Central Organisation for Railway Electrification Vs. M/s ECI SPIC SMO MCML (JV) A Joint Venture Company
[Civil Appeal Nos. 9486-9487 of 2019]
[Special Leave Petition (C) No.15936 of 2020]
[Special Leave Petition (C) No. 6125 of 2021]
[Special Leave Petition (C) No. 9462 of 2022]
[Special Leave Petition (C) No. 21131 of 2023 Diary No. 7086 of 2024 Diary No. 13670 of 2024]
Dr. Dhananjaya Y. Chandrachud, CJI.
Table of Contents
| A. | Background .......... | 4 | ||
| i. | Background to the reference .......... | 4 | ||
| ii. | The reference .............. | 11 | ||
| B. | Issues ............ | 12 | ||
| C. | Submissions .................. | 13 | ||
| D. | Principles underpinning the Arbitration Act ........... | 18 | ||
| i. | Party autonomy ....... | 20 | ||
| ii. | Mandatory provisions ........... | 22 | ||
| iii. | Appointment of arbitrators ............ | 27 | ||
| iv. | Independence and impartiality of arbitrators ........ | 32 | ||
| v. | Equality in the arbitral proceedings .............. | 39 | ||
| vi. | Public-private arbitration ............ | 41 | ||
| E. | The principle of equality applies at the stage of appointment of arbitrators ........... | 43 | ||
| i. | Arbitration as a quasi-judicial function ........ | 43 | ||
| ii. | Equality applies at the stage of appointment of arbitrators ....... | 48 | ||
| F. | Nemo judex rule and the doctrine of bias ........... | 53 | ||
| i. | Principles of natural justice .......... | 54 | ||
| ii. | Doctrine of bias ......... | 57 | ||
| iii. | Test of real likelihood of bias ........ | 61 | ||
| a. | Automatic disqualification ......... | 61 | ||
| b. | Real likelihood of bias ............ | 63 | ||
| iv. | Indian approach to the bias test ......... | 71 | ||
| v. | Bias and doctrine of necessity in the context of the Arbitration Act ...... | 75 | ||
| vi. | Unilateral appointment of arbitrators is violative of the equality clause under Section 18 ....... | 83 | ||
| G. | Public-private contracts and public policy ...... | 90 | ||
| i. | Unconscionability under the Contract Act ....... | 90 | ||
| ii. | US jurisprudence on unconscionability of arbitration agreements ...... | 98 | ||
| iii. | Public-private contracts and public policy of arbitration ........ | 102 | ||
| H. | Necessity of maintaining the principle of minimum judicial interference .... | 107 | ||
| I. | Prospective Overruling ........... | 109 | ||
| J. | Conclusion ........... | 111 | ||
A. Background
1. In the present batch of appeals, this Court has to decide the contours defining the independence and impartiality of arbitral tribunals under the Arbitration and Conciliation Act 1996.1 The Arbitration Act allows parties to agree on a procedure for appointment of arbitrators. The sanctity inhering in the arbitration agreement underscores the autonomy of parties to settle their disputes by arbitrators of their choice. However, the Arbitration Act subjects party autonomy to certain mandatory principles such as the equality of parties, independence and impartiality of the tribunal, and fairness of the arbitral procedure. The reference to the Constitution Bench raises important issues of the interplay between party autonomy and independence and impartiality of the arbitral tribunal.
i. Background to the reference
2. The Law Commission of India in its 246th Report opined that party autonomy cannot be stretched to disregard the principles of impartiality and independence of the arbitral process, specifically at the stage of constituting of an arbitral tribunal.2 Hence, the Law Commission suggested automatic disqualification of persons whose relationship with the parties falls under any of the categories specified by law.
Following upon the recommendations of the Law Commission, Parliament enacted the Arbitration and Conciliation (Amendment) Act 20152 to incorporate Section 12(5)4. Section 12(5) renders a person whose relationship with the parties falls under any of the categories specified under the Seventh Schedule ineligible for appointment. Given the 2015 amendment, parties filed applications under Section 11(6) urging the invalidation of appointment procedures which gave one party dominance in appointing arbitrators.
3. In Voestalpine Schienen GmbH v. Delhi Metro Rail Corporation Ltd.,5 the arbitration clause required the Delhi Metro Rail Corporation6 to prepare a panel of engineers comprising of serving or retired engineers of government departments or public sector undertakings. The clause further stated that matters where the total value was below Rupees 1.5 million should be referred to sole arbitrators, and those exceeding the amount shall be arbitrated before a panel of three arbitrators. The relevant clause for disputes to be decided by three arbitrators was thus:
"(c) For the disputes to be decided by three Arbitrators, the Purchaser will make out a list of five engineers from the aforesaid panel. The supplier and Purchaser shall choose one Arbitrator each, and the two so chosen shall choose the third Arbitrator from the said list, who shall act as the presiding Arbitrator."
4. The issue before a two-Judge Bench of this Court was whether the panel of arbitrators prepared by DMRC violated Section 12 of the Arbitration Act. This Court emphasized that an arbitrator appointed in terms of the agreement between the parties must be independent of the parties. Further, this Court held that Section 12(5) read with the Seventh Schedule does not put an embargo on retired government employees from serving as arbitrators. It held that "[b]ias or even real likelihood of bias cannot be attributed to such highly qualified and experienced persons, simply on the ground that they served the Central Government or PSUs."7
5. The Court held that the arbitration clause had the following adverse consequences: (i) the choice given by DMRC to the other party was limited; and (ii) the discretion given to DMRC to curate a panel of five persons gave rise to the suspicion that it "may have picked up its own favourites." To remedy the situation, it was held that a choice must be given to both parties to nominate any person from the entire panel of arbitrators. Further, this Court observed that in case of a government contract where the authority to appoint an arbitrator rests with a government entity, there is an imperative to have a "broad based panel"8 to instil confidence in the mind of the other party and secure the principle of independence and impartiality at the stage of the constitution of the arbitral tribunal.9
6. In TRF Ltd v. Energo Engineering Projects Ltd,10 the purchase order issued by the respondent to the appellant contained an arbitration clause that stated that any dispute or difference between the parties in connection with the agreement shall be referred "to sole arbitration of the Managing Director of Buyer or his nominee."
After a dispute arose between the parties about the encashment of the bank guarantee, the Managing Director of the respondent appointed a former judge of this Court as the sole arbitrator in terms of the arbitration clause. The issue before the Bench of three Judges was whether the Managing Director was eligible to nominate a sole arbitrator because of Section 12(5) of the Arbitration Act. The Court distinguished the situation where both the parties appoint their arbitrators from a situation where a person ineligible to be appointed as an arbitrator nominates a sole arbitrator:
"53. when there are two parties, one may nominate an arbitrator and the other may appoint another. That is altogether a different situation. If there is a clause requiring the parties to nominate their respective arbitrator, their authority to nominate cannot be questioned. What really in that circumstance can be called in question is the procedural compliance and the eligibility of their arbitrator depending upon the norms provided under the Act and the Schedules appended thereto. But, here is a case where the Managing Director is the "named sole arbitrator" and he has also been conferred with the power to nominate one who can be the arbitrator in his place. Thus, there is subtle distinction."
7. The Court relied on the maxim qui facit per alium facit per se (what one does through another is done by oneself)11 to hold that a person who becomes ineligible to be appointed as an arbitrator cannot nominate another person as an arbitrator:
"57. once the arbitrator has become ineligible by operation of law, he cannot nominate another as an arbitrator. The arbitrator becomes ineligible as per prescription contained in Section 12(5) of the Act. It is inconceivable in law that person who is statutorily ineligible can nominate a person. once the identity of the Managing Director as the sole arbitrator is lost, the power to nominate someone else as an arbitrator is obliterated."
(emphasis supplied)
8. In Perkins Eastman Architects DPC v. HSCC (India) Ltd.,12 the arbitration clause stipulated that disputes or differences between the parties to the contract "shall be referred for adjudication through arbitration by a sole arbitrator appointed by the CMD HSCC within 30 days from the receipt of request from the Design Consultant."
The Bench of two Judges held that the test to determine the possibility of bias is directly relatable to the interest the person appointing an arbitrator has in the outcome of the dispute. The Court held that a person having an interest in the dispute "cannot and should not have any role in charting out any course to the dispute resolution by having the power to appoint an arbitrator."13
9. TRF (supra) and Perkins (supra) both dealt with a situation where a person who was rendered ineligible in terms of Section 12(5) was making an appointment of a sole arbitrator. Consequently, Perkins (supra) relied on TRF (supra) to observe that a person who has an interest in the dispute or its outcome should not have the power to unilaterally appoint a sole arbitrator:
"16. The next sentences in the paragraph, further show that cases where both the parties could nominate respective arbitrators of their choice were found to be completely a different situation. The reason is clear that whatever advantage a party may derive by nominating an arbitrator of its choice would get counter-balanced by equal power with the other party. But, in a case where only one party has a right to appoint a sole arbitrator, its choice will always have an element of exclusivity in determining or charting the course for dispute resolution. Naturally, the person who has an interest in the outcome or decision of the dispute must not have the power to appoint a sole arbitrator. That has to be taken as the essence of the amendments brought in by the Arbitration and Conciliation (Amendment) Act, 2015 (3 of 2016) and recognised by the decision of this Court in TRF Ltd."
(emphasis supplied)
10. In Central Organisation for Railway Electrification v. ECI-SPIC-SMOMCML (JV) A Joint Venture Company,14 the arbitration was to be held following Clause 64(3)(b) of the General Conditions of Contract. The clause reads thus:
"64. (3)(b) Appointment of arbitrator where applicability of Section 12(5) of the A&C Act has not been waived off The Arbitral Tribunal shall consist of a panel of three retired railway officers retired not below the rank of SAO officer, as the arbitrator. For this purpose, the Railways will send a panel of at least four names of retired railway officer(s) empanelled to work as railway arbitrator indicating their retirement date to the contractor within 60 days from the day when a written and valid demand for arbitrators is received by the GM. Contractor will be asked to suggest to General Manager at least two names out of the panel for appointment as contractor's nominee within 30 days from the date of dispatch of the request by the Railways.
The General Manager shall appoint at least one out of them as the contractor's nominee and will, also simultaneously appoint the balance number of arbitrators either from the panel or from outside the panel, duly indicating the "presiding arbitrator" from amongst the three arbitrators so appointed. The GM shall complete this exercise of appointing the Arbitral Tribunal within 30 days from the receipt of the names of contract's nominees. While nominating the arbitrators, it will be necessary to ensure that one of them has served in the Accounts Department."
11. The first relevant issue before the Bench of three Judges was whether the appointment of retired railway officers as arbitrators was valid, given Section 12(5) read with the Seventh Schedule. The Court relied on Voestalpine (supra) to observe that Section 12(5) does not bar former employees of parties from being appointed as arbitrator. The other issue was whether the General Manager could appoint arbitrators. The Court held that the law laid down in TRF (supra) and Perkins (supra) was not applicable because "the right of the General Manager in formation of Arbitral Tribunal is counterbalanced by respondent's power to choose any two from out of the four names and the General Manager shall appoint at least one out of them as the contractor's nominee."
The Court upheld the validity of the arbitration clause and directed the constitution of the arbitral tribunal in terms of the agreement.
ii. The reference
12. In Union of India v. Tantia Constructions Limited,15 a three Judge Bench prima facie disagreed with CORE (supra), observing:
"1. on the facts of this case, the judgment of the High Court cannot be faulted with (sic). Accordingly, the Special Leave Petition is dismissed. However, reliance has been placed upon a recent three- Judge Bench decision of this Court delivered on 17.12.2019 in Central Organisation for Railway Electrification v. ECI-SPIC-SMO-MCML (JV) A Joint Venture Company, 2019 SCC OnLine SC 1635. We have perused the aforesaid judgment and prima facie disagree with it for the basic reason that once the appointing authority itself is incapacitated from referring the matter to arbitration, it does not then follow that notwithstanding this yet appointments may be valid depending on the facts of the case.
2. We therefore request the Hon'ble Chief Justice to constitute a larger Bench to look into the correctness of this judgment."
(emphasis supplied)
13. When the reference came up on 12 July 2023, Mr R Venkataramani, the Attorney General for India, submitted that the Union Government had constituted an Expert Committee on Arbitration Law16 (chaired by Dr T K Viswanathan) to reconsider the provisions of the Arbitration Act. It was further submitted that the issues that have been raised in the present reference would fall within the broad remit of the Expert Committee. On 17 January 2024, the Constitution Bench provided three months to the Union Government to evaluate the recommendations of the Expert Committee. The Court was informed on 16 April 2024 that the government had not taken any decision on the recommendations of the Expert Committee. The Constitution Bench decided to take up the reference for final hearing.
B. Issues
14. The following issues fall for the determination of this Court: a. 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; b. Whether the principle of equal treatment of parties applies at the stage of the appointment of arbitrators; and c. 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.
C. Submissions
15. Mr Gourab Banerji, Mr Neeraj Kishan Kaul and Mr S Ravi Shankar, senior counsel, and Mr Rohan Talwar, Mr George Poothan Poothicote and Mr Anirurdh Krishnan, counsel, made the following submissions:
a. Party autonomy is subject to the mandatory provisions of the Arbitration Act such as Section 18 (equal treatment of parties) and Section 12(5) (independence and impartiality of the arbitration proceedings). A panel of potential arbitrators unilaterally controlled by one party suffers from a lack of independence and impartiality;
b. An arbitration clause that gives one party the power to appoint a sole arbitrator will give rise to a reasonable apprehension of bias concerning the independence and impartiality of the tribunal. The test to determine the existence of reasonable apprehension of bias is that of a reasonable third person;
c. Section 12(5) overrides an arbitration agreement because of the non obstante clause. Although the statute does not specifically bar an ineligible person from appointing an arbitrator, TRF (supra) and Perkins (supra) rightly held that an ineligible person could not appoint an arbitrator or curate a panel of arbitrators. The thread running through TRF (supra) and Perkins (supra) is that if a person has an interest in the outcome of the dispute, such person should not have any role in the process of appointing an arbitrator, including curation of a panel of potential arbitrators;
d. TRF (supra) and Perkins (supra) only carved out an exception for situations where both parties are permitted to appoint an arbitrator of their choice;
e. A unilaterally appointed panel is contrary to the principle of equal treatment of parties enshrined under Section 18, which is a mandatory provision. Although Section 18 is part of Chapter V dealing with the conduct of arbitral proceedings, it also applies at the stage of the constitution of arbitral tribunals. A lack of mutuality in the appointment process is a violation of Section 18 because it gives an unfair advantage to one party;
f. In Lombardi Engineering Limited v. Uttarakhand Jal Vidyut Nigam Limited,17 this Court held that arbitration agreements must conform with the Constitution. An arbitration clause authorizing one party to unilaterally appoint an arbitrator or curate a panel of arbitrators is unconscionable and violative of Article 14. Section 23 of the Indian Contract Act 187218 also prohibits unconscionable contracts;
g. In Voestalpine (supra), this Court directed the constitution of a broad-based panel of arbitrators. However, the constitution of such a panel restricts the choice of the other party and falls foul of the requirement of equality and impartiality; and
h. CORE (supra) does not consider Voestalpine (supra), Section 11(8), and the principle of an independence and impartiality under Section 12. Further, the counter-balancing test evolved in Perkins (supra) is only applicable in situations where both parties have an equal and unfettered choice in appointing their arbitrators. It does not apply to situations where one party's choice of arbitrators is restricted to a pre-selected list by the other party; and
i. The prohibition on a person ineligible under Section 12(5) from nominating an arbitrator or a panel of arbitrators can be traced to Section 18. Further, if the panel of arbitrators is curated and controlled by one party, it gives rise to "justifiable doubts" as to the independence and impartiality of the arbitrator under Section 12.
