[Pranav is a student at National Law University Delhi.]
After quite a hiatus, the Supreme Court had resumed hearings on whether ineligible persons can appoint arbitrators and if PSUs can select arbitrators from their own panels, raising long-standing concerns. This article contends that the court-suggested solutions have been inadequate and offers recommendations focused on transparency, fairness, and balancing party rights.
Introduction
Arbitration, as a mode of alternative dispute resolution, allows parties to freely nominate arbitrators. Given that the parties are responsible for selecting the arbitrators, it becomes crucial to ensure that the arbitrators are independent and impartial. It is now well accepted that the arbitrator’s independence and impartiality forms the crux of a fair arbitration process. Consequently, to ensure fairness, parties typically decide the method of selecting the arbitrator in their arbitration agreement. Most often, this method is designed to give both parties a say in the selection of arbitrators.
However, the process of appointing arbitrators in disputes involving public sector undertaking (PSUs) is somewhat different. Given the frequency with which PSUs may be involved in arbitration, they maintain a roster of potential arbitrators for the sake of convenience and expedient dispute resolution. This roster consists of arbitrators whom the PSU considers suitable for handling matters involving the PSU, based on their experience, understanding, and expertise in both the PSU’s field of operation and the relevant area of law.
The methods of choosing arbitrators can differ. While some arbitration clauses allow the PSU to suggest a few names from their roster, with the opposing party required to select their nominee arbitrator from the suggested names, the others allow the PSU to appoint the sole arbitrator. A third approach involves a combination of these methods, wherein the PSU suggests a panel of individuals, from which the other side selects a few, and then the PSU finally nominates the arbitral tribunal from the arbitrators already selected by the opposing party. While these methods are not exhaustive, they are representative of the common approaches deployed by PSUs while constituting an arbitral tribunal.
This approach of having a pre-selected roster of arbitrators aims to foster convenience and expediency. However, such an approach raises significant concerns. One key issue is whether the opposing party truly has an independent choice in appointing its arbitrator when it is being asked to select from a panel that has already been determined by the PSU. On a larger scale, this raises concerns about party autonomy and balancing the rights of the parties, both of which are fundamental to the arbitration process. This balancing idea can become even more complex in multi-party arbitrations, wherein it is necessary to balance the interest of more than two parties.
The String of Decisions by Courts and their Suggestions
There has been a difference of opinion among courts regarding the unilateral appointment of arbitrators. While one school of thought leans toward balancing the rights of both parties and ensuring fairness, the other prioritizes upholding the terms agreed upon in the arbitration clause.
In TRF Limited v. Energo Engineering Project Limited (TRF), the Supreme Court held that since the Managing Director of a company is ineligible to act as an arbitrator, they are also ineligible to nominate any other individual as an arbitrator. This decision was based on the rationale that allowing an ineligible person to nominate an arbitrator could raise concerns about the transparency and fairness of the arbitration process and therefore its outcome. Subsequently, in Voestalpine Schienen GmbH v. Delhi Metro Rail Corporation Limited (Voestalpine), the Supreme Court reaffirmed the principles established in TRF. The court suggested a “broad-based approach”, where a larger pool of arbitrators from the entire panel should be made available to the other party. This approach would ensure that the opposite party has a broader and more independent selection of arbitrators to choose from. On a similar line of reasoning, the Supreme Court in Perkins Eastman Architects DPC v. HSCC held that a person having an interest in the dispute should not have any role in charting the course of the dispute resolution.
While these decisions leaned in one direction, another set of judgments adopted a different perspective. A three-judge bench of the Supreme Court in Central Organisation for Railway Electrification v. ECI-SPIC-SMO-MCML (JV) (CORE), held that once parties agree to a procedure for appointing arbitrators, they must adhere to it. In CORE, the procedure involved the Railways sending a panel of at least 4 retired railway officers to the contractor, who would suggest 2 names. The Railways would then nominate one of these as the contractor's nominee and appoint the remaining arbitrators. The court held that the Railways' right to form the arbitral tribunal was counterbalanced by the contractor's power to choose two names from the four provided.
However, the decisions in Union of India v. Tantia Construction and JSW Steel Limited v. South Western Railway and Another doubted the view in CORE and referred the issue to a larger bench.
Ultimately, to resolve this conflict, a Constitutional Bench of the Supreme Court is now hearing the matter to address these critical questions.
The Half-Baked Nature of the Courts’ Suggestions
While hearing the matter, the constitutional bench emphasized that since the appointment of arbitrators forms the foundation of a fair arbitration process, it is crucial for the parties to feel, from the outset, that the arbitral tribunal is free from bias and that parity between the parties exists.
