The Supreme Court on Friday ruled against unilateral appointment of arbitrators by the public sector undertakings in contractual disputes, saying such practices violate principles of fairness, impartiality and equality guaranteed under the Constitution.

The top court held that unilateral appointment clauses in public-private contracts for appointing arbitrators are violative of Article 14 (right to equality) of the Constitution.

A five-judge constitution bench comprising Chief Justice D Y Chandrachud and Justices Hrishikesh Roy, P S Narasimha, J B Pardiwala and Manoj Misra delivered three separate and concurring verdicts on the vexatious legal issues.

"Whether an appointment process 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," read the first question decided by the bench.

The second question was whether the principle of equal treatment of parties applies at the stage of the appointment of arbitrators.

"Whether an appointment process in a public-private contract which allows a government entity to unilaterally appoint a sole arbitrator or majority of the arbitrators of the arbitral tribunal is violative of Article 14 of the Constitution,” the third question read.

Writing a 113-page judgment for himself and Justices Pardiwala and Misra, the CJI held the principle of equal treatment of parties applies at all stages of arbitration proceedings, including the stage of appointment of arbitrators.

"The Arbitration Act does not prohibit PSUs from empanelling potential arbitrators. However, an arbitration clause cannot mandate the other party to select its arbitrator from the panel curated by PSUs themselves," the verdict said.

A clause that allows one party to unilaterally appoint a sole arbitrator gives rise to "justifiable doubts as to the independence and impartiality of the arbitrator", it said.

"Further, such a unilateral clause is exclusive and hinders equal participation of the other party in the appointment process of arbitrators," the judgment said.

In the appointment of a three-member arbitrators' panel, mandating the other party to select its arbitrator from a curated panel of potential arbitrators is against the principle of equal treatment of parties, it held.

The bench held in this situation, there was no effective counterbalance because parties do not participate equally in the process of appointing arbitrators.

It said the law laid down in this judgment will apply prospectively to arbitrator appointments to be made after the date of this judgment and the direction applied to three-member arbitrator tribunals as well.

The bench examined a batch of pleas involving the Central Organisation for Railway Electrification (CORE) and the ECI-SPIC-SMO-MCML Joint Venture Company, focusing on whether it is permissible for one party, especially government entities, to have sole authority in appointing arbitrators.

This practice has been prevalent in public-private contracts, where the public sector unit (PSU) often controls the arbitration panel selection process.

The court concluded that such unilateral appointments create "justifiable doubts" regarding the independence and impartiality of arbitrators, directly impacting the principle of equal treatment.

Justice Roy and Justice Narasimha wrote separately to concur with the CJI's opinion.

The top court had reserved its verdict on August 30 on the legal questions.

Before the arguments had concluded, Solicitor General Tushar Mehta told the bench that the focus should be on ensuring that arbitration as a mechanism to resolve disputes was strengthened.

Two references were made by three-judge apex court benches in 2021 for the constitution of a larger bench to consider the issue.

The CJI had in June last year constituted a five-judge constitution bench to examine the issue.

On February 21, the Centre had told the apex court that an expert committee headed by former law secretary T K Vishwanathan has submitted its report on proposed reforms in the arbitration sector to the law ministry.

Amid a push for making India a hub of international arbitration, the government had set up an expert panel led by Vishwanathan to recommend reforms in the Arbitration and Conciliation Act in order to reduce the burden on courts.

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