16. Mr Tushar Mehta, Solicitor General of India, Mr K M Nataraj, Additional Solicitor General of India, Mr Arvind Kamath, Additional Solicitor General of India, Mr Mahesh Jethmalani, Ms Madhavi Divan, Mr Guru Krishna Kumar, Mr Anand Padmanabhan, Mr Naresh Kaushik, Mr Nakul Dewan, Mr P V Dinesh, senior counsel, and Mr Shashank Garg, counsel, made the following submissions:
a. The principle of party autonomy is ingrained in the entire architecture of the Arbitration Act. Section 11(2) allows the parties to agree on a procedure for appointing arbitrators. The procedure contemplated under Section 11(2) can include one party preparing a panel of arbitrators and giving a choice to the other party to select its nominee from the panel;
b. The duty of the Supreme Court or the High Court to appoint an independent and impartial arbitrator under Section 11(8) arises only in situations contemplated under Sections 11(4), 11(5), and 11(6) where parties fail to abide by the agreed procedure. The provision does not hinder the right of the parties to agree on a procedure for appointment of arbitrators under Section 11(2);
c. The action of "appointing" or "enlisting" a person as an arbitrator is distinct from "acting" as an arbitrator. Section 12(5) expressly prohibits a person who is ineligible in terms of the Seventh Schedule from being appointed as an arbitrator. However, the Arbitration Act does not expressly prohibit such an ineligible person from appointing an arbitrator or enlisting a panel of potential arbitrators;
d. The Arbitration Act does not recognize any presumed ineligibility concerning arbitrators. The ineligibility must be real and actual according to Section 12;
e. The equality of treatment under Section 18 does not refer to inter se equality between the parties at the stage of agreeing upon a procedure for appointing an arbitrator. Section 18 mandates the arbitral tribunal to treat the parties with equality and give them a full opportunity to present their case. Further, Section 18 only applies after the composition of the arbitral tribunal during the conduct of arbitral proceedings;
f. The Arbitration Act provides adequate statutory safeguards for securing the independence and impartiality of arbitrators. These safeguards include: (i) Section 12(5) read the Seventh Schedule; (ii) mandatory disclosure under Sections 12(1) read with the Fifth Schedule; (iii) challenge procedures under Sections 13 and 14; and (iv) judicial review of the decision of an arbitrator under Section 34;
g. Voestalpine (supra) has upheld the maintenance of a panel of potential arbitrators by public sector undertakings. It correctly laid down the broadbased principle for the operation of a panel of arbitrators. Further, it did not bar former employees of the parties to the arbitration agreement from serving as arbitrators;
h. TRF (supra) erred by relying on the maxim qui facit per alium facit per se which is usually applied in the context of delegation of authority. The act of appointing or nominating an arbitrator under an arbitration clause is not an act of delegation of the appointing authority's power. Rather, the arbitrator exercises an independent power of adjudication within the limits laid down by the pertinent arbitration agreement and the Arbitration Act; and
i. Non-banking financial companies19 include arbitration clauses in the standard form contracts entered into with the borrowers. Since the nature of the dispute generally involves default in payment by the borrowers, the arbitration clause allows the NBFCs to appoint an arbitrator. Nevertheless, the arbitrator has to satisfy the criteria laid down under Section 12.
D. Principles underpinning the Arbitration Act
17. Our courts have jurisdiction to try all suits of a civil nature except where cognizance is expressly or impliedly barred.20 Section 28 of the Contract Act bars any agreement that prohibits parties from enforcing their rights under contract by usual legal proceedings in ordinary tribunals. However, the provision makes an exception to a contract by which two or more persons agree to refer the disputes that may arise between them in respect of any subject or class of subjects to arbitration.21 Thus, parties can contract out of the traditional justice dispensing mechanism to refer their disputes to arbitration.
18. The Arbitration Act consolidates and amends the law relating to domestic arbitration, international commercial arbitration and enforcement of foreign arbitral awards. It brings the domestic arbitration law in consonance with the UNCITRAL Model Law on International Commercial Arbitration 1985.22 One of the main objectives of the Arbitration Act is to make provision for an arbitral procedure that is fair, efficient and capable of meeting the needs of the specific arbitration.
19. Article 2A of the Model Law enunciates the following principles to interpret the provisions of national arbitration laws: (i) regard for the arbitration law's international origin; (ii) the need to promote uniformity in its application; and (iii) observance of good faith. It further provides that issues not expressly settled under the arbitration law are to be settled in conformity with the "general principles" on which the law is based.23
20. The principles of interpretation suggested by the Model Law require courts to assume a global perspective consistent with the prevailing practice in courts of other jurisdictions and arbitral tribunals.24 The Model Law encourages resort to "general principles" to fill the gaps in the national arbitration laws.25 The term "general principles" is intended to refer to principles widely accepted by legal systems.26 The above principles of interpretation will also apply when interpreting the provisions of the Arbitration Act.
i. Party autonomy
21. Section 7 defines an arbitration agreement to mean an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not. The arbitration agreement records the consent of the parties to submit their disputes to arbitration.27 Arbitration is premised on a consensual agreement to submit disputes to (a) a decision-maker chosen by or for the parties; (b) to render a binding resolution of the dispute following adjudicatory procedures which afford the parties an opportunity to be heard. The right to arbitrate is a private right of the parties to adjudicate in personam disputes.
22. The basis of any arbitration is the freedom of the parties to agree to submit their disputes to an individual or to a panel of individuals whose judgment they are prepared to trust and obey. Party autonomy is fundamental to international commercial arbitration because it allows the parties to design the arbitration proceedings to suit their needs and commercial reality. Party autonomy has been described by this Court as the "brooding and guiding spirit"28 and "backbone"29 of arbitrations. The principle of minimum judicial interference supplements the autonomy of parties by prohibiting courts from interfering in arbitral proceedings unless mandated by the law.30 This principle respects the autonomy of the parties to mutually chart the course of the arbitral proceedings.
23. The Arbitration Act has given pre-eminence to party autonomy throughout the arbitral process. The Arbitration Act has used phrases such as "unless otherwise agreed by the parties"31, "failing any agreement"32, "the parties are free to agree"33, "failing such agreement"34, and "unless the agreement on the appointment procedure provides other means"35 to recognise the autonomy of parties to determine the arbitral proceedings. The use of the above phrases also indicates that an arbitrator is bound by the procedures agreed upon between the parties.36
24. Some of the relevant provisions of the Arbitration Act which reflect the principle of party autonomy are encapsulated below:
a. Section 10 allows parties the freedom to decide the number of arbitrators;
b. Section 11(2) allows parties the freedom to agree on a procedure for appointing the arbitrator or arbitrators;
c. The Proviso to Section 12(5) allows parties to waive the applicability of the provision by an express agreement in writing after the dispute has arisen; and
d. Section 14 allows parties to mutually terminate the mandate of an arbitrator.
25. Additionally, the parties are free to agree on the procedures to be followed by the arbitral tribunal,37 the place of arbitration,38 the date of commencement of arbitral proceedings,39 the language to be used in the arbitral proceedings,40 procedure for hearings and written proceedings,41 consequence of a default by a party,42 appointment of experts43, and the manner of decision making by the arbitral tribunal.44 Thus, the Arbitration Act recognises and enforces mutual commercial bargains and understanding between the parties at all stages of the arbitration proceedings. However, the autonomy of the parties under the Arbitration Act is not without limits. It is limited by certain mandatory provisions of the Arbitration Act.
ii. Mandatory provisions
26. Part I of the Arbitration Act applies where the place of arbitration is in India.45 Section 4 deals with a waiver of the right of a party to object in the following terms:
"4. Waiver of right to object.- A party who knows that -
(a) any provision of this Part from which the parties may derogate, or
(b) any requirement under the arbitration agreement, has not been complied with and yet proceeds with the arbitration without stating his objection to such non-compliance without undue delay or, if a time limit is provided for stating that objection, within that period of time, shall be deemed to have waived his right to so object."
27. Section 4 is a deeming provision.46 It deems that a party has waived its right to object if it proceeds with the arbitration without stating its objection to noncompliance of any provisions from which the parties may derogate or of any requirement under the arbitration agreement.47 Importantly, Section 4 distinguishes between derogable (non-mandatory) and mandatory provisions.48
28. Section 4 is based on Article 4 of the Model Law.49 The purpose of incorporating Section 4 is to inform the arbitrators of the principle of waiver.50 Peter Binder suggests that Article 4 aims to prohibit the adoption of delay tactics by parties and contribute to the fluency of the proceedings.51 A party to arbitration has a right to object to any non-compliance with procedural requirements. Section 4 implies a waiver of this right under certain conditions based on the principle of waiver or estoppel.52
The procedural default at issue must be stipulated either in the arbitration agreement or a non-mandatory provision under Part I of the Arbitration Act. If the arbitration agreement is silent on a procedural point, the provisions of the Arbitration Act take effect. According to Section 4, a party cannot insist on compliance with non-mandatory provisions of the Arbitration Act if it fails to make a timely objection.53 Section 4 of the Arbitration Act necessarily implies that parties cannot proceed with arbitration in derogation of a mandatory provision.
29. The initial draft of Article 4 of the Model Law did not make an exception for mandatory provisions. Therefore, suggestions were made to "soften" the provision by limiting "the waiver rule to non-compliance with non-mandatory provisions."54 Further, a proposal was also made to include a list of mandatory provisions under the Model Law. It was suggested that such a list "would make it unnecessary to include in the non-mandatory provisions such wording as "unless otherwise agreed by the parties."55 The Secretariat considered it unnecessary to include a list of mandatory provisions given the overall scheme of the Model Law.56 It was also of the opinion that mandatory provisions could be discerned from the content of such provisions.
30. Holtzmann and Neuhaus give the following examples of mandatory provisions under the Model Law:
"Examples of provisions that appear to be mandatory and therefore cannot be waived under Article 4 are the following: the requirement that the arbitration agreement be in writing (Article 7(2)); the requirement that the parties be treated with equality and that each party be given a full opportunity of presenting his case (Article 18); the requirement that a party be given notice of any hearing and be sent any materials supplied to the arbitral tribunal by the other party (Article 24(2), (3)); the requirement that an award - including an award on agreement terms - be in writing, that it state its date and place, and that it be delivered to the parties (Article 30(2), 31(1), (3), (4))"57
31. The above extract suggests that an arbitration agreement entered into by the parties is subject to certain well-defined and mandatory legal principles. For instance, Section 34(2)(a)(v) allows for refusal of enforcement of arbitral awards if the composition of the arbitral tribunal or arbitral procedure was not following the agreement of the parties unless such agreement conflicts with the mandatory provisions of the law.58 The composition of the arbitral tribunal or the arbitral procedure must not only be in accordance with the agreement of the parties but also be consistent with the mandatory standards laid down under the Arbitration Act.59 In case of a conflict, mandatory provisions of the Arbitration Act prevail over the arbitration agreement between the parties.60
32. Under the Arbitration Act, the mandatory provisions must be deduced from their content. For instance, the use of the phrase "unless otherwise agreed by the parties" is an indicator of the fact that the provision is derogable because it gives priority to the agreement of the parties. In contrast, the use of the word "shall" in a provision is an indicator that the legislature intended to give it a mandatory effect. However, the use of "shall" is not the sole indicator to determine the mandatory nature of a provision. The provision must be interpreted by having regard to its text and the context to determine its nature.61
33. As opposed to the Indian approach, the UK Arbitration Act 1996 lists the mandatory provisions under Schedule I.62 In this context, Section 4 provides that the mandatory provisions have effect notwithstanding any agreement to the contrary.63 It further provides that the non-mandatory provisions allow the parties to make their arrangements by agreement. Lord Mustill and Stewart Boyd term Section 4 as one of the 'four pillars' of the UK Arbitration Act.64 They observe that the provision is one of the instances indicating the influence of the state on the internal law of arbitration.65
iii. Appointment of arbitrators
34. Section 10 provides that "parties are free to determine the number of arbitrators, provided that such number shall not be an even number."66 If parties fail to determine the number of arbitrators, the arbitral tribunal shall consist of a sole arbitrator. Section 11 pertains to the appointment of arbitrators. Section 11(2) provides that subject to Section 11(6), parties "are free to agree on a procedure for appointing the arbitrator or arbitrators." Section 11 provides recourse to the following contingencies if the parties fail to adhere to the agreed procedure for the appointment of an arbitrator or arbitrators:
"(3) Failing any agreement referred to in sub-section (2), in an arbitration with three arbitrators, each party shall appoint one arbitrator, and the two appointed arbitrators shall appoint the third arbitrator who shall act as the presiding arbitrator;
(4) If the appointment procedure in sub-section (3) applies and -
(a) a party fails to appoint an arbitrator within thirty days from the receipt of a request to do so from the other party; or
(b) the two appointed arbitrators fail to agree on the third arbitrator within thirty days from the date of their appointment, The appointment shall be made, on an application of a party, by the Supreme Court or, as the case may be, by the High Court or any person or institution designated by such Court.
(5) Failing any agreement referred to in sub-section (2), in an arbitration with a sole arbitrator, if the parties fail to agree on the arbitrator within thirty days from receipt of a request by one party from the other party to so agree the appointment shall be made, upon request of a party, by the Supreme Court or, as the case may be, the High Court or any person or institution designated by such Court.
(6) Where, under an appointment procedure agreed upon by the parties, -
(a) a party fails to act as required under that procedure; or
(b) the parties, or the two appointed arbitrators, fail to reach an agreement expected of them under that procedure; or
(c) a person, including an institution, fails to perform any function entrusted to him or it under that procedure, A party may request the Supreme Court or, as the case may be, the High Court or any person or institution designated by such Court to take necessary measure, unless the agreement on the appointment procedure provides other means for securing the appointment."
