A Supreme Court constitution bench on Thursday underscored the importance of fairness in arbitration, particularly in cases involving the government and public sector undertakings (PSUs), stating that the government’s interest should extend beyond securing favourable outcomes, focussing instead on preserving the integrity of the arbitration process as a whole.
The five-judge bench, led by Chief Justice of India Dhananjaya Y Chandrachud, warned against any attempts by the PSUs to “rig” the arbitration process, emphasising that the integrity of the process must be maintained to instill confidence among both domestic and foreign investors.
“Today, we are in an economy where we feel private investment is crucial for the growth of economy. Therefore, from a national perspective, it is necessary that PSUs don’t rig the arbitration in any manner…As a nation, there is a vital interest in ensuring that the process of arbitration is fair,” the five-judge bench, led by Chief Justice of India Dhananjaya Y Chandrachud, said.
The bench, which also included justices Hrishikesh Roy, PS Narasimha, JB Pardiwala and Manoj Misra, is considering whether one of the parties to an arbitration can unilaterally appoint a panel of arbitrators while asking the other party to choose the arbitrators from that panel. A related issue before the bench is whether someone not eligible to be appointed as an arbitrator can nominate the members of the panel of arbitrators.
While the Railways and other PSUs have maintained that the Arbitration and Conciliation Act does not prohibit unilateral appointment of arbitrators and that a broad-based panel of arbitrators picked through a transparent process will further the objective of the law, bodies promoting arbitration and private contractors have maintained that unilateral appointments are opposed to the principles of equality and fairness. Solicitor general Tushar Mehta led the arguments for the Railways and other PSUs while senior counsel Gourab Banerjee and Neeraj Kishan Kaul appeared for the other side.
During the day-long hearing, the bench, addressing SG Mehta, stressed that the broader national interest lies in maintaining the trust of private investors in the arbitration process.
“One element of this is that big public revenues are involved. If there is an award for ₹20,000 crore against a government entity, it will have to be paid out of public money. Equally, the government, representing the nation, has to be concerned that you must have the faith of the private sector in the process of arbitration process. And it’s true not only for the foreign investors but also for domestic investors,” remarked the bench.
The constitution bench’s hearing on the unilateral appointment of arbitrators is a pivotal moment for arbitration in India, particularly concerning cases involving government entities and PSUs, as it seeks to address long-standing concerns about the impartiality and autonomy of arbitration panels. The bench’s emphasis on fairness and creating a level playing field reflects the broader need for trust in the arbitration process, which is essential for attracting both domestic and international investment. The significance of this hearing extends beyond the immediate cases before the court because the principles established here could reshape the arbitration landscape by scrutinising practices like the unilateral appointment of arbitrators and aligning the process with India’s larger economic goals by fostering a pro-arbitration environment.
Caution against superimposing public law in the realm of private law matters
SG Mehta, representing the Railways, pointed out that a broad-based panel prepared after open and transparent selection and publicly available would help achieve the intent, object and purpose of the arbitration as a medium of disputes resolution.
The bench, however, expressed its reluctance to delve into framing guidelines on the composition and formation of arbitration panels, stating that such an intervention could blur the lines between public and private law. It pointed out that arbitration, being a matter of private contractual agreements, should not be subjected to public law principles that typically govern public tenders and administrative actions.
The court further voiced concerns about the potential complexities and pitfalls of government-overseen arbitration panels, suggesting that such a move could lead to a “minefield” of legal challenges.
“Are we walking into a minefield? Slowly and steadily, we are effacing the distinction between public law and private law,” said the bench, highlighting the risks of overstepping its jurisdiction under Article 142 of the Constitution by laying down structural parameters for the composition of arbitration tribunals. Such an action, the court remarked, could lead to criticism on the global stage, particularly from the business community, which might view the Indian Supreme Court’s involvement in private law matters as an overreach.
