[Gargi is a student at Gujarat National Law University.]
The issue of unilateral arbitrator appointments in India has been a subject of considerable legal debate and judicial to and fro. The matter was finally referred to a five-judge bench of the Supreme Court, which has rendered its judgement in CORE II invalidating unilateral arbitrator appointments and overturning its earlier decisions in Voestalpine Schienen GmbH v. Delhi Metro Rail Corporation Limited and CORE v. ECL.
While the majority judgement is laudable for the most part, particularly because it hopefully shuts the can of worms opened by previous conflicting decisions, some untangled knots are still left. This piece begins with an appraisal of the Supreme Court’s reasoning and then addresses the remaining concerns.
The judgment firmly upholds the principle embedded in Section 18 of the Arbitration and Conciliation Act 1996 (A&C Act), which mandates equality and equal opportunity for parties as the sine qua non of valid arbitration. It explicitly rejects the argument that Section 18 has a limited scope, extending only to specific stages of the arbitration proceedings, and holds that the principle of equality must govern the entire arbitration process, including the appointment of arbitrators.
The court notes that the principle of "party autonomy" in arbitration cannot be extended to a point where it infringes upon the fundamental rights enshrined in the Constitution of India under Article 14. Arbitration clauses are only valid if they align with the "public policy of India," which includes adherence to the Constitution, the grund-norm, ensuring consonance with the principle that consent cannot circumvent constitutional mandates, reaffirming what Lombardi Engineering Limited. v. Uttarakhand Jal Vidyut Nigam Limited (2023), a three-judge bench of the Supreme Court, led by Hon’ble Justice JB Pardiwala, had said.
Scope of Section 18 of the A&C Act
The court recognized that the A&C Act is modeled on the provisions of the UNCITRAL Model Law. Consequently, hence it relied on the Model Law and its travaux préparatoires as tools for interpreting and discerning the intent behind the provisions of the act.
Article 18, which was originally drafted as Article 19(3), is underscored in the official UNCITRAL commentary as a foundational component, often referred to as the "Magna Carta of Arbitral Procedure". The commentary expressly states that this provision is not subject to derogation, even by the agreement of the parties.
The court noted that while under Section 19, parties have the scope and the autonomy to agree on the procedural rules to be followed by the arbitral tribunal. Any such agreement, as well as any actions undertaken by the tribunal, must adhere to the stipulations outlined in Article 18, as also noted by the Explanatory Note on Model Law prepared for Commonwealth Nations. Consequently, the court held that the overarching framework of Section 18 applies to the entirety of the arbitration proceedings.
Party Autonomy or Arbitrator’s Integrity?
Section 11(2) grants parties to an arbitration agreement the freedom to prescribe their own procedures for appointing an arbitrator, this provision was sought to be relied upon to argue that this party autonomy extends beyond, and is not constrained by, Section 11(8), which outlines the requirements for impartiality and independence when an arbitrator is appointed by the Supreme Court (in case of a failure in the parties' appointed methodology). Importantly, the travaux préparatoires also shed light on the discussions surrounding the adoption of Article 11(2). During these deliberations, the delegates had in fact proposed the inclusion of an explicit requirement that all arbitrators be impartial and independent. This concern was addressed by the chairman, who clarified that there was no need to expressly state this requirement, as it was inherently understood to be a fundamental part of the model law's framework.
Consequently, the court correctly observes that Section 11(2), which is modeled after Article 11(2) does not give the parties absolute freedom to appoint any arbitrator they choose. Instead, it grants autonomy to decide on the technical and procedural aspects of the appointment, and can not be interpreted to derogate the substantive aspects.
Missing Pieces of the Puzzle
While the majority opinion rightly invalidates unilateral appointments, it is essential to ground this understanding within specific provisions of the A&C Act.