35. In terms of the legislative scheme in Section 11, parties are free to agree on a procedure for appointing the arbitrator or arbitrators. The procedure for appointment agreed by the parties is subject to the power of the Supreme Court or the High Courts under Section 11(6) to appoint an arbitrator in cases where the parties do not agree on a procedure or if the parties or the arbitrator fail to act following the agreed procedure. Thus, Section 11(6) allows judicial involvement as a default mechanism and not as an independent basis for choosing the arbitrators irrespective of the parties' agreement. Further, parties can invoke Sections 11(3), 11(4) or 11(5), as the case may be, only upon the failure of the agreed procedure for appointment of arbitrators.
36. Party autonomy is the governing feature of the constitution of the arbitral tribunal.67 The process of selecting a tribunal allows parties to choose arbitrators with peculiar experience or expertise.68 Parties are free to agree either on a specified individual or individuals as arbitrators or on a procedure for the selection of arbitrators. Most international arbitration statutes give primacy to the agreement of parties for the constitution of the arbitral tribunal.69 The genesis of this international consensus could be traced to the Geneva Protocol on Arbitration Clauses 1923 which stated that the "arbitral procedure, including the constitution of the arbitral tribunal, shall be governed by the will of the parties and by the law of the country in whose territory the arbitration takes place."70
37. When appointing an arbitrator under Section 11, the appointing authority has to ensure the appointment of independent and impartial arbitrators in terms of Section 11(8):
"(8) The Supreme Court or, as the case may be, the High Court or the person or institution designated by such Court shall seek a disclosure in writing from the prospective arbitrator in terms of sub-section (1) of section 12, and have due regard to -
(a) any qualifications required for the arbitrator by the agreement of the parties; and
(b) the contents of the disclosure and other considerations as are likely to secure the appointment of an independent and impartial arbitrator."
38. Section 11(8) requires an appointing authority to have due regard to the qualifications required for the arbitrator as agreed by the parties. For instance, if the agreement only allows a professional of a particular class such as a chartered accountant to serve as an arbitrator, the appointing court should normally abide by this requirement. However, while appointing an arbitrator following the agreed qualifications, the appointing court must also have due regard for considerations that are likely to secure an independent and impartial tribunal. Section 11(8) imposes a duty on the appointing court to ensure the appointment of an independent and impartial arbitrator.
39. Section 11 is based on Article 11 of the Model Law. The draft text of the Model Law contained a provision which invalidated an arbitration agreement if it accorded a predominant position or unfair advantage to one party in the appointment of the arbitrator. The provision is extracted below:
"An arbitration agreement is invalid [if] [to the extent that] it accords one of the parties a [predominant position] [manifestly unfair advantage] with regard to the appointment of arbitrators."71
40. The Working Group decided to delete the above paragraph from the draft article based on the following reasoning:
"90. The prevailing view, however, was to delete paragraph (2) since (a) there was no real need for such a rule in view of the fact that the few instances aimed at could appropriately be dealt with by other provisions of the model law (e.g., on challenge of arbitrator or setting aside of award); (b) the wording was too vague and could thus lead to controversy or dilatory tactics and, above all, to a misinterpretation which could endanger well-established and recognised appointment practices; (c) the legal sanction, in particular the idea of partial invalidity, was not sufficiently clear.
91. The Working Group, after deliberation, decided to delete paragraph (2). That decision, however, should not be understood as condoning practices where one party had a clearly greater influence on the appointment without good reasons."72
(emphasis supplied)
41. The Working Group noted that other provisions in the Model Law such as Article 12 (challenge to an arbitrator) and Article 34 (setting aside of an arbitral award) implicitly restrict the autonomy of parties to appoint arbitrators.73 Thus, an arbitrator may be subject to challenge if the agreed procedure for appointment by the parties fails to adhere to the standards of independence and impartiality prescribed under Section 12. Gary Born also opines that the autonomy of parties to select arbitrators is generally subject to certain limitations, including mandatory requirements of equality and due process, impartiality and independence, and capacity requirements.74
iv. Independence and impartiality of arbitrators
42. Section 12 provides the grounds to challenge the appointment of arbitrators.75 Section 12(1) mandates that a person who has been approached to be appointed as an arbitrator must disclose in writing any circumstances that are likely to give rise to "justifiable doubts as to his independence or impartiality." The Fifth Schedule to the Arbitration Act specifies circumstances that give rise to justifiable doubts as to the independence or impartiality of arbitrators.
Section 12(1) also mandates an arbitrator to disclose in writing any circumstances that are likely to affect the ability to devote sufficient time to the arbitration and in particular the ability to complete the entire arbitration within twelve months. The duty of disclosure is a continuing duty. Section 12(3) provides that an arbitrator may be challenged only if: (i) circumstances exist that give rise to justifiable doubts as to independence or impartiality; or (ii) the arbitrator does not possess the qualifications agreed to by the parties.
43. Before the 2015 amendment, this Court generally upheld arbitrator appointment clauses which gave one party "unfettered discretion" to appoint a sole arbitrator.76 It was also held that there was no bar under the Arbitration Act for an employee of a government or Public Sector Undertaking77, which is a party to an arbitration agreement, to act as an arbitrator.78
However, it was observed that there could be justifiable apprehension about the independence or impartiality of an employee arbitrator who was the "controlling or dealing authority" regarding the subject contract or if the arbitrator was a direct subordinate to the officer whose decision was the subject-matter of the dispute.79 The Court suggested phasing out arbitration clauses providing for the appointment of serving officers as arbitrators to "encourage professionalism in arbitration."80
44. The 2015 amendment mandates arbitrators to make disclosures before their appointment in terms of the categories specified under the Fifth Schedule. The Fifth Schedule prescribes thirty-four categories that give rise to justifiable doubts as to the independence or impartiality of arbitrators. These categories are classified as follows:
(i) the relationship of the arbitrator with the parties or counsel;
(ii) the relationship of the arbitrator to the dispute;
(iii) the arbitrator's direct or indirect interest in the dispute;
(iv) previous services rendered by the arbitrator to one of the parties or other involvement in the case;
(v) relationship between an arbitrator and another arbitrator or counsel;
(vi) relationship between arbitrator and party and others involved in the arbitration, and
(vii) and other circumstances.
45. The 2015 amendment has incorporated Section 12(5) to provide for ineligibility of a person to be appointed as an arbitrator whose relationship with the parties or counsel or the subject matter of the dispute falls under any of the categories specified in the Seventh Schedule. Section 12(5) reads thus:
"(5) Notwithstanding any prior agreement to the contrary, any person whose relationship, with the parties or counsel or the subject-matter of the dispute, falls under any of the categories specified in the Seventh Schedule shall be ineligible to be appointed as an arbitrator:
Provided that parties may, subsequent to disputes having arisen between them, waive the applicability of this sub-section by an express agreement in writing."
46. The Seventh Schedule to the Arbitration Act divides the specified categories based on three factors:
(i) arbitrator's relationship with the parties or counsel;
(ii) the relationship of the arbitrator to the dispute; and
(iii) arbitrator's direct or indirect interest in the dispute.
The categories that are relevant for the present reference are as follows:
"1. The arbitrator is an employee, consultant, advisor or has any other past or present business relationship with a party.
5. The arbitrator is a manager, director or part of the management, or has a similar controlling influence, in an affiliate of one of the parties if the affiliate is directly involved in the matters in dispute in the arbitration."
47. Section 12(5) overrides any prior procedure for appointing the arbitrators agreed upon between the parties under Section 11(2) due to the non obstante clause. However, the proviso to Section 12(5) allows parties to waive the applicability of that provision after the dispute has arisen. The proviso secures "real and genuine party autonomy" by allowing parties to waive the applicability of Section 12(5).81
48. Section 12(5) does not prescribe a method to challenge the appointment of an ineligible person. Section 14 deals with the termination of the mandate of an arbitrator who is unable to perform their functions.82 A person who is ineligible to be appointed as an arbitrator in terms of Section 12(5) becomes de jure unable to perform functions according to Section 14. Resultantly, the mandate of such an ineligible person gets automatically terminated and they are liable to be substituted by another arbitrator under Section 14.83
49. The disclosure requirement helps prevent the appointment of an unacceptable candidate.84 The duty of disclosure is a continuing requirement to: (i) provide the information to any party who did not obtain it before the arbitrator's appointment; and (ii) secure information about circumstances that only arise at a later stage of the arbitral proceedings, that is, new business affiliations or share acquisitions.85
50. During the drafting of Article 12 of the Model Law, proposals were mooted to provide specific circumstances or grounds for challenging the appointment of arbitrators. The Secretariat noted that instead of prescribing a list of all the possible grounds of challenge, an alternative would be to prescribe "a general formula such as "circumstances giving rise to justifiable doubts as to the arbitrator's impartiality or independence.""86 The Working Group did not set forth any comprehensive understanding of the meaning of the standard for challenge included under Article 12.87
It acknowledged that the general formula is exhaustive and will include most of the grounds of challenge set forth under national laws.88 According to the Working Group, the grounds of challenge under national law applicable to judges, such as a financial interest or previous involvement in the subject matter or a certain relation to one of the parties, could apply to arbitrators.89
51. Section 13 prescribes the procedure for challenging an arbitrator in terms of Section 12(3).90 Section 13(1) provides that the parties are free to agree on a procedure for challenging an arbitrator. If the parties fail to agree on a procedure, the arbitral tribunal shall decide on the challenge. In case the challenge to the arbitrator is not successful, the arbitral tribunal shall continue with the arbitral proceedings and make an arbitral award. A party may later make an application for setting aside such an arbitral award under Section 34.
v. Equality in the arbitral proceedings
52. Chapter V of the Arbitration Act deals with the 'conduct of arbitral proceedings.' Section 18 provides that the parties "shall be treated with equality and each party shall be given a full opportunity to present his case." Section 18 establishes two principles: equal treatment of the parties and a right to a fair hearing. This provision has been referred to as the "due process clause of arbitration."91
53. Section 18 is based on Article 18 of the Model Law. Article 18 was initially paragraph 3 of Article 19 dealing with the freedom of parties to determine the rules of procedure. It was later formed into a separate article considering its overall importance. The Working Group stated that the freedom of parties is subject to mandatory provisions including the then paragraph 3 of Article 19:
"3. The freedom of the parties is subject only to the provisions of the model law, that is, to its mandatory provisions. The most fundamental of such provisions, from which the parties may not derogate, is the one contained in paragraph (3). Other such provisions concerning the conduct of the proceedings or the making of the award are contained in articles 23(1), 24(2)-(4), 27, 30(2), 31(1), (3), (4), 32 and 33(1), (2), (4), (5)."
(emphasis supplied)
54. Ultimately, paragraph 3 of Article 19 was placed in a separate article in the form of Article 18. This was meant to distinguish two distinct issues: party autonomy to determine rules of procedure and fairness of arbitral proceedings.92 Moreover, the separation was meant to emphasise the importance of procedural fairness over the autonomy of parties to determine procedural rules.
55. Article 18 constitutes a fundamental principle that is "applicable to the entire arbitral proceedings."93 The Working Group has also stated that the principles of equality and fairness "should be observed not only by the arbitral tribunal but also by the parties when laying down any rules of procedure."94 It was the understanding of the Working Group that the principle of equality of parties applies to arbitral proceedings in general, including aspects such as the composition of arbitral tribunal.95
Article 18 also operates as a limitation on Article 19 which provides broad autonomy to both the parties and, in the absence of an arbitration agreement, to the arbitral tribunal when determining the procedure to be followed in conducting the arbitral proceedings.96 It imposes a duty on the arbitral tribunal to ensure fairness in the arbitral process.
vi. Public-private arbitration
56. Private law is a part of common law which involves relationships between individuals by way of contract or tort.97 The demands of the modern market economy require the State to contract out certain public tasks to private entities. The procurement of goods and services is among the most common forms of government contracting with private providers.98 Indian law does not provide a special regime governing contracts by public authorities. Generally, the resolution of disputes arising out of the contractual terms of a public-private contract is subject to ordinary civil law remedies.99 Arbitration is one of the preferred private dispute resolution mechanisms adopted in public-private contracts.
57. An arbitration involving a company owned or controlled by government would likely involve public interest, considering the impact of an arbitral award on public finances. However, the Arbitration Act does not make a distinction between public-private arbitrations and private arbitrations. This lack of differentiation also extends to other aspects of arbitration including appointment of arbitrators, conduct of arbitration proceedings, and setting aside and enforcement of arbitral awards.100 Since the grounds for setting aside an arbitral award have been narrowly framed, the thrust of this privately ordered legal system is on the decision made by the arbitral tribunal. Moreover, the Arbitration Act mandates the arbitration proceedings to be conducted following two main principles: (i) equality of parties; and (ii) independence and impartiality of arbitral proceedings.
58. In Pam Developments Private Limited v. State of West Bengal101, the arbitrator made an award in favour of the contractor. When the contractor sought to enforce the award, the State government obtained a stay by relying on Order XXVII Rule 8-A of the Code of Civil Procedure 1908.102 This Court held that since the Arbitration Act is a self-contained code, the provisions of the CPC "will apply only insofar as the same are not inconsistent with the spirit and provisions of the Arbitration Act."
Noting that no special treatment can be given to the government under the Arbitration Act, the Court observed:
"26. Arbitration proceedings are essentially alternate dispute redressal system meant for early/quick resolution of disputes and in case a money decree - award as passed by the arbitrator against the Government is allowed to be automatically stayed, the very purpose of quick resolution of dispute through arbitration would be defeated as the decree-holder would be fully deprived of the fruits of the award on mere filing of objection under Section 34 of the Arbitration Act. The Arbitration Act is a special Act which provides for quick resolution of disputes between the parties and Section 18 of the Act makes it clear that the parties shall be treated with equality.
Once the Act mandates so, there cannot be any special treatment given to the Government as a party. As such, under the scheme of the Arbitration Act, no distinction is made nor any differential treatment is to be given to the Government, while considering an application for grant of stay of a money decree in proceedings under Section 34 of the Arbitration Act. As we have already mentioned above, the reference to CPC in Section 36 of the Arbitration Act is only to guide the court as to what conditions can be imposed, and the same have to be consistent with the provisions of the Arbitration Act."
