’Homs et de Banias v. Chambre de Commerce Internationale, 1985 Recv. Arb. 141,146 97 Judgment of 31 January, 2002, 2003:2 Cahiers de l’Arbitrage 303. 98 Judgement of 11 November 1981, DFT 107 Ia 155,158 (Swiss Fed. Trib.).

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participate in the appointment process.”99 Similarly, in another case,100 the Supreme Court of Alabama invalidated an arbitration agreement as being unconscionable for the reason that it excluded one party from the appointment process. Further, in Hooters of America, Inc. v. Phillips,101 the arbitration clause was held to be against rules of neutrality and the award refused enforcement because one party was given exclusive control over the panel of potential arbitrators from which the other party could select its nominee arbitrator. It was observed that: “In this case, the challenge goes to the validity of the arbitration agreement itself. Hooters materially breached the arbitration agreement by promulgating rules so egregiously unfair as to constitute a complete default of its contractual obligation to draft arbitration rules and to do so in good faith. Hooters and Phillips agreed to settle any disputes between them not in a judicial forum, but in another neutral forum -- arbitration. Their agreement provided that Hooters was responsible for setting up such a forum by promulgating arbitration rules and procedures. To this end, Hooters instituted a set of rules in July 1996. The Hooters rules when taken as a whole, however, are so one-sided that their only possible purpose is to undermine the neutrality of the proceeding.” Further, on the question of unilateral composition of panel, the court remarked: “The Hooters rules also provide a mechanism for selecting a panel of three arbitrators that is crafted to ensure a biased decisionmaker. Rule 8. The employee and Hooters each select an arbitrator, and the two arbitrators in turn select a third. Good enough, except that the employee’s arbitrator and the third arbitrator must be selected from a list of arbitrators created exclusively by Hooters. This gives Hooters control over the entire panel and places no limits whatsoever on whom Hooters can put on the list. Under

99 Rosenberg v. Merril Lynch, Pierce, Fennner & Smith, Inc. 995 F.Supp. 190,208. 100 Harold Allen’s Mobile Home Factory Outlet, Inc. v. Butler, 825 So.2d 779,783-85 (Ala. 2002) 101 39 F. Supp. 2d 582 (D.S.C. 1998).

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the rules, Hooters is free to devise lists of partial arbitrators who have existing relationships, financial or familial, with Hooters and its management. In fact, the rules do not even prohibit Hooters from placing its managers themselves on the list. Further, nothing in the rules restricts Hooters from punishing arbitrators who rule against the company by removing them from the list. Given the unrestricted control that one party (Hooters) has over the panel, the selection of an impartial decisionmaker would be a surprising result.”

50. Similarly, in Murray v. United Food and Commercial Workers Union,102 the District Court of Maryland held the arbitration agreement to be unconscionable because the arbitrator was selected from a list of potential arbitrators curated by one of the parties to the dispute. In doing so, the court observed that, “Although an arbitration agreement will not be invalidated for failure to “replicate the judicial forum”, we again refuse to enforce an agreement so utterly lacking in the rudiments of even-handedness.” This line of reasoning continues in McMullen v. Meijer, Inc.103 where the agreement granted one party unilateral control over the pool of potential arbitrators. There, the court noted that, “when the process used to select the arbitrator is fundamentally unfair, as in this case, the arbitral forum is not an effective substitute for a judicial forum, and there is no need to present separate evidence of bias or corruption.”

51. The importance of composition of a just and proper arbitral tribunal was also highlighted by the Supreme Court of West Virginia in Board of Education of Berkley County v. W. Harley Miller, Inc.104 There, the disputes were to be settled pursuant to a standard arbitration provision contained in the construction contract with the Board which provided that disputes shall be decided by arbitration in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association. While the clause did not give one party unilateral control over the pool of arbitrators, the Court nonetheless discussed the issue of unilaterality in matters of appointment and reasoned that:

102 289 F.3d 297 (4th Cir.2002). 103 355 F.3d 485 (6th Cir. 2004). 104 Board of Ed. v. W. Harley Miller, Inc., 160 W. Va. 473, 236 S.E.2d 439 (W. Va. 1977).

