In a landmark ruling, the Supreme Court has declared unilateral appointments of arbitrators in public-private contracts by public sector undertakings (PSUs) unconstitutional. This decision underscores the importance of fairness, impartiality, and equality in arbitration processes under the Indian legal framework.
A constitution bench of five judges, led by Chief Justice D Y Chandrachud, with Justices Hrishikesh Roy, P S Narasimha, J B Pardiwala, and Manoj Misra, addressed several critical legal questions affecting the arbitration landscape in India. The bench delivered three separate, concurring opinions, setting a precedent for future arbitration agreements and procedures.
The primary issue under scrutiny was whether the common practice by PSUs of unilaterally appointing arbitrators or influencing the selection of arbitration panels violates the principle of equality before the law as guaranteed by Article 14 of the Constitution. The court resoundingly affirmed that such practices are indeed unconstitutional.
In a comprehensive 113-page judgment authored by Chief Justice Chandrachud, on behalf of Justices Pardiwala and Misra, the court emphasized that the principle of equal treatment must apply at all stages of arbitration proceedings, including the crucial phase of appointing arbitrators. “The Arbitration Act permits PSUs to maintain a panel of potential arbitrators; however, compelling another party to choose from this panel is fundamentally unfair and against the tenets of impartiality,” stated the judgment.
The court further noted that allowing a party to unilaterally appoint a sole arbitrator or a majority of the arbitrators creates “justifiable doubts as to the independence and impartiality of the arbitrator,” thereby hindering fair and equal participation in the arbitration process.
This directive will be applied prospectively, affecting appointments made after the date of the judgment, ensuring that both sides in arbitration have an equal say in the selection of arbitrators, thus fostering a more balanced and just resolution environment.
This ruling came in response to a series of petitions involving the Central Organisation for Railway Electrification (CORE) and the ECI-SPIC-SMO-MCML Joint Venture Company, among others, that questioned the fairness of the prevalent arbitration practices in public contracts.