(emphasis supplied)
Therefore, the Arbitration Act does not provide different or special treatment to the government in arbitrations by or against the government.103
E. The principle of equality applies at the stage of appointment of arbitrators
i. Arbitration as a quasi-judicial function
59. According to well-established legal principles, an act of a statutory authority will be a quasi-judicial if:
(i) the authority is empowered under a statute;
(ii) the mandate is to decide disputes arising out of a claim made by one party which is opposed by another party; and
(iii) the body which decides has to determine the rights of contesting parties who are opposed to each other.104
A quasi-judicial function is required to be exercised judicially, that is, following the principles of natural justice because of its impact on the rights of persons affected.105 In Jaswant Sugar Mills Ltd. v. Lakshmi Chand,106 a Constitution Bench has identified the following criteria to determine whether an act is judicial:
"(1) it is in substance a determination upon investigation of a question by the application objective standards to facts found in the light of preexisting legal rules;
(2) it declares rights or imposes upon parties obligations affecting their civil rights; and
(3) that the investigation is subject to certain procedural attributes contemplating an opportunity of presenting its case to a party, ascertainment of facts by means of evidence if a dispute be on questions of fact, and if the dispute be on question of law on the presentation of legal argument, and a decision resulting in the disposal of the matter on findings based upon those questions of law and fact."
60. An arbitrator's relationship with parties is contractual. The rights and obligations of an arbitrator are principally the result of the contractual relations with the parties.107 However, the position under common law is that the rights and duties of an arbitrator are derived from a conjunction of contract and quasi-judicial status granted by national laws. In Norjarl v. Hyundai Heavy Industries, Lord Browne-Wilkinson observed that it is impossible to distinguish contractual matters from those of quasi-judicial status.108
Similarly, in ONGC v. Afcons Gunanusa JV, this Court recognized that the rights and duties of arbitrators flow from: (i) the national laws governing arbitration which give a quasi-judicial status to arbitrators wheres they have to act as impartial adjudicators; and (ii) the arbitrator's contract with the parties which governs many aspects of the arbitrator-party relationship including remuneration, confidentiality, and timelines for completion of arbitral proceedings.109
61. An arbitral tribunal performs a quasi-judicial function because it substantially determines the rights and liabilities of competing parties through adjudicative means.110 The tribunal is generally required to arrive at decisions or awards based on procedural and substantive law. The Arbitration Act allows flexibility to parties to select the procedural and substantive law to be followed by the arbitral tribunal. During the arbitration process, the arbitral tribunal generally meets at a place agreed upon by the parties, considers the statement of claim and defence, conducts oral hearings, and may appoint experts. Thus, arbitral tribunals act judicially to adjudicate the rights of parties.
62. The Arbitration Act is a self-contained code.111 The legal framework contained under the Arbitration Act and the Contract Act recognises and enforces the contractual intention of parties to entrust an arbitral tribunal with the authority to settle their disputes. Section 8 of the Arbitration Act mandates judicial authorities to refer parties to arbitration where there is an arbitration agreement. The other provisions of the Arbitration Act are also geared towards ensuring minimal judicial interference112 in arbitral proceedings and recognizing the competence of the arbitral tribunals to rule on their jurisdiction.113
63. Although the Arbitration Act recognizes the autonomy of parties to decide on all aspects of arbitration, it also lays down a procedural framework to regulate the composition of the arbitral tribunal and conduct of arbitral proceedings. The incorporation of Section 12(5) is a recognition of the wellestablished principle that quasi-judicial proceedings should be conducted consistent with the principles of natural justice. Section 18 serves as a guide for arbitral tribunals to follow the principles of equality and fairness during the conduct of arbitral proceedings. Thus, the Arbitration Act requires the arbitral tribunals to act judicially in determining disputes between parties.114
64. Since arbitral proceedings have "trappings of a court", the law requires arbitral tribunals to act objectively and "exercise their discretion in a judicial manner, without caprice, and according to the general principles of law and rules of natural justice."115 An arbitral award can be set aside if the composition of the arbitral tribunal or the arbitral procedure violates the mandatory provisions of the Arbitration Act, including Sections 12 and 18. Thus, the Arbitration Act emphasizes that the substance of the law cannot be divorced from the procedure.
65. Section 31 mandates that an award made by an arbitrator shall be in writing and signed by all members of the arbitral tribunal.116 The provision further provides that an arbitral award shall state the reasons upon which it is based, unless the parties have agreed that no reasons are to be given. This provision is consistent with the principle that a quasi-judicial authority must generally record its reasons in support of the order it makes.117 Further, the decision rendered by an arbitral tribunal is binding and enforceable "in the same manner as if it were a decree of the court."118
66. Arbitral tribunals serve as effective alternatives to traditional justice dispensing mechanisms. The purpose of arbitral tribunals is to be expeditious where the law is slow, cheap where the law is costly, simple where the law is technical, and a peace-maker instead of a stirrer up of strife.119 Arbitral tribunals can inspire confidence in their adjudicatory process by conducting fair and impartial hearings and providing sufficient and cogent reasons for their decisions.120 Given the adjudicatory functions performed by arbitral tribunals, the decisions which emanate from them must be grounded in a process that is independent and impartial.
ii. Equality applies at the stage of appointment of arbitrators
67. Section 18 contains the principle of natural justice to give full opportunity to parties to present their case.121 In Union of India v. Vedanta Ltd., Justice Indu Malhotra, writing for a three Judge Bench, observed that the "[f]air and equal treatment of the parties is a non-derogable and mandatory provision, on which the entire edifice of the alternate dispute resolution mechanism is based."122 The purpose of Section 18 is to give the arbitral process a semblance of judicial proceedings by infusing the principles of equality and fairness.123 The theoretical basis for this understanding stems from the fact that arbitrators are authorities vested with powers to resolve disputes under the law.124
68. The first part of Section 18 provides that "parties shall be treated with equality." The broad nature of the prescription has to be complied with not only by arbitral tribunals, but also by parties while giving expression to party autonomy. The principle has to be followed in all procedural contexts of arbitral proceedings, including the stage of appointment of arbitrators.125
According to Peter Binder, the principle of equal treatment of parties "means that no party may be given preference in the arbitrator-selection process regardless of how strong its bargaining power may be."126 Countries such as Germany,127 the Netherlands,128 Spain,129 and Estonia130 allow the party that has been disadvantaged by an asymmetric appointment clause to request courts to appoint an arbitrator or arbitrators. The underlying principle is that the courts should not recognise and enforce agreements that are unfair and biased.
69. In Indian Oil Corporation Ltd. v. Raja Transport (P) Ltd.,131 the arbitration clause provided that any disputes arising between the parties shall be referred to the "sole arbitration of the Director, Marketing of the Corporation or of some officer of the Corporation who may be nominated by the Director, Marketing." It was contended that an arbitration clause which allows one party to nominate its officer as the sole arbitrator is against the principle of independence and impartiality contained in Sections 11(8), 12, and 18. A two-Judge Bench of this Court rejected this contention by holding that Sections 11, 12, and 18 do not prohibit an employee of either of the parties from acting as an arbitrator:
"32. Section 18 requires the arbitrator to treat the parties with equality (that is to say without bias) and give each party full opportunity to present his case. Nothing in Sections 11, 12, 18 or other provisions of the Act suggests that any provision in an arbitration agreement, naming the arbitrator will be invalid if such named arbitrator is an employee of one of the parties to the arbitration agreement."
Raja Transport (supra) was delivered before the 2015 amendment. Section 12(5) now renders an employee of either of the parties ineligible for being appointed as an arbitrator.
70. The concept of equality under Article 14 enshrines the principle of equality of treatment. The basic principle underlying Article 14 is that the law must operate equally on all persons under like circumstances.132 The implication of equal treatment in the context of judicial adjudication is that "all litigants similarly situated are entitled to avail themselves of the same procedural rights for relief, and for defence with like protection and without discrimination."133
In Union of India v. Madras Bar Association,134 a Constitution Bench held that the right to equality before the law and equal protection of laws guaranteed by Article 14 of the Constitution includes a right to have a person's rights adjudicated by a forum which exercises judicial power impartially and independently. Thus, the constitutional norm of procedural equality is a necessary concomitant to a fair and impartial adjudicatory process.
71. Arbitration is an adversarial system. It relies on the parties to produce facts and evidence before the arbitral tribunal to render a decision. Procedural equality is generally considered to contain the following indicia: (i) equal capability of parties to produce facts and legal arguments; (ii) equal opportunities to parties to present their case; and (iii) neutrality of the adjudicator.135 In an adversarial process, formal equality is important because it helps secure legitimate adjudicative outcomes and create a level playing field between parties.136
72. The defining characteristic of arbitration law (particularly ad hoc arbitration) is that it allows freedom to the parties to select their arbitrators. This is unlike domestic courts or tribunals where the parties have to litigate their claims before a pre-selected and randomly allocated Bench of judges. Section 11(2) of the Arbitration Act allows parties to agree on a procedure for appointing the arbitrators. The "procedure" contemplated under Section 11(2) is a set of actions which parties undertake in their endeavour to appoint arbitrators to adjudicate their dispute independently and impartially.
Without formal equality at the stage of appointment of arbitrators, a party may not have an equal say in facilitating the appointment of an unbiased arbitral tribunal. In a quasi-judicial process such as arbitration, the appointment of an independent and impartial arbitrator ensures procedural equality between parties during the arbitral proceedings. This is also recognised under Section 11(8) which requires the appointing authority to appoint independent and impartial arbitrators.
73. The 2015 amendment has introduced concrete standards of impartiality and independence of arbitrators. One of the facets of impartiality is procedural impartiality. Procedural impartiality implies that the rules constitutive of the decision-making process must favour neither party to the dispute or favour or inhibit both parties equally.137 Further, a procedurally impartial adjudication entails equal participation of parties in all aspects of adjudication for the process to approach legitimacy.138 Participation in the adjudicatory process is meaningless for a party against whom the arbitrator is already prejudiced.139 Equal participation of parties in the process of appointment of arbitrators ensures that both sides have an equal say in the establishment of a genuinely independent and impartial arbitral process.
74. Under Sections 12(1) and 12(5), the Arbitration Act recognises certain mandatory standards of independent and impartial tribunals. The parties have to challenge the independence or impartiality of the arbitrator or arbitrators in terms of Section 12(3) before the same arbitral tribunal under Section 13.140 If the tribunal rejects the challenge, it has to continue with the arbitral proceedings and make an award. Such an award can always be challenged under Section 34. However, considerable time and expenses are incurred by the parties by the time the award is set aside by the courts. Equal participation of parties at the stage of the appointment of arbitrators can thus obviate later challenges to arbitrators.
75. Independence and impartiality of arbitral proceedings and equality of parties are concomitant principles. The independence and impartiality of arbitral proceedings can be effectively enforced only if the parties can participate equally at all stages of an arbitral process. Therefore, the principle of equal treatment of parties applies at all stages of arbitral proceedings, including the stage of the appointment of arbitrators.
F. Nemo judex rule and the doctrine of bias
76. The principles of natural justice principally consist of two rules: (i) no one shall be a judge in their own cause (nemo judex in causa sua); and (ii) no decision shall be given against a party without affording a reasonable opportunity of being heard.141 Adherence to the principles of natural justice is a facet of procedural fairness. A decision made by the State to the prejudice of a person must be after following the basic rules of justice and fair play.142
The principles of natural justice are applied because administrative or quasi-judicial proceedings can abridge or take away rights.143 Application of the principles of natural justice prevents miscarriage of justice.144 Natural justice has both an intrinsic and an instrumental function. The intrinsic function values natural justice as an end in itself. It values natural justice as an essential feature of fairness. In its instrumental element, natural justice is viewed as a means to achieving just outcomes.
77. The principle of nemo judex is based on the precept that justice should not only be done but manifestly and undoubtedly be seen to be done.145 The principle of nemo judex applies to judicial, quasi-judicial, and administrative proceedings.146 An adjudicator should be disinterested and unbiased.147 A bias is a predisposition to decide for or against one party, without proper regard to the true merits of the dispute.148
i. Principles of natural justice
78. Article 14 of the Constitution provides that the State shall not deny to any person equality before the law or equal protection of the laws within the territory of India. Article 14 is founded on a sound public policy to secure to all persons, citizens or non-citizens, the equality of status and opportunity.149 One of the dimensions of the equality jurisprudence evolved by this Court is that arbitrariness is antithetical to equality.150 State action must be based on principles of fairness and equality of treatment.151
Article 14 strikes at arbitrary actions and ensures fairness and equality of treatment.152 Violation of the principles of natural justice results in arbitrariness.153 The principle of reasonableness is an essential element of equality.154 Resultantly, a procedure contemplated under Article 21 must be just, fair, and nonarbitrary. This Court has recognized that the concept of reasonableness and non-arbitrariness pervades the entire constitutional scheme.155
79. In Union of India v. Tulsiram Patel,156 a Constitution Bench of this Court observed that violation of the principles of natural justice results in arbitrariness:
"95. The principles of natural justice have thus come to be recognized as being a part of the guarantee contained in Article 14 because of the new and dynamic interpretation given by this Court to the concept of equality which is the subject-matter of that article. Shortly put, the syllogism runs thus: violation of a rule of natural justice results in arbitrariness which is the same as discrimination; where discrimination is the result of State action, it is a violation of Article 14: therefore, a violation of a principle of natural justice by a State action is a violation of Article 14.
Article 14, however, is not the sole repository of the principles of natural justice. What it does is to guarantee that any law or State action violating them will be struck down. The principles of natural justice, however, apply not only to legislation and State action but also where any tribunal, authority or body of men, not coming within the definition of State in Article 12, is charged with the duty of deciding a matter. In such a case, the principles of natural justice require that it must decide such matter fairly and impartially."
80. Article 14 is an important facet of administrative, judicial and quasi-judicial decision-making in India and demands fair play in action.157 The object of observing the principles of natural justice is to ensure that "every person whose rights are going to be affected by the proposed action gets a fair hearing."158 The non-observance of natural justice is itself a prejudice to any person who has been denied justice depending upon the facts and circumstances of each case.159 The principle of procedural fairness is rooted in the principles of the rule of law and good governance.160 In Madhyamam Broadcasting Limited v. Union of India,161 this Court held that the requirement of procedural fairness "holds an inherent value in itself."
It was further observed:
"42. Inherent value in fair procedure: Fair procedure is not only a means to the end of achieving a fair outcome but is an end it itself. Fair procedure induces equality in the proceedings. The proceedings 'seem' to be and are seen to be fair."
81. We recognize that arbitration is a private dispute settlement mechanism. Yet, it is statutorily subject to the principles of equality and fairness contained under the Arbitration Act. Section 18 of the Arbitration Act mandates the equal treatment of parties and fairness in arbitral proceedings as a mandatory principle governing the conduct of arbitration. Thus, the resolution of disputes arising in a private contractual relationship is subject to certain inherent principles which a quasi-judicial body like an arbitral tribunal is required to adhere to. Resolution of private disputes following the minimum statutory standards of equality and fairness is essential not only in the interest of justice, but also to uphold the integrity of arbitration in India.
ii. Doctrine of bias
82. In A K Kraipak v. Union of India,162 the Central Government constituted a Special Selection Board for selecting officers to the Indian Forest Service in the senior scale and junior scale from the serving officers of the Forest department of the State of Jammu and Kashmir. One of the members of the selection board was the officiating Chief Conservator of Forests of Jammu and Kashmir. However, the Chief Conservator was also one of the candidates in contention for the posts in the Indian Forest Service. Although the Chief Conservator was not present when his name was considered for selection by the board, he was present and participated in the deliberations when the names of other candidates were being considered.