Schedule 5 enumerates “circumstances that give rise to justifiable doubts as to the arbitrator’s independence or impartiality.” If any of these circumstances exist, the arbitral proceedings may still be deemed valid, provided a priori disclosure of such potential conflicts by the arbitrator. Failure to disclose these circumstances allows the parties to challenge the appointment under Section 13, initially before the arbitrator; if unsuccessful, they may raise the issue again while seeking to set aside the award under Section 34. In contrast, Schedule 7 outlines situations that render an arbitrator ineligible due to serious conflicts that cannot be mitigated by prior disclosure. These ineligibilities result in the automatic termination of the arbitrator’s mandate under Section 14. Both the schedules have been derived from the IBA Guidelines.
However, it is unclear whether as per the majority, unilateral appointments constitute an ‘ineligibility’ under Schedule 7 or merely a ‘circumstance giving rise to doubt’ under Schedule 5. J Hrishikesh, in dissent, considers that the majority holds it to be an ineligibility (para 28). However, the majority states that the doctrine of bias is not applicable to Schedule 7; yet, it grounds its invalidation of unilateral appointments in this very doctrine. This suggests the court might classify unilateral appointments as a ‘circumstance giving rise to doubt’ under Schedule 5, leaving room for interpretation.
For instance, if unilateral appointments fall under Schedule 5, as per the scheme of the law, a challenge should lie first to the arbitrator, and then at the time of setting aside. However, the majority, in para 74, in case of unilateral appointments, allows a challenge at the time of appointment itself, taking into account the possibility of wasting ‘considerable time and expense’ of the parties, if proceedings continue until the stage of Section 34.
Furthermore, as highlighted by the minority opinion of J Hrishikesh, this still does not address the question of whether such a challenge can be entertained at the stage of appointment under Section 11, which only involves a prima facie determination of the existence and not the validity of the arbitration agreement by the court. Again, does this also mean that for all circumstances (other than unilateral appointment) mentioned in the Fifth Schedule, Section 11 is the appropriate stage of raising a challenge? Would this not have the effect of rendering the statutory process of challenge under Section 13 nugatory, effectively blending aspects of both schedules?
While the court’s conclusion is laudable, its reliance on principles of administrative law can open a Pandora's box of procedural bottlenecks in India’s arbitration scene, which is already plagued with delays. This risks inviting excessive interventions and prolonging of the arbitral process due to allegations of a ‘manifestly unfair procedure’ or ‘predominant position of a party’ - a risk underscored by the majority opinion. This was also aptly noted by J Narsimha during the proceedings, as the court’s judgement sets a precedent not just for the public sector undertakings, but also for two private parties acting purely in the realm of contract.
Furthermore, the judgment appears to conflate the standard of bias applicable to an arbitrator with that required of a judicial authority. It must be noted that private parties choosing to litigate outside the adversarial system can not be made to subscribe to the standard that the state and its machineries have to abide by under administrative law. While impartiality under Section 18 is non-negotiable, there’s a flexibility in arbitration on how this is applied. Impartiality operates on a spectrum, with judicial authorities expected to maintain the highest standards of neutrality, while executive officers, in their quasi-judicial capacity, are bound by natural justice principles. In contrast, arbitrators, as “private judges,” are bound by Section 18 of the A&C Act, which as the court itself acknowledges in para 161, is the minimum standard of independence and impartiality. Under the law, the arbitrators are granted some clear leeway - prior disclosure of potentially mitigating circumstances permits them to adjudicate disputes, a flexibility that judicial officers do not possess. This signals a legislative choice not to impose the highest standards of judicial propriety upon them. As also noted by Bishop and Reed, an arbitrator who is impartial but not wholly independent may be qualified, while an independent arbitrator who is not impartial must be disqualified, but the same cannot be said for a judicial officer who must meet both the requirements of independence and impartiality.
While party autonomy is the governing principle of arbitration as an alternative party-driven means of dispute resolution, it cannot be extended to infringe upon the fundamental notions of fair play and justice. Thus, while the decision strengthens procedural fairness, it does so at the risk of undermining arbitration’s flexibility and efficiency - two qualities essential to its appeal as an alternative to traditional litigation.
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