However, the courts' past suggestions have not fully met this requirement. In Voestalpine, the court proposed a broad-based approach, where a larger pool of arbitrators would be offered to the opposing party for nomination, albeit from the panel maintained by DMRC itself. As a result, instead of forwarding a list of just 5 names, the entire panel of 31 individuals was made available to the other party.
While this suggestion did increase the number of choices, it did not fully address the crisis of confidence, as the opposing party would still question the impartiality of the panel. Suspicion would persist that DMRC may have included its preferred arbitrators in the roster, and concerns may arise that arbitrators on the panel might be inclined to favour the PSU to remain on the roster and therefore be repeatedly chosen for future cases.
Rather, if interpreted differently, this suggestion could imply that all the PSU needs to do is forward the entire list of panel arbitrators, subtly creating the impression that the panel has been formulated fairly. However, the question still persists: how are the rights balanced when the opposing party never had a genuinely free and independent choice to nominate the arbitrator? From the start, their options were confined to a list curated by their adversary in the dispute, and they are merely selecting from the PSU's favorites.
Similarly, in CORE, where the court held that the Railways' right to form the arbitral tribunal was counterbalanced by the respondent’s ability to choose 2 names from a list of 4, the decision falls short of ensuring party parity. Although it may seem that the opposing party is given a choice, this choice is superficial. Ultimately, the Railways still controls the process, and any selection made by the opposing party has already been filtered by the PSU.
While previous judgments held that an impartial arbitration free from justifiable doubts cannot exist if the constitution of the arbitral tribunal itself raises such doubts, it seems that in CORE, the Supreme Court has rather moved backwards by allowing constitution of arbitral tribunals despite the existence of serious concerns pertaining to its impartiality.
It is also important to deliberate on the lines that while, on the one hand, India aspires to become an international arbitration hub, it is, on the other hand, giving the impression that the likes of a PSU in an arbitration will be favored. Such an understanding can further disparage the entities looking to engage in arbitration. This understanding can be even more appalling for the foreign entities willing to engage in business with the PSUs in India – especially given the perception that PSUs have strong government backing.
The Way Out
As indicated above, the mere suggestion of a broad-based approach in Voestalpine does not adequately address the issue. This raises the challenge of establishing a benchmark for what number of people on the panel satisfies the criterion of being broad, which may be difficult to ascertain. Furthermore, the apprehension that the panel list, prepared by the adversary, contains their favorites will always persist. The only theoretical way to alleviate such concerns would be to include virtually every potential member in the list of panel arbitrators or to make the list inclusive enough to eliminate the possibility of the panel arbitrators being favorites of the PSU. However, while this situation may exist theoretically, its practical implementation and viability require careful consideration.
Interestingly, given the surrounding concerns, countries such as Estonia, Germany, the Netherlands, Poland, Russia, and Spain have expressly prohibited the appointment of an arbitrator from a list made by one party, thereby creating an exception to the principle of party autonomy.
A more pragmatic approach, than the broad based approach, would thus be to adopt an institution-based mechanism, which entails the use of an independent panel appointed by an independent institution. This would ensure that neither party has an undue influence in appointing the arbitral tribunal and that the opposing party is not constrained to choose from a pre-filtered list curated by its adversary. Such an undertaking shall foster confidence in the arbitration process. Moreover, this mechanism would facilitate the expeditious nomination of the panel, as the independent institution would already maintain a roster of competent and available arbitrators. Pertinently, this suggestion of moving to an institution-based mechanism, departing from the panel-based model, is currently under consideration by the Supreme Court.
Alternatively, if this mechanism does not fit the bill, it may be best to revert to the classic model that allows parties to choose the arbitral tribunal based on their free and independent choice, without unduly constraining the opposing party to select from an already filtered list of panel arbitrators. In this scenario, the PSUs can maintain their roster of panel arbitrators for nominating their choices. Subsequently, this roster can also be provided to the opposing party for their selection, however there should be no outright restriction on going beyond that list. This approach should not raise concerns pertaining to expediency, as parties engaged in business are often acquainted with the experts and potential arbitrators in their field. Therefore, if required, the parties can expeditiously appoint the tribunal. However, even if a slight compromise on expediency is incurred, it addresses the much larger issues of fairness, transparency, and the balance of rights between the parties in arbitration proceedings, making the trade-off worthwhile.
As we anticipate the court's decision on this matter, it is clear that balancing party autonomy and genuine impartiality is not an easy task. Whether the court will endorse one of the previously discussed alternatives, or whether it will offer a new approach, is yet to be unveiled. Whatever approach the court adopts, it is hoped that the fundamental principles of arbitration—transparency, fairness, and party parity—are upheld.
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