83. The Constitution Bench held that the real question was not whether the Chief Conservator was biased, but whether there was a reasonable ground for believing that he was likely to have been biased. It was observed that a reasonable likelihood of bias has to be determined by taking into consideration human probabilities and the ordinary course of human conduct.163 It was observed that the Chief Conservator had an interest in keeping his rivals out and securing the position for himself. Further, it was held that the other members of the selection board would have been influenced by the Chief Conservator's opinion about other candidates. Resultantly, this Court struck down the entire selection made by the board.
84. In J Mohapatra v. State of Orissa,164 the State government had constituted a committee to select books for general reading to be kept in school and college libraries. For the years 1980 to 1982, the committee selected and purchased books in a prescribed manner. The list of books prepared by the committee was challenged before the High Court. One of the grounds of challenge was that some of the members of the committee were themselves authors of books that were selected and purchased. The High Court rejected the challenge on two grounds: (i) the decision of the committee was subject to the approval of the State government; and (ii) the role played by an individual member of the committee was insignificant and could not have influenced the decision of the committee.
85. This Court observed that a person who has written a book that is submitted for selection has an interest in the matter of selection. It was further observed that there is a direct correlation between the selection of books by the committee and an increase in sales of the books. The increased sales resulted in increased royalties for the authors. Therefore, it was held that an author benefits financially if their book is selected by the committee. This Court further disagreed with the finding of the High Court that the authormember had an insignificant role in the book selection process, by observing:
"11. to say that such author-member is only one of the members of the Assessment Sub-Committee is to overlook the fact that the author-member can subtly influence the minds of the other members against selecting books by other authors in preference to his own. It can also be that books by some of the other members may also have been submitted for selection and there can be between them a quid pro quo or, in other words, you see that my book is selected and in return I will do the same for you.
In either case, when a book of an authormember comes up for consideration, the other members would feel themselves embarrassed in frankly discussing its merits. Such author-member may also be a person holding a high official position whom the other members may not want to displease. It can be that the other members may not be influenced by the fact that the book which they are considering for approval was written by one of their members. Whether they were so influenced or not is, however, a matter impossible to determine. It is not, therefore, the actual bias in favour of the authormember that is material but the possibility of such bias."
(emphasis supplied)
86. In J Mohapatra (supra), it was observed that a decision-maker who is prejudiced can possibly influence the decision of the authority in tangible and intangible ways. This Court recognized that the doctrine of necessity serves as an exception to the nemo judex rule. An adjudicator, who is subject to disqualification on the ground of bias or interest in the matter which he has to decide, may be required to adjudicate in three situations: (i) if there is no other person who is competent or authorized to adjudicate; (ii) if a quorum cannot be formed without him; or (iii) if no other competent tribunal can be constituted.
87. In Ashok Kumar Yadav v. State of Haryana,165 some members of the selection committee of the Haryana Public Service Commission were related to the candidates who appeared for the viva voce examination. Although the members did not participate when their relatives were being interviewed, they participated in the interviews of other candidates.
The court observed that the test "is not that the decision is actually tainted with bias, but that the circumstances are such as to create a reasonable apprehension in the mind of others that there is a likelihood of bias affecting the decision." The Court observed that the nemo judex rule extends to all cases where an independent mind has to be applied to arrive at a fair and just decision between rival claims of parties. However, the court resorted to the doctrine of necessity to hold that the decision of the state Public Service Commission, being a constitutional authority, was not vitiated.166
88. The principle governing the doctrine of bias is that a member of a judicial body with a predisposition in favour of or against any party to a dispute or whose position in relation to the subject matter or a disputing party is such that a lack of impartiality would be assumed to exist should not be a part of a tribunal composed to decide the dispute.167
This principle is applicable to authorities who have to act judicially in deciding rights and liabilities and bodies discharging quasi-judicial functions. A quasi-judicial authority empowered to decide a dispute between opposing parties "must be one without bias towards one side or the other in the dispute."168 A member of a tribunal which is called upon to try issues in judicial or quasi-judicial proceedings must act impartially, objectively, and without bias.169
iii. Test of real likelihood of bias
a. Automatic disqualification
89. Bias is generally classified under three heads: (i) legal interest, which means a judge is "in such a position that a bias must be assumed"; (ii) pecuniary interest; and (iii) personal bias.170 A pecuniary or proprietary interest, however small, automatically disqualifies a person.171 A person who has an interest in the outcome of an issue that is to be resolved would be acting as a judge in their own cause.172
The question is not whether a judge has some link with parties involved in a cause before the judge but whether the outcome of that cause could realistically affect the judge's interest.173 This principle has been authoritatively stated by the House of Lords in Dimes v. Grand Junction Canal.174 In that case, the Lord Chancellor decreed in favour of a canal company in which he held substantial shares. The House of Lords observed that the principle that no person should be judge in their own cause "is not to be confined to a cause in which he is a party, but applies to a cause in which he has an interest."175.
90. In R v. Bow Street Metropolitan Stipendiary Magistrate, ex parte Pinochet Ugarte (No. 2),176 the House of Lords held that the former head of Chile was not immune from extradition to Spain for trial of alleged crimes against humanity. Lord Hoffman was one of the five members who agreed with the majority. During the hearings, Amnesty International,177 a human rights body, intervened and participated in the proceedings. It came to light after the judgment that Lord Hoffman was a director and chairman of Amnesty International Charity Limited,178 which was wholly owned and controlled by AI. Resultantly, the House of Lords set aside its previous decision and directed a rehearing of the matter.
91. Lord Browne-Wilkinson observed that AI and AICL were all "parts of an entity or movement" working in different fields to establish that Pinochet was not immune from extradition as a former head of State. This interest of the organizations was termed as a non-pecuniary interest to achieve a particular result. The rationale of automatic disqualification was held to extend to situations where a judge's decision will lead to the promotion of a cause in which the judge is involved with one of the parties.179 In re Pinochet (supra) extended automatic disqualification to situations where a judge has an interest in the cause, which is being promoted by one of the parties to the case.
b. Real likelihood of bias
92. The nemo judex rule may be applicable where a judge's conduct or circumstances give rise to an apprehension of bias. In such situations, the judge does not have a financial or cause-based interest in the outcome of the dispute but provides benefit to a party by failing to be neutral and impartial. The determination of bias does not depend upon actual proof of bias but whether there is a real possibility of bias based on the facts and circumstances.
93. In R v. Sussex Justices,180 the applicant was charged with the offence of dangerous driving, which involved a collision with another vehicle. The prosecution brought a case against the applicant before the Magistrate's court. Simultaneously, the driver of the other vehicle also instituted civil proceedings against the applicant. The solicitor hired by the other driver in civil proceedings was also acting as the Magistrate's clerk in the criminal proceedings. At the conclusion of the evidence before the Magistrate, the acting clerk retired with the judges to their chambers.
The Magistrate convicted the applicant without consulting the clerk. In appeal, the Divisional Court quashed the conviction. Lord Hewart CJ held that the clerk's involvement in the civil proceedings made him unfit in the circumstances to serve as clerk to the Magistrate in the criminal matter. Lord Hewart CJ observed that the question depended not upon what actually was done but upon what might appear to be done and the judicial proceedings will be vitiated if there is "even a suspicion that there has been improper interference with the course of justice."
94. Over the course of time, the English courts have preferred the test of real likelihood to determine bias. In R v. Barnsley Licencing Justices,181 Devlin LJ observed that "real likelihood" depends on the impression that the court gets from the circumstances in which the justices were sitting. However, in Metropolitan Properties Company v. Lannon,182 Lord Denning expressed the test of the real likelihood of bias as being whether a reasonable person would think it "likely or probable" that a judge or member of a tribunal was biased.
95. In Regina v. Gough,183 the House of Lords observed that the probability standard laid down by Lord Denning in Metropolitan Properties (supra) was "too rigorous a test." It reconciled the real likelihood of bias test by grounding it in terms of possibility rather than the probability of bias. Therefore, it restated the test in terms of the real danger of bias:
"having ascertained the relevant circumstances, the court should ask itself whether, having regard to those circumstances, there was a real danger of bias on the part of the relevant member of the tribunal in question, in the sense that he might unfairly regard (or having regarded with favour), or disfavour, the case of a party to the issue under consideration by him."
The House of Lords observed that the court "personifies the reasonable man" to ascertain the relevant circumstances from the available evidence. The real danger of the bias test was criticized by courts in other jurisdictions such as Australia and South Africa for emphasising the court's view of the circumstances rather than the public perception of the bias.184
96. In Locabail (UK) Ltd. v. Bayfield Properties Ltd.,185 the Court of Appeal observed that the test of real danger of bias could reach the same results as the test of real possibility of bias since the court is taken to personify the reasonable man. It further listed a few circumstances which might give rise to real danger of bias:
"By contrast, a real danger of bias might well be thought to arise if there were personal friendship or animosity between the judge and any member of the public involved in the case; or if the judge were closely acquainted with any member of the public involved in the case, particularly if the credibility of that individual could be significant in the decision of the case; or if, in a case where the credibility of any individual were an issue to be decided by the judge, he had in a previous case rejected the evidence of that person in such outspoken terms as to throw doubt on his ability to approach such person's evidence with an open mind on any later occasion; or if on any question at issue in the proceedings before him the judge had expressed views, particularly in the course of the hearing, in such extreme and unbalanced terms as to throw doubt on his ability to try the issue with an objective judicial mind; or if, for any other reason, there were real ground for doubting the ability of the judge to ignore extraneous considerations, prejudices and predilections and bring an objective judgment to bear on the issues before him."
(emphasis supplied)
97. In re Medicaments and Related Classes of Goods (No. 2),186 the Court of Appeal made a "modest adjustment" to the real danger of bias test laid down in Gough (supra) by holding that the court must determine whether the circumstances "would lead a fair-minded and informed observer to conclude that there was a real possibility, or a real danger, the two being the same, that the tribunal was biased."
In Porter v. Magill,187 the House of Lords approved the adjustment made to the real danger of bias test. Lord Craighead stated the bias test thus:
"103. The question is whether the fair-minded and informed observer, having considered the facts, would conclude that there was a real possibility that the tribunal was biased."
98. The shift in the bias test in the UK has "at its core the need for the confidence which must be inspired by the courts in a democratic society."188 In Lawal v. Northern Spirit Limited,189 Lord Bingham observed that a "fair-minded and informed observer"190 will adopt a balanced approach and as "a reasonable member of the public is neither complacent nor unduly sensitive or suspicious." The above discussion shows that the bias test has undergone significant development in the UK over the last four decades. The current bias test in the UK is the real possibility of a bias test.
99. The real likelihood of bias test has also been applied by the UK Supreme Court in the case of arbitral bias. In Haliburton Company v. Chubb Bermuda Insurance Ltd.,191 the issue before the UK Supreme Court was whether or not the UK Arbitration Act imposed a legal obligation on arbitrators to disclose facts and circumstances known to the arbitrator which would give rise to justifiable doubts as to their impartiality. Although the UK Arbitration Act does not expressly impose a duty of disclosure on arbitrators or potential arbitrators, the UK Supreme Court read the general duty under Section 33 of the legislation.
Section 33 requires an arbitrator to act fairly and impartially in conducting arbitral proceedings.192 It was held that the statutory duty of fairness and impartiality "gives rise to an implied term in the contract between the arbitrator and the parties" to make that disclosure. Hence, it was held a legal obligation to disclose is encompassed within the statutory obligation of fairness unless the parties have expressly or implicitly waived their right to disclosure.193
100. Recently, the UK Law Commission suggested that the ruling in Haliburton (supra) has limitations because: (i) an arbitrator may not owe a duty of disclosure to parties who may not have signed the arbitration agreement (non-signatory parties); and (ii) a contract of appointment cannot create a duty of disclosure before the appointment of the arbitrator.194 Therefore, the UK Law Commission has recommended codification of the duty of disclosure to ensure that the duty applies at the pre-appointment stage.195 There are two important distinctions between the position of law in India and the UK: First, the UK Arbitration Act does not require an arbitrator to be completely independent of the parties;196 and second, Section 12 of the Indian Arbitration Act already imposes a mandatory duty of disclosure on potential arbitrators.
101. Other jurisdictions also apply a real possibility of bias or reasonable apprehension of bias test to determine judicial and arbitral bias. Article 6 of the European Convention on Human Rights states that "everyone is entitled to a fair and public hearing within a reasonable time by an independent and impartial tribunal established by law" in the determination of their civil rights and obligations. The European Court of Human Rights197 determines the existence of impartiality for Article 6 by applying (i) a subjective test which considers whether the judge holds any personal prejudice or bias in a given case; and (ii) an objective test to ascertain whether the tribunal's composition offers significant guarantees to exclude any legitimate doubt in respect of its impartiality.198
102. In the vast majority of cases, the ECtHR has focused on the objective test, which requires the court to determine "whether, quite apart from the judge's conduct, there are ascertainable facts which may raise doubts as to his or her impartiality."199 The objective test takes into consideration hierarchical and other links between a judge and the parties to the proceedings.
The ECtHR's approach, therefore, emphasizes determining "whether the relationship in question is of such a nature and degrees as to indicate a lack of impartiality on the part of the tribunal."200 The real possibility of bias test as evolved by the English courts is in alignment with the bias test evolved by the ECHR.201 The ECtHR has held that an arbitration agreement does not constitute a waiver of the fair procedure guarantees contained in Article 6, particularly the right to have disputes settled by an independent and impartial tribunal.202
iv. Indian approach to the bias test
103. This Court has consistently adopted the real likelihood test to determine bias.203 In Manak Lal v. Dr. Prem Chand Singhvi,204 Justice P B Gajendragadkar (as the learned Chief Justice then was) observed that the test to determine bias is whether a litigant could reasonably apprehend that a bias attributable to a member of the tribunal might have operated against him in the final decision. In S Parthasarathi v. State of AP,205 Justice KK Mathew observed that the test of likelihood of bias is based on the reasonable apprehension of a reasonable man fully cognizant of the facts.
The learned Judge further observed that the question of whether the real likelihood of bias exists is to be determined on the probabilities to be inferred from the objective circumstances by a court or based on impressions that might reasonably be left on the minds of the aggrieved party or the public at large.206 The legal development under English law about the real danger of bias test was also accepted by this Court.