“Exercising Article 142 jurisdiction to lay down structural parameters for the composition of arbitration tribunals, we dare say we will be heavily criticised in the world of business. What has the Supreme Court done? The panel that you are proposing or has been suggested may address the concerns of impartiality, independence and integrity, but it will not address the concern of party autonomy which is very relevant in the field of arbitration,” it added.
Call for notification of the Arbitration Council of India
The bench also questioned the government on its delay in notifying the legal provision in the Act that envisages the appointment of the Arbitration Council of India (ACI) following the 2019 amendment in the law. The main functions of the ACI, as outlined in Section 43B of the Act, include framing policies for grading arbitral institutions and accrediting arbitrators; making policies for the establishment, operation and maintenance of uniform professional standards for all alternate dispute redressal matters and maintaining a depository of arbitral awards (judgments) made in India and abroad.
As the SG raised the issue of delays in arbitration owing to the busy schedules of the arbitrators who are not in position to devote sufficient time nor is there a requirement under the regime for them to disclose their itinerary, the bench pointed out that the ACI is intended to institutionalise and regulate arbitration in India, thereby addressing issues such as the dedication and devotion of time by arbitrators.
The bench observed that the solution to concerns about arbitrator timelines and pendency lies in the establishment of the ACI. “You put your timelines and pendency of arbitration with each arbitrator on your website. Then institutionalisation or regulations must happen. That was the purpose of 43B. What we have been resorting to is ad hoc arbitration, which is an unorganised sector after all. You notify the provision. Why isn’t the government notifying the provision? What’s the concern?” the court asked. Mehta assured the Court that he would seek instructions on the matter.
Concerns over unilateral appointment of arbitrators by financial companies
Another key issue raised during the hearing was the practice of financial companies, particularly non-banking financial companies (NBFCs), unilaterally appointing sole arbitrators in disputes involving vulnerable individuals, such as taxi and truck drivers. The bench took umbrage at how these practices lead to the harassment of poor individuals, who often find themselves at a severe disadvantage in arbitration proceedings.
The court’s criticism came after senior counsel Madhavi Divan, appearing for Mahindra and Mahindra, lamented that the firm’s ₹22,000 crore is stuck due to its inability to execute the arbitral awards. According to Divan, the court’s previous rulings that invalidated the company’s appointment of sole arbitrator for deciding a dispute between the firm and the loanee have led to a “defaulter’s paradise” and a “devastating effect” for the NBFCs that cannot recover their loans despite the loanees not challenging such appointments. She favoured the principle of unilateral appointment of arbitrators for quick recovery of monies through arbitral awards.
But the bench observed that the unilateral appointment of sole arbitrators by NBFCs is distorting the purpose of arbitration, giving it a bad name and undermining its credibility as an alternative dispute resolution (ADR) mechanism.
Citing instances where truck and taxi drivers have been dispossessed of their vehicles through ex parte proceedings led by these arbitrators, the bench highlighted the plight of poor individuals who, after entering into agreements with NBFCs, find themselves at the mercy of arbitrators unilaterally appointed by the financiers.
“A poor truck driver will be thrown out of the vehicle by a bunch of goons on a national highway in the middle of the night and you will get an award of ₹20 lakh against him. That’s what’s happening. That’s the reality,” it rued.
Referring to his personal experience of handling scores of such cases as a judge in the Bombay high court, the CJI expressed frustration over how the arbitration process has been “perverted” in such cases, with the weaker party being left with little to no recourse.
The court will continue hearing the case on Friday when it is expected to reserve its judgment in the matter that arises from a reference by a three-judge bench in 2021. In 2019, a three-judge bench upheld an arbitration clause, which provided for the appointment of three serving or retired railway officers, to be appointed by the general manager, Railways, as arbitrators. In January 2021, another three-judge bench doubted the correctness of this judgment, questioning how a person (general manager in this case) who cannot act as an arbitrator due to possible conflict of interest and other handicaps under the Act, be given a right to appoint a panel of arbitrators. Another question that cropped up in the reference related to the Railways having the authority to unilaterally appoint a panel of arbitrators.