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“A functional analysis of the West Virginia cases which do not favor arbitration demonstrates that this Court would not countenance an arbitration provision by which the parties agree that all disputes will be arbitrated by a panel chosen exclusively by one of the parties. This is the classic rabbits and foxes situation, with the foxes stacking the arbitration panel in their favor. Such a contract provision is inherently inequitable and unconscionable because in a way it nullifies all the other provisions of the contract.” (emphasis supplied)

52. In a case decided by the England and Wales Court of Appeal in Sumukan Ltd. v. Commonwealth Secretariat,105 the award passed by the arbitrator was set aside on the ground that one of the parties to the dispute was not consulted in the appointment of arbitrator. It was observed: “Furthermore if the arbitrators were to be selected from a Panel, and if there was a procedure for the appointment of the Panel aimed at guarding against any apparent lack of independence, it seems to me right that a substantial failure to comply with that procedure should have an effect on the jurisdiction of the tribunal itself.”

53. The comparative analysis of judicial pronouncements across jurisdictions reveals that, while party autonomy is often respected in the appointment of arbitrators, courts are also wary of provisions granting one-sided control over the arbitral panel. Rulings from the U.S., Switzerland, France, and the UK highlight differing views on this matter. This diversity in views across jurisdictions reinforces the need for caution in relying on foreign precedents or laws.

J. On the opinion of the Hon’ble CJI

54. I have had the benefit of the exhaustive and erudite judgment of the Hon’ble Chief Justice Dr. D.Y. Chandrachud. I have already given reasons for my decision. I find it necessary to indicate certain issues about the perspective and the final conclusion.

105 [2007] EWCA 1148.

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54.1 At the outset, I reiterate the necessary distinction between the duty of the parties to arbitration agreement to constitute an independent arbitral tribunal and the duty of the arbitrator to act judicially. In this case, we are concerned with the former and not about the duty of the arbitrator. 54.2 Holding that an arbitral tribunal has the “trappings of a court” as it determines the competing rights and liabilities of parties through an ‘adjudicatory process’, and therefore it must act judicially has the problems of introducing public law principles in contractual dispute resolution. This formulation has engendered the application of principles of procedural equality, equal treatment under Article 14, fairness, non-arbitrariness, justice, reasonableness, impartiality and bias, all of which have been subsequently invoked in the judgment as core values. I tried to locate the obligations of contracting parties to the arbitration agreement within the province of contract law and public policy considerations therein. This approach, I believe, is better suited for the determination of disputes in arbitration law, as it balances and protects the twin values of party autonomy through judicial restraint, and the duty the parties to constitute an independent arbitral tribunal without compromising any one in favour of the other. 54.3 There is a certain difficulty in invoking Section 18 of the Act and applying it as an equality principle mandating equal opportunity to both the contracting parties at the time of constituting the arbitral tribunal. Section 18 is the obligation of the arbitrator in conduct of arbitral proceedings. I have already highlighted the important distinction between the duty of the arbitrator to act judicially and the obligations of the parties to constitute an independent arbitral tribunal. That apart, the text and the context of Section 18 as is evident from the scheme of the Act eschews application of Section 18 at the time of appointment. This is clear through two factors: first, through the placement of Section 18 in Chapter V, on ‘Conduct of arbitral proceedings’, which comes after Chapter III on ‘Composition of arbitral tribunal’; and second, through the wording of Section 18, which makes it clear that the obligation to treat the parties with equality is on the arbitral tribunal, rather than the parties to the arbitration agreement.

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Central Organisation for Railway Electrification v. M/s ECI SPIC SMO MCML (JV) A Joint Venture Company

The later portion of Section 18, which mandates that “each party shall be given a full opportunity to present his case”, further fortifies this view. 54.4 The doctrine of bias and the contours of the test of real likelihood of bias have been discussed through various significant decisions of this Court rendered in the context of administrative and constitutional law. Considering that the issue before us is the legality of a procedure in the arbitration clause, I find it difficult to apply the doctrine of bias or real likelihood of bias at this stage. The real issue is about the imbalance caused due to unilateral power of one of the parties to the contract to constitute the arbitral tribunal. Composition of the arbitral tribunal is part of party autonomy but there is always the power, coupled with duty, of the court to ensure that procedure under the arbitration clause enables constitution of an independent arbitral tribunal. This scrutiny or enquiry by the court is at the stage of considering the application under Section 11. I am of the opinion that we cannot, as an advance ruling, give a declaration that all arbitration clauses enabling unilateral appointments are null and void at this stage. 54.5 I am of the opinion that a priori declaration that arbitration agreements that prescribe unilateral appointment procedures are invalid can lead to many problems in the day-to-day working of arbitral remedies. Particularly for institutions involving multiple transactions such as insurance claims, credit card defaults, etc. involving large number of cases but each claim may be of small sum. Our declaration of law substantially covers domestic arbitration, it will not be confined to high and international commercial arbitration. There could also be situations where the unilateral constitution of the panel of arbitrators could have credible members with respect to which no one can have an objection. Rather than declaring that all such agreements are void, it would be better to strengthen the remedial mechanisms available under the Act. This way, the choice of the parties is not completely ignored, and impartiality and independence of the arbitral tribunal is also ensured through close scrutiny by courts on a case-to-case basis. In any event, as indicated earlier, the enquiry about the arbitration clause will be at the stage of Section 11.