104. In Kumaon Mandal Vikas Nigam Ltd. v. Girja Shankar Pant,207 this Court observed that the real danger of bias is essentially based on deciding bias based on the facts and circumstances of the individual case.208 In M P Special Police Establishment v. State of M P,209 a Constitution Bench referred with approval to Kumaon Mandal Vikas Nigam Ltd. (supra).
105. Subsequently, the decision in P D Dinakaran v. Judges Inquiry Committee,210 traced the evolution of the bias test under Indian jurisprudence to state the following principles:
"71. To disqualify a person from adjudicating on the ground of interest in the subject-matter of lis, the test of real likelihood of the bias is to be applied. In other words, one has to enquire as to whether there is real danger of bias on the part of the person against whom such apprehension is expressed in the sense that he might favour or disfavour a party. In each case, the court has to consider whether a fair-minded and informed person, having considered all the facts would reasonably apprehend that the Judge would not act impartially. To put it differently, the test would be whether a reasonably intelligent man fully apprised of all the facts would have a serious apprehension of bias."
(emphasis supplied)
106. In Supreme Court Advocates-on-Record Association v. Union of India,211 Justice J Chelameswar, writing for himself and Justice A K Goel, summarized the following principles of the bias test in India:
"25.1. If a Judge has a financial interest in the outcome of a case, he is automatically disqualified from hearing the case.
25.2. In cases where the interest of the Judge in the case is other than financial, then the disqualification is not automatic but an enquiry is required whether the existence of such an interest disqualifies the Judge tested in the light of either on the principle of "real danger" or "reasonable apprehension" of bias.
25.3. The Pinochet case added a new category i.e. that the Judge is automatically disqualified from hearing a case where the Judge is interested in a cause which is being promoted by one of the parties to the case."
107. Although there have been vacillations about the test in England, the Indian courts have been largely consistent in their approach by applying the test of real likelihood of bias or reasonable apprehension of bias. Recently, the court has used the real danger of bias test. However, the above discussion shows that there is no significant difference between the real danger of bias test and the real possibility of bias test if the question of bias is inferred from the perspective of a reasonable or fair-minded person.
108. This Court has consistently applied the test of real likelihood of bias to determine arbitrator bias. In HRD Corporation v. GAIL (India),212 the Court explained the application of the real likelihood of bias test to determine the issue of arbitrator bias thus:
"20. As has been pointed out by us hereinabove, the items contained in the Schedules owe their origin to the IBA Guidelines, which are to be construed in the light of the general principles contained therein- that every arbitrator shall be impartial and independent of the parties at the time of accepting his/her appointment. Doubts as to the above are only justifiable if a reasonable third person having knowledge of the relevant facts and circumstances would reach the conclusion that there is a likelihood that the arbitrator may be influenced by factors other than the merits of the case in reaching his or her decision. This test requires taking a broad commonsensical approach to the items stated in the Fifth and Seventh Schedules. This approach would, therefore, require a fair construction of the words used therein, neither tending to enlarge or restrict them unduly."
(emphasis supplied)
109. In Government of Haryana v. GF Toll Road Private Ltd.,213 the Court had to decide whether a retired government employee could be appointed as an arbitrator by the state government. Justice Indu Malhotra, writing for the two-Judge Bench, observed that the test to be applied for bias is whether the circumstances are such as would lead a fair-minded and informed person to conclude that the arbitrator was in fact biased. It was held that the Arbitration Act does not disqualify a former employee from acting as an arbitrator, provided there are no justifiable doubts as to their independence and impartiality.214 Thus, in India, the sanctity and integrity of the arbitral process are held to the same standard of bias as that applicable to judicial authorities.
v. Bias and doctrine of necessity in the context of the Arbitration Act
110. In comparison to other jurisdictions, the Arbitration Act has adopted a different approach to deal with the issue of arbitrator bias. Through the 2015 amendment, the Arbitration Act provides an extensive list of circumstances which may give rise to justifiable doubts as to an arbitrator's independence or impartiality. The enumeration of categories under the Fifth and Seventh Schedules is inspired by the Orange and Red List of the IBA Guidelines on Conflicts of Interest in International Arbitration.215 In HRD Corporation (supra) this Court observed that the categories listed under the Fifth and Seventh Schedules must be construed by taking a "broad commonsensical approach" without restricting or enlarging the words.
111. Section 12 of the Arbitration Act places a duty on a person who is approached for appointment as an arbitrator to disclose in writing any direct or indirect circumstances such as: (i) the existence of any direct or indirect past or present relationship with any of the parties; (ii) interest in any of the parties; or (iii) interest in relation to the subject-matter in dispute, whether financial, business, professional, or other kind. The disclosure of circumstances made by an arbitrator is a procedural safeguard which allows the parties to assess whether disqualification of the arbitrator is required for a case.216 Disclosure allows an arbitrator to overcome an appearance of bias. The parties may challenge the appointment of an arbitrator if the circumstances give rise to "justifiable doubts" as to their independence or impartiality.
112. In Voestalpine (supra), this Court explained the distinction between independence and impartiality thus:
"22. Independence and impartiality are two different concepts. An arbitrator may be independent and yet, lack impartiality, or vice versa. Impartiality, as is well accepted, is a more subjective concept as compared to independence. Independence, which is more an objective concept, may, thus, be more straightforwardly ascertained by the parties at the outset of the arbitration proceedings in light of the circumstances disclosed by the arbitrator, while partiality will more likely surface during the arbitration proceedings."
113. The fundamental premise of arbitration is the impartial resolution of disputes between parties according to the arbitration agreement.217 Unlike a judge, an arbitrator is generally engaged in occupations and professions before, during, and after the arbitral proceedings. The arbitrators may also have had prior commercial or professional contacts and relationships with either of the parties to the dispute. In such circumstances, arbitration law has evolved safeguards and mechanisms to ensure the independence and impartiality of the arbitral procedure.
The independence of an arbitrator is generally considered with respect to the relationships or links between the arbitrator and one of the parties, whether financial, professional, employment or personal.218 The independence of an arbitrator can be deduced objectively because the dependence arises from the relationship between an arbitrator and one of the parties, or somebody closely connected with one of the parties.219 In comparison, the existence of impartiality is inferred from facts and circumstances surrounding an arbitrator's exercise of quasi-judicial functions.220
114. An arbitrator will not be automatically disqualified in situations where the relationship of an arbitrator with parties does not fall under the categories mentioned under the Seventh Schedule. Yet, either of the parties may have "justifiable doubts" about the independence or impartiality of the arbitrator. The party challenging the appointment of an arbitrator does not need to demonstrate that the arbitrator lacks independence or impartiality. It only needs to show that there are possible "doubts" as to an arbitrator's independence or impartiality.221 The purpose behind incorporating the word "justifiable" under Section 12 was to establish an objective standard for impartiality and independence.222 Resultantly, the possibility of "doubts" must be "real" in the sense that they should be derived from the objective circumstances disclosed by an arbitrator.
115. The consideration of possible "doubts" must be undertaken from the perspective of a "fair-minded and informed person" rather than the subjective views of the parties or the arbitrators. According to Gary Born, the standard of proof adopted under Article 12 of the Model Law is relatively low to ensure "the integrity of the arbitral tribunal and arbitral process, particularly given the extremely limited review available for substantive or procedural errors by the arbitrators."223 The issue of arbitrator bias is to be resolved by applying the test of the real likelihood of bias in the given facts and circumstances.
116. Section 12(5) automatically disqualifies any person whose relationship with the parties or counsel or subject matter of the dispute falls under any of the categories mentioned under the Seventh Schedule. The categories listed in the Seventh Schedule in essence denote situations where an arbitrator might have a pecuniary, proprietary, or cause-based interest in the arbitration. For instance, employees of either of the parties are barred from acting as an arbitrator because they have an immediate financial and cause-based interest in the arbitration. If such an employee is appointed as an arbitrator, they would be sitting as a judge in their cause because they have a pecuniary interest in the outcome of the case.
117. In Voestalpine (supra), this Court observed that an individual who had previously served the government, a public sector corporation or a statutory corporation but had no connection to the party in dispute could not be held to be ineligible for appointment as an arbitrator. The Court observed:
"25. It cannot be said that simply because the person is a retired officer who retired from the government or other statutory corporation or public sector undertaking and had no connection with DMRC (the party in dispute), he would be treated as ineligible to act as an arbitrator. Had this been the intention of the legislature, the Seventh Schedule would have covered such persons as well. Bias or even real likelihood of bias cannot be attributed to such highly qualified and experienced persons, simply on the ground that they served the Central Government or PSUs, even when they had no connection with DMRC.
The very reason for empanelling these persons is to ensure that technical aspects of the dispute are suitably resolved by utilising their expertise when they act as arbitrators. It may also be mentioned herein that the Law Commission had proposed the incorporation of the Schedule which was drawn from the red and orange list of IBA guidelines on conflict of interest in international arbitration with the observation that the same would be treated as the guide "to determine whether circumstances exist which give rise to such justifiable doubts".
Such persons do not get covered by red or orange list of IBA guidelines either." The Court refers to the fact that the individual had no connection with DMRC, the party in dispute, at two places in the above extract. Hence, the fact that he had previously been employed with government or a corporation controlled by government (but not DMRC which was the disputant) was held not to render the individual ineligible.
118. In G F Toll Road (supra), the arbitration contract between the State government and the contractor allowed for the constitution of a three member arbitral tribunal "of whom each party shall select one and the third arbitrator shall be appointed under the Rules of Arbitration of the Indian Council of Arbitration." After disputes arose between the parties, the State government appointed a retired Engineer-in-Chief as their arbitrator. The contractor and the Indian Council of Arbitration224 challenged the appointment of the State's arbitrator on the ground that he was a former employee of the State government. The issue before this Court was whether Section 12(5) read with the Seventh Schedule disqualifies a former employee from being appointed as an arbitrator.
119. Justice Indu Malhotra, writing for the Bench of two judges, held that the apprehension of bias against the State's arbitrator was unjustified because: (i) the arbitrator was employed by the State over ten years ago; (ii) the use of the expression "is an" under Entry 1 of the Seventh Schedule indicates that an arbitrator is disqualified only if they are current employees of one of the parties; and (iii) the expression "other" under the said entry indicates a relationship other than an employee. It was observed that the expression "other" cannot "be used to widen the scope of the entry to include past/former employees."225
120. The categories mentioned under the Seventh Schedule are such that it is difficult to distinguish the interests of an arbitrator from those of a party to which an arbitrator is connected. In such cases, the issue is whether the outcome of the arbitration will realistically affect the arbitrator's interests. The law prioritises the objective criterion of independence over the subjective criterion of impartiality.
Once it is established that an arbitrator falls under any of the categories mentioned in the Seventh Schedule, they are automatically disqualified without any investigation into whether or not there is any real likelihood of bias. Since the ineligibility envisaged under Section 12(5) goes to the root of the appointment, an application may be filed under Section 14(2) of the Arbitration Act to the court to decide on the termination of the arbitrator's mandate.226
121. An objection to the bias of an adjudicator can be waived.227 A waiver is an intentional relinquishment of a right by a party or an agreement not to assert a right.228 The Arbitration Act allows parties to waive the application of Section 12(5) by an express agreement after the disputes have arisen. However, the waiver is subject to two factors. First, the parties can only waive the applicability of Section 12(5) after the dispute has arisen. This allows parties to determine whether they will be required or necessitated to draw upon the services of specific individuals as arbitrators to decide upon specific issues.
To this effect, Explanation 3 to the Seventh Schedule recognizes that certain kinds of arbitration such as maritime or commodities arbitration may require the parties to draw upon a small, specialized pool.229 The second requirement of the proviso to Section 12(5) is that parties must consciously abandon their existing legal right through an express agreement. Thus, the Arbitration Act reinforces the autonomy of parties by allowing them to override the limitations of independence and impartiality by an express agreement in that regard.
122. The proviso to Section 12(5) is a reflection of the common law doctrine of necessity. The nemo judex rule is subject to the doctrine of necessity and yields to it.230 The doctrine of necessity allows an adjudicator who may be disqualified because of their interest in the matter to continue to adjudicate because of the necessity of the circumstances.231 The proviso to Section 12(5) allows parties to exercise their autonomy to determine if there is a necessity to waive the applicability of the ineligibility prescribed under Section 12(5). Thus, common law principles and doctrines are adjusted to subserve the fundamental principles of arbitration by giving priority to the autonomy of parties.
123. In Bharat Broadband Network Ltd. (supra), this Court held that the proviso to Section 12(5) requires an express agreement in writing, that is, an agreement made in words as opposed to an agreement that can be inferred by conduct.232 It was explained that such an agreement must be made by both parties with full knowledge of the fact that although a particular person is ineligible to be appointed as an arbitrator, the parties still have full faith and confidence in them to continue as an arbitrator.233
The principle of express waiver contained under the proviso to Section 12(5) also applies to situations where the parties seek to waive the allegation of bias against an arbitrator appointed unilaterally by one of the parties. After the disputes have arisen, the parties can determine whether there is a necessity to waive the nemo judex rule. This balances the autonomy of parties and the principles of an independent and impartial arbitral tribunal.
vi. Unilateral appointment of arbitrators is violative of the equality clause under Section 18
124. The doctrine of bias as evolved in English and Indian law emphasizes independence and impartiality in the process of adjudication to inspire the confidence of the public in the adjudicatory processes. Although Section 12 deals with the quality of independence and impartiality inherent in the arbitrators, the provision's emphasis is to ensure an independent and impartial arbitral process.
125. Fali Nariman, distinguished lawyer and erudite jurist, in an article on 'Standards of Behaviour of Arbitrators',234 opined that the level of probity expected of arbitrators is no less, and perhaps more stringent than what is expected of judges:
"Though litigation is compulsory and arbitration is consensual, both are judicial processes of an adversarial character. That is why arbitration has always been regarded as quasi-judicial. Standards of behaviour expected of arbitrators - with reference to their impartiality and their independence - are no less stringent than that demanded of judges; in fact, arbitrators are expected to behave a shade better since judges are institutionally insulated by the established court-system, their judgments being also subjected to the corrective scrutiny of an appeal."
126. The agreement on the number of arbitrators is a matter of party autonomy. However, the choice of arbitrators has a direct effect on the conduct of arbitral proceedings. In commercial cases, the choice of the number of arbitrators is usually between one and three. The parties select the number of arbitrators by considering factors such as the needs of a particular dispute, costs, and efficiency.235
In case parties cannot agree upon the number of arbitrators, national arbitration legislation specifies the number of arbitrators to be appointed. For instance, Article 10(2) of the Model Law provides that if the parties fail to determine the number of arbitrators, three arbitrators will be appointed.236 Interestingly, the Arbitration Act departs from the Model Law by providing that the arbitral tribunal shall consist of a sole arbitrator if parties fail to determine the number of arbitrators.237
127. Reference of disputes to a sole arbitrator has various advantages, including easy arrangements of meetings or hearings, reduced expenses since the parties will only have to bear the expense of one arbitrator, and speedy decision-making.238 In the case of the appointment of a sole arbitrator, the decision-making vests in the hands of one person. This poses a greater risk of bias against the weaker party, especially if the arbitrator is unilaterally appointed by the other party.