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55. I consider it necessary to note that mere existence of some relationship with the appointing authority does not inherently undermine autonomy. For instance, senior officers always serve as appellate authorities, and their objectivity is not compromised due to their employment. The solution is in the remedies and certainty in law. System of governances must evolve and recognize the capability in handling distinct professional duties. It is said that the key difference between humans and other beings lies in their ability to think independently and even against our own interests. While it is important to acknowledge potential conflicts of interest, it does not mean that the system must bend backward to cater to unending suspicion and doubt. A balance must be struck between ensuring confidence in the system and fostering a healthy culture of independence and objective in functioning. If we focus solely on identifying and disqualifying individuals for perceived conflicts, the process becomes an endless cycle of mistrust.

K. Conclusion

56. With these findings and observations, I summarise my conclusions as follows: I. Dispute resolution through arbitration encompasses two independent yet interdependent principles: contractual freedom as party autonomy and statutory obligation as duty to constitute an independent arbitral tribunal. II. Party autonomy in making of an arbitration agreement is an essential feature of arbitration. It commences with choosing the members of the arbitral tribunal, extends to the procedure that would apply for its conduct, and concludes with the method by which an award could be challenged before a court. It is thus a brooding and guiding spirit of arbitration. Party autonomy is sufficiently incorporated in the Arbitration Act, along with a restraint on judicial intervention. III. The moment parties choose arbitration over ordinary civil proceedings for dispute resolution, their duty to establish an independent and impartial tribunal arises. The substitution of arbitration in place of civil courts as an exception under Section 28 of the Contract Act is only for a forum and not for contracting out of the most essential feature of a dispute resolution, i.e.,

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Central Organisation for Railway Electrification v. M/s ECI SPIC SMO MCML (JV) A Joint Venture Company

independence and impartiality must exist in every forum. This essential feature is the inviolable public policy consideration under Section 23 of the Contract Act from which the parties cannot opt out. Arbitration agreements which are not compliant of this public policy consideration are void under Section 23 of the Contract Act. Thus, there is a statutory incorporation of duties of the parties to the arbitration agreement. IV. If an arbitration agreement is considered by the court as not enabling constitution of an independent and impartial tribunal, any submission that the said agreement is a binding contract, or it is in exercise of party autonomy is not tenable as such an agreement will be against public policy and as such not an enforceable contract. V. In view of the statutory incorporation of these duties, it is not necessary to apply public law principles evolved in constitutional and administrative laws. Sourcing these duty obligations from Contract Act and Arbitration Act is important to maintain the integrity of the party autonomy and restraint of judicial institutions. VI. The power to ensure that the arbitration agreement is compliant of the public policy requirement of establishing an independent and impartial tribunal is always of the Court. This principle is recognised and statutorily incorporated in the Contract Act and the Arbitration Act. It is the duty of the court to ensure that the arbitration agreement inspires confidence and it will enable establishment of an independent and impartial arbitral tribunal. VII. Neither public policy considerations under the Contract Act or the Arbitration Act restrain the parties to the arbitration from maintaining a panel of arbitrators in any manner. However, arbitration agreements enabling one of the parties to unilaterally constitute arbitral tribunal do not inspire confidence of independence and may violate the public policy requirement of constituting an independent and impartial tribunal. The court will, therefore, scrutinise the agreement and hold them to be invalid if it considers it appropriate. VIII. The occasion for the court to examine the constitution of the independent and impartial tribunal under the arbitration clause will arise when one of the parties makes an application under Sections 11, 14 or 34. It is not permissible for the court to give

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an advance declaration that all such agreements which enable one of the parties to unilaterally constitute the arbitral tribunal would be void per se. No two agreements are the same and it is necessary for the court to examine the text and context of the agreement. IX. All applications pending before the courts challenging the unilateral appointment clauses will be disposed of applying the test as to whether such a clause enables establishment of an independent and impartial tribunal.

Result of the case: Reference answered.

† Headnotes prepared by: Ankit Gyan