128. If a person having a financial interest in the outcome of the arbitral proceedings unilaterally nominates a sole arbitrator, it is bound to give rise to justifiable doubts on the independence and impartiality of the arbitrator. The possibility of bias by the arbitrator is real because the person who has an interest in the subject matter of the dispute can chart out the course of the entire arbitration proceeding by unilaterally appointing a sole arbitrator.
A party may select a particular person to be appointed as a sole arbitrator because of a quid pro quo arrangement between them. Moreover, the fact that the sole arbitrator owes the appointment to one party may make it difficult to decide against that party for fear of displeasure. It is not possible to determine whether the sole arbitrator will be prejudiced, but the circumstances of the appointment give rise to the real possibility of bias.
129. Equal treatment of parties at the stage of appointment of an arbitrator ensures impartiality during the arbitral proceedings. A clause that allows one party to unilaterally appoint a sole arbitrator is exclusive and hinders equal participation of the other party in the appointment process of arbitrators. Further, arbitration is a quasi-judicial and adjudicative process where both parties ought to be treated equally and given an equal opportunity to persuade the decision-maker of the merits of the case. An arbitral process where one party or its proxy has the power to unilaterally decide who will adjudicate on a dispute is fundamentally contrary to the adjudicatory function of arbitral tribunals.239
130. In comparison, a three-member arbitral tribunal usually allows each party to nominate one arbitrator of their choice, with the third arbitrator being appointed either by the two party-appointed arbitrators or by agreement of parties.240 The fact that both parties nominate their respective arbitrators gives them "a sense of investment in the arbitral tribunal."241 A three-member arbitral tribunal also enhances the quality of the adjudicative deliberations and ensures compliance with due process.242 According to Gary Born, the major advantage of a three-member tribunal is that the parties can participate in the selection of the tribunal to the maximum extent possible.243
131. In a three-member tribunal, each of the parties seeks to appoint a coarbitrator. However, the third arbitrator is usually appointed by a process which allows equal participation of both parties in the appointment process. The equal participation of parties enables the appointment of an independent and impartial third arbitrator. Hence, any perceived tilt of an arbitrator in favour of the party which nominated that arbitrator is offset by the appointment of the third arbitrator in the course of a deliberative process involving both the arbitrators or as envisaged in the agreement between parties.
Perkins (supra) rightly observed that whatever advantage a party may derive by nominating an arbitrator of its choice would get counterbalanced by equal power with the other party.244 This counter-balancing will ideally apply only in situations where the arbitrators are appointed by the parties in the exercise of their genuine party autonomy. TRF (supra) and Perkins (supra) have been relied upon by this Court on numerous occasions, including in Glock Asia-Pacific Limited v. Union of India245 and Lombardi Engg Ltd. v. Uttarakhand Jal Vidyut Nigam Ltd.246
132. In Voestalpine (supra) and CORE (supra), one of the parties curated a panel of arbitrators and mandated the other party to select their arbitrator from the panel. Since the curation of the list is exclusively undertaken by one party, the other party is effectively excluded from the process of curating the panel from which exclusively, the appointment of an arbitrator is to be made.
The other party has to mandatorily select its arbitrator from a curated panel, restricting their freedom to appoint an arbitrator of their choice. This is against the principle of equal treatment contained under Section 18. In this situation, there is no effective counter-balance because both parties do not participate equally in the process of appointing arbitrators. The party curating the panel can restrict the choice of the party only to a person who is on the panel selected by the other party and to no other person.
133. Many PSUs are regularly involved in arbitration disputes and constantly need the services of arbitrators. Such institutions often maintain a pool of potential arbitrators with the sole object of having a ready pool of qualified professionals who have committed their time and consented to act as arbitrators for fixed fees. The Arbitration Act does not prohibit parties to an arbitration agreement from maintaining a curated panel of potential arbitrators.
However, the problem arises when the PSUs make it mandatory for other parties to select their nominees from the curated panel of arbitrators. When a PSU exercises its discretion to curate a panel, the very factor that the PSU is choosing only a certain number of persons as potential arbitrators and not others will raise a reasonable doubt in the mind of a fairminded person. The PSUs may conceivably have nominated a person on the panel of potential arbitrators because they have a certain predisposition in favour of the former. This doubt is reinforced when the other party is given no choice but to select its arbitrator from the curated panel.
134. In CORE (supra), the three-member tribunal was sought to be constituted in the following manner: (i) the Railways would suggest at least four names of retired railway officers; (ii) the contractor would select two names out of the panel for appointment as their arbitrator; (iii) The General Manager (of the Railways) would thereafter choose at least one person out of the two to be appointed as the contractor's arbitrator; and (iv) The General Manager would proceed to appoint the balance arbitrators from the panel or outside the panel and also indicate the presiding arbitrator.
135. Such an arbitrator-appointment clause is likely to give rise to justifiable doubts as to the independence and impartiality of arbitrators for two reasons: (i) the contractor is restricted to choosing its arbitrator from the panel of four arbitrators nominated by the party who is a disputant; and (ii) the contractor's choice is further constrained because it is made subject to the decision of the General Manager who will choose one among the two persons suggested by the party.
Since the contractor has to select its arbitrator from a curated panel, the arbitration clause does not allow the contractor equal participation in the appointment of their arbitrator. Moreover, the clause allows the General Manager to appoint the balance arbitrators from either the panel or outside the panel. Thus, the process of appointing the arbitrators is unequal because the General Manager can go beyond the panel of four potential arbitrators, while the contractor is bound by the names enlisted in the panel.
136. In a three-member tribunal, the independence and impartiality of a third or presiding arbitrator are prerequisites to the integrity of the arbitral proceedings. In CORE (supra), the arbitration clause allowed the General Manager to unilaterally nominate the presiding officer out of the panel of three arbitrators. The clause does not countenance any participation from the contractor in the process of appointing or nominating the presiding officer. Thus, the process of appointing and nominating the presiding officer is unequal and prejudiced in favour of the Railways. The fact that the General Manager is nominating the presiding officer gives rise to a reasonable doubt about the independence and impartiality of the entire arbitration proceedings.
137. Given the above discussion, it needs reiteration that 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. The PSUs can give a choice to the other party to select its arbitrators from the curated list provided the other party expressly waives the applicability of the nemo judex rule.
G. Public-private contracts and public policy
138. An arbitration is a creature of contract between the parties. An arbitration agreement must meet the criteria laid down under Section 7, in addition to satisfying the principles of contract law prescribed under the Contract Act to be considered valid.247 According to the Contract Act, a promisor makes a proposal when they signify to the promisee their willingness to do or abstain from doing anything, to obtain the assent of the promisee to such act or abstinence. The proposal is said to be accepted when the promisee signifies their assent. A proposal becomes a promise upon acceptance. Every promise and every set of promises, forming the consideration248 for each other, is an agreement. An agreement enforceable by law is a contract.
i. Unconscionability under the Contract Act
139. The Contract Act accounts for unconscionability under Section 16 relating to undue influence. It provides that a contract induced by undue influence is unconscionable. A contract is induced by undue influence where the relations subsisting between the parties are such that one of the parties is in a position to dominate the will of the other and uses that position to obtain an unfair advantage.249 A contract induced by undue influence is voidable at the option of the party whose consent was caused by undue influence.250 Illustration (c) to Section 16 pertains to an unconscionable bargain:
"(c) A, being in debt to B, the money-lender of his village, contracts a fresh loan on terms which appear to be unconscionable. It lies on B to prove that the contract was induced by undue influence."
140. Section 23 pertains to unlawful consideration or object of an agreement:
"23. What considerations and objects are lawful, and what not - The consideration or object of an agreement is lawful, unless - it is forbidden by law; or is of such a nature that if permitted, it would defeat the provisions of any law; or is fraudulent; or involves or implies injury to the person or property of another; or the Court regards it as immoral, or opposed to public policy."
141. Although the Contract Act does not define the expression "public policy", it has generally been defined as a principle of judicial legislation or interpretation founded on the current needs of the community.251 Section 23 codified the common law position that "all contracts and agreements which have as their object anything contrary to principles of sound policy are void."252
The prevalent view in the nineteenth century was that the doctrine of public policy should be governed by precedent and courts should refrain from inventing new heads of public policy. The purpose behind limiting the grounds of public policy was to respect the freedom of contract of parties, which was also considered as a paramount policy in common law.253 Under the common law, a contract for marriage brokerage, creation of a perpetuity, in restraint of trade, gaming or wagering, or assisting the King's enemies were unlawful and opposed to public policy.254
142. This Court has adopted a flexible approach to the application of the doctrine of public policy to contracts. In Gherulal Parakh v. Mahadeodas Maiya,255 this Court had to decide on the validity of a wagering contract under Section 23 of the Contract Act. The three-Judge Bench observed that public policy is a branch of common law and can be applied in clear and incontestable cases of harm to the public.
It was further observed that the doctrine could be invoked by evolving "a new head under exceptional circumstances of a changing world." The court must determine public policy by considering the welfare of society and the social consequences of the rule propounded, especially in light of the factual evidence available to its probable result.256 In Delhi Transport Corporation v. DTC Mazdoor Congress,257 this Court held that courts can rely upon the Constitution as a source of public policy. In his concurring opinion, Justice Ramaswamy observed:
"292. From this perspective, it must be held that in the absence of specific head of public policy which covers a case, then the court must in consonance with public conscience and in keeping with public good and public interest invent new public policy and declare such practice or rules that are derogatory to the Constitution to be opposed to public policy.
The rules which stem from the public policy must of necessity be laid to further the progress of the society in particular when social change is to bring about an egalitarian social order through rule of law. In deciding a case which may not be covered by authority courts have before them the beacon light of the trinity of the Constitution and the play of legal light and shade must lead on the path of justice, social, economic and political. Lacking precedent, the court can always be guided by that light and the guidance thus shed by the trinity of our Constitution."
143. In Central Inland Water Transport Corporation v. Brojo Nath Ganguly,258 this Court had to decide on the validity of Rule 9 of Central Inland Water Transport Corporation Ltd Service Discipline and Appeal Rules 1979 which empowered the corporation to terminate the employment of its permanent employees with three months' notice. These rules constituted part of the contract of employment between the Corporation and its employees. The issue before this Court was whether Rule 9 was void under Section 23 of the Contract Act for being opposed to public policy. It was held that the court could refuse to enforce an unfair and unreasonable clause in a contract entered into between parties who are not equal in bargaining power:
"89. The Constitution was enacted to secure to all the citizens of this country social and economic justice. Article 14 of the Constitution guarantees to all persons equality before the law and the equal protection of the laws. The principle deducible from the above discussions on this part of the case is in consonance with right and reason, intended to secure social and economic justice and conforms to the mandate of the great equality clause in Article 14. This principle is that the courts will not enforce and will, when called upon to do so, strike down an unfair and unreasonable contract, or an unfair and unreasonable clause in a contract, entered into between parties who are not equal in bargaining power.
It is difficult to give an exhaustive list of all bargains of this type. No court can visualize the different situations which can arise in the affairs of men. One can only attempt to give some illustrations. For instance, the above principle will apply where the inequality of bargaining power is the result of the great disparity in the economic strength of the contracting parties. It will apply where the inequality is the result of circumstances, whether of the creation of the parties or not. It will apply to situations in which the weaker party is in a position in which he can obtain goods or services or means of livelihood only upon the terms imposed by the stronger party or go without them.
It will also apply where a man has no choice, or rather no meaningful choice, but to give his assent to a contract or to sign on the dotted line in a prescribed or standard form or to accept a set of rules as part of the contract, however unfair, unreasonable and unconscionable a clause in that contract or form or rules may be. This principle, however, will not apply where the bargaining power of the contracting parties is equal or almost equal. This principle may not apply where both parties are businessmen and the contract is a commercial transaction.
In today's complex world of giant corporations with their vast infrastructural organizations and with the State through its instrumentalities and agencies entering into almost every branch of industry and commerce, there can be myriad situations which result in unfair and unreasonable bargains between parties possessing wholly disproportionate and unequal bargaining power. These cases can neither be enumerated nor fully illustrated. The court must judge each case on its own facts and circumstances."
(emphasis supplied)
144. The Court held that Rule 9(i) was void under Section 23 of the Contract Act for being opposed to public policy. The principle of unconscionability cannot be applied to contracts where: (i) the bargaining power of the contracting parties is equal or almost equal;259 and (ii) both parties are businessmen and the contract is a commercial transaction. This Court has held that the doctrine of unequal bargaining of parties does not generally apply to arbitration agreements, which are in the nature of commercial contracts.260 However, the principles of non-arbitrariness continue to apply in situations where a government instrumentality enters into a contract with a private party.
145. The government has the freedom to enter into contracts with private parties. However, the award of governmental contracts is subject to the exercise of judicial review to prevent arbitrariness or favouritism.261 The government has to abide by the principles laid down under Article 14 while awarding contracts.262 In Food Corporation of India v. Kamdhenu Cattle Feed Industries,263 this Court held that in the "contractual sphere as in all other State actions, the State and all its instrumentalities have to conform to Article 14 of the Constitution of which non-arbitrariness is a significant facet." It was further observed that since a public authority possesses powers only to use them for the public good, they have a duty to act fairly and "to adopt a procedure which is 'fair play in action'."264
146. In Tata Cellular v. Union of India,265 this Court held that contractual decisions of government and its instrumentalities "must be free from arbitrariness not affected by bias or actuated by mala fides." In a publicprivate contract, the state must act fairly, justly, and reasonably.266 When a state acts contrary to the public good or public interest, it acts contrary to Article 14.267
147. In ICOMM Tele Ltd. v. Punjab State Water Supply and Sewerage Board,268 this Court had to adjudicate on the validity of a pre-deposit arbitral clause in a public-private contract. According to the pre-deposit clause, a party invoking arbitration was required to furnish a "deposit-at-call" for ten percent of the amount claimed. To determine the validity of the clause from the viewpoint of arbitrariness, this Court held that a contractual clause would be arbitrary "which would be unfair and unjust and which no reasonable man would agree to."269 This Court termed the pre-deposit clause to be violative of Article 14 for being excessive and disproportionate. Importantly, the Court held that the pre-deposit requirement was contrary to the object of arbitration because it served as a deterrent for a party to invoke arbitration.270 The predeposit clause was termed arbitrary for defeating the purpose of arbitration.
148. In Lombardi (supra), a decision of a three-Judge Bench of this Court, a term of contract mandated "the party initiating the arbitration claim to deposit 7% of the arbitration claim in the shape of fixed deposit receipt as security deposit" in a public-private arbitration agreement. This Court observed that an arbitration agreement has to comply with the "operation of law", which includes the grundnorm.
It was observed that the layers of grundnorm in the context of an arbitration agreement include (i) the Constitution of India; (ii) the Arbitration Act and any other Central and State law; and (iii) the arbitration agreement entered into by the parties under Section 7 of the Arbitration Act.271 Further, this Court observed that party autonomy "cannot be stretched to an extent where it violates the fundamental rights under the Constitution."272 It was concluded that the predeposit clause violated Article 14 of the Constitution.
ii. US jurisprudence on unconscionability of arbitration agreements
149. Section 2 of the Federal Arbitration Act provides that an agreement in writing to submit to arbitration an existing controversy arising out of a contract shall be "valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract."273 The US Supreme Court has held that issues concerning validity, irrevocability, and enforceability of arbitration agreements will be decided with reference to the state law grounds such as fraud, duress, and unconscionability.274
The doctrine of unconscionability has been codified by the Uniform Commercial Code and is now a part of American contract law. Section 2-302 of the Uniform Commercial Code allows courts to refuse enforcement of unconscionable contracts or limit the application of an unconscionable clause to avoid any unconscionable result.275
150. The doctrine of unconscionability has roots in equity. An unconscionable contract "is a contract which no man in his senses, not under delusion, would make, on the one hand, and which no fair and honest man would accept on the other."276 Unconscionability has also been defined to include: (i) an absence of meaningful choice on the part of one of the parties; and (ii) unreasonable contractual terms favourable to one party.277 The unconscionability doctrine seeks to balance the freedom of contract with the values of protecting the weaker parties from imposition and oppression.278
151. Unconscionability focuses on abuses relating to the contract formation process (procedural unconscionability) and the substantive terms of the contract (substantive unconscionability).279 In determining procedural unconscionability, the court is concerned with factors such as the relative bargaining power of the parties and whether the parties had a meaningful choice. Substantive unconscionability is geared towards pitting the substance of the contractual terms against the legitimate interests of the parties and considerations of public policy.280
152. US courts have consistently held that an arbitration agreement which provides for the unilateral formation of a panel of arbitrators by one of the parties is inherently inequitable and unconscionable.281 The reason is that a unilateral arbitrator selection clause is inimical to the principle of arbitration, that is, the resolution of disputes through a fair and impartial tribunal.
It has been held that an arbitration agreement that allows one of the parties to unilaterally control the arbitral tribunal conflicts with the "fundamental notions of fairness"282 and does not meet the "minimum levels of integrity which we must demand of a contractually structured substitute for judicial proceedings."283 The US courts have emphasised the importance of equality in the appointment process as a means to secure fairness in the arbitration proceedings.284
153. In Hooters of Am. Inc. v. Phillips,285 the US Court of Appeals for the Fourth Circuit had to determine the validity of an arbitration agreement for employment-related disputes. The arbitration agreement provided for the formation of a three-member arbitral tribunal. The employer and employee select their arbitrators, who in turn select the third arbitrator. However, the employee's arbitrator and the third arbitrator were selected from a list of arbitrators created exclusively by the employer. The Court observed that the arbitration agreement gave Hooters "control over the entire panel and places no limits whatsoever on whom Hooters can put on the list."
It was further observed:
"Under the rules, Hooters is free to devise lists of partial arbitrators who have existing relationships, financial or familial, with Hooters and its management. In fact, the rules do not even prohibit Hooters from placing its managers themselves on the list. Further, nothing in the rules restricts Hooters from punishing arbitrators who rule against the company by removing them from the list. Given the unrestricted control that one party (Hooters) has over the panel, the selection of an impartial decisionmaker would be a surprising result."
The Court noted that arbitration is a system where disputes between parties are resolved by an impartial third party and allowing one party to control the arbitral tribunal was against the principles of arbitration.286
154. In McMullen v. Meijer,287 the issue before the US Court of Appeals for the Sixth Circuit was whether the arbitration agreement provided the employee "an effective substitute for the judicial forum". The agreement allowed the employer to unilaterally select a pool of at least five potential arbitrators. The employer and employee were required to mutually select a sole arbitrator from that pool of arbitrators by alternatively striking names until only one remained.
The Court held that the process of selection of the arbitrator prevented the arbitration from being an effective substitute for a judicial forum because: (i) the employer exercised unilateral control over the entire panel; (ii) the arbitrator selection procedure allowed the employer to create a symbiotic relationship with its arbitrators, which promulgated bias; and (iii) the arbitrator selection procedure inherently lacked fairness and neutrality.
iii. Public-private contracts and public policy of arbitration
155. Although arbitration law is an autonomous legal field,288 it functions within the boundaries prescribed by the state. For instance, adjudication of certain proceedings is reserved by the legislature exclusively for the courts as a matter of public policy.289 The non-arbitrable proceedings generally include disputes relating to rights and liabilities that give rise to or arise out of criminal offences, matrimonial disputes relating to divorce, judicial separation, restitution of conjugal rights, child custody, and guardianship matters.290 The safeguards of public policy ensure that arbitration proceedings, which are effective substitutes for civil courts, are conducted within a framework in the broader public interest.291
156. Section 34 of the Arbitration Act specifies the grounds for setting aside an arbitral award. The grounds are separated into two categories: (i) Section 34(2)(a) contains those grounds that have to be proved by the parties; and (ii) Section 34(2)(b) contains grounds that a court has to examine ex officio. The challenge of arbitral awards on ex officio grounds is "of fundamental importance to the institution of arbitration as a whole."292
157. Section 34(2)(b) specifically provides that an arbitral award may be set aside if the court finds that the arbitral award conflicts with the public policy of India. The provision further clarifies "public policy of India" to only mean that: (i) the making of the award was induced or affected by fraud or corruption or was in violation of section 75 or section 81; (ii) it is in contravention with the fundamental policy of Indian law; or (iii) it is in conflict with the most basic notions of morality or justice.
158. This Court has construed the expression "public policy of India" appearing under Section 34 to mean the "fundamental policy of Indian law".293 The concept of "fundamental policy of Indian law" has been held to cover compliance with statutes and judicial precedents, adopting a judicial approach, and compliance with the principles of natural justice.294 In OPG Power Generation Private Limited v. Enexio Power Cooling Solutions India Private Limited,295 this Court explained the concept of "fundamental policy of Indian law" thus:
"The expression "in contravention with the fundamental policy of Indian law" by use of the word 'fundamental' before the phrase 'policy of Indian law' makes the expression narrower in its application than the phrase "in contravention with the policy of Indian law", which means mere contravention of law is not enough to make an award vulnerable. To bring the contravention within the fold of fundamental policy of Indian law, the award must contravene all or any of such fundamental principles that provide a basis for administration of justice and enforcement of law in this country.
Without intending to exhaustively enumerate instances of such contravention, by way of illustration, it could be said that (a) violation of the principles of natural justice; (b) disregarding orders of superior courts in India or the binding effect of the judgment of a superior court; and (c) violating law of India linked to public good or public interest, are considered contravention of the fundamental policy of Indian law."
159. In Avitel Post Studioz Ltd. v. HSBC PI Holdings (Mauritius) Ltd.,296 this Court held that the most basic notions of morality and justice under the concept of "public policy" will include bias.
160. The provisions of the statute, including Section 34, highlight the important role played by the Indian legal system in recognising and enforcing arbitral awards. It is one such instance where the Indian courts exercise a measure of control over the private arbitral process.297 This control over the arbitral process ensures that the arbitral awards are made by following certain minimum standards of due process and justice.298 Thus, the courts must ensure that the arbitral awards are consistent with the fundamental policy of Indian law such as compliance with the principles of natural justice. As a corollary, Section 34 places a responsibility on the arbitral tribunals to ensure that the arbitral proceedings are consistent with the fundamental policy of Indian law.299
161. By agreeing to arbitrate in a public-private contract, the government or its companies agree to settle their disputes with private contractors through arbitration. Since the activities of the government have a public element, it is incumbent upon the government to ensure that it enters into a contract with the public without adopting any unfair or unreasonable procedure.300 Every action of a public authority or a person acting in the public interest or any act that gives rise to a public element must be based on principles of fairness and non-arbitrariness.301
Therefore, government agencies have to consider the principles of equality and non-arbitrariness when crafting arbitration procedures, including the procedure for the appointment of arbitrators. The terms of the arbitration agreement must meet the minimum standards of equality and fairness. In a public-private contract, the government and its instrumentalities must ensure that the arbitral process contemplated by the contract is also fair to the other party to avoid arbitrariness.
162. The possibility of bias is real in situations where an arbitration clause allows a government company to unilaterally appoint a sole arbitrator or control the majority of the arbitrators. Since the government has control over the arbitral tribunal, it can chart the course of the arbitration proceedings to the prejudice of the other party. Resultantly, unilateral appointment clauses fail to provide an effective substitute for judicial proceedings in India. Further, a unilateral appointment clause is inherently exclusionary and violates the principle of equal treatment of parties and procedural equality.
163. Unilateral appointment clauses in a public-private contract fail to provide the minimum level of integrity required in authorities performing quasi-judicial functions such as arbitral tribunals. Therefore, a unilateral appointment clause is against the principle of arbitration, that is, impartial resolution of disputes between parties. It also violates the nemo judex rule which constitutes the public policy of India in the context of arbitration. Therefore, unilateral appointment clauses in public-private contracts are violative of Article 14 of the Constitution for being arbitrary in addition to being violative of the equality principle under the Arbitration Act.
H. Necessity of maintaining the principle of minimum judicial interference
164. In re Interplay Between Arbitration Agreements under Arbitration and Conciliation Act 1996 and the Stamp Act 1899,302 a seven judge Bench of this Court emphasized the importance of minimal judicial interference by the courts at the Section 11 stage. This Court held that the scope of the proeceeding under Section 11 must be confined to the existence of an arbitration agreement. The Court further observed:
"165. The legislature confined the scope of reference under Section 11(6-A) to the examination of the existence of an arbitration agreement. The use of the term "examination" in itself connotes that the scope of the power is limited to a prima facie determination. Since the Arbitration Act is a selfcontained code, the requirement of "existence" of an arbitration agreement draws effect from Section 7 of the Arbitration Act. In Duro Felguera [Duro Felguera, S.A. v. Gangavaram Port Ltd., (2017) 9 SCC 729: (2017) 4 SCC (Civ) 764], this Court held that the Referral Courts only need to consider one aspect to determine the existence of an arbitration agreement - whether the underlying contract contains an arbitration agreement which provides for arbitration pertaining to the disputes which have arisen between the parties to the agreement.
Therefore, the scope of examination under Section 11(6-A) should be confined to the existence of an arbitration agreement on the basis of Section 7. Similarly, the validity of an arbitration agreement, in view of Section 7, should be restricted to the requirement of formal validity such as the requirement that the agreement be in writing. This interpretation also gives true effect to the doctrine of competencecompetence by leaving the issue of substantive existence and validity of an arbitration agreement to be decided by Arbitral Tribunal under Section 16.
166. The burden of proving the existence of arbitration agreement generally lies on the party seeking to rely on such agreement. In jurisdictions such as India, which accept the doctrine of competence-competence, only prima facie proof of the existence of an arbitration agreement must be adduced before the Referral Court. The Referral Court is not the appropriate forum to conduct a minitrial by allowing the parties to adduce the evidence in regard to the existence or validity of an arbitration agreement. The determination of the existence and validity of an arbitration agreement on the basis of evidence ought to be left to the Arbitral Tribunal. This position of law can also be gauged from the plain language of the statute.
167. Section 11(6-A) uses the expression "examination of the existence of an arbitration agreement". The purport of using the word "examination" connotes that the legislature intends that the Referral Court has to inspect or scrutinise the dealings between the parties for the existence of an arbitration agreement. Moreover, the expression "examination" does not connote or imply a laborious or contested inquiry.
On the other hand, Section 16 provides that the Arbitral Tribunal can "rule" on its jurisdiction, including the existence and validity of an arbitration agreement. A "ruling" connotes adjudication of disputes after admitting evidence from the parties. Therefore, it is evident that the Referral Court is only required to examine the existence of arbitration agreements, whereas the Arbitral Tribunal ought to rule on its jurisdiction, including the issues pertaining to the existence and validity of an arbitration agreement."
(emphasis supplied)
The Constitution Bench held that the nature of objections to the jurisdiction of an arbitral tribunal on the basis that stamp duty has not been paid or is inadequate cannot be decided on a prima facie basis.303 Hence, it was observed that objections of such a kind will require a detailed consideration of evidence and submissions and a finding as to the law as well as the facts.
165. At the Section 11 stage, a referral court only has to determine the existence of arbitration agreement. The validity of the arbitration clause providing for the procedure for appointment of arbitrators will require the referral court to enter into a detailed consideration of evidence and render a finding as to law and facts. This issue should be left to be decided by the arbitral tribunal in view of the doctrine of competence-competence. The arbitral tribunal is competent to rule on its jurisdiction, including the issue of validity of the arbitration clause for violating the equality principle under the Arbitration Act.
I. Prospective Overruling
166. A decision of this Court has retrospective effect unless expressly given a prospective effect. Commercial relations are structured on the basis of law. A change in law may have the effect of distorting established rights and commercial bargains between parties.304 To avoid large-scale social and economic disruption, this Court can exercise its discretionary jurisdiction under Article 142 to give prospective effect to its decisions.305
The application of the doctrine of prospective overruling results in the application of the law declared by this Court to cases arising in future.306 In Mineral Area Development Authority v. Steel Authority of India,307 eight Judges of this Court held that the doctrine of prospective overruling is applied to bring about a smooth transition of the operation of law without unduly affecting the rights of people who acted upon the overruled law.
167. In Bharat Aluminium Company v. Kaiser Aluminium Technical Services,308 a Constitution Bench of this Court prospectively overruled Bhatia International v. Bulk Trading S A309 observing:
"197. The judgment in Bhatia International [(2002) 4 SCC 105] was rendered by this Court on 13-3-2002. Since then, the aforesaid judgment has been followed by all the High Courts as well as by this Court on numerous occasions. In fact, the judgment in Venture Global Engg. [(2008) 4 SCC 190] has been rendered on 10-1-2008 in terms of the ratio of the decision in Bhatia International [(2002) 4 SCC 105]. Thus, in order to do complete justice, we hereby order, that the law now declared by this Court shall apply prospectively, to all the arbitration agreements executed hereafter."
168. In the present reference, we have upheld the decisions of this Court in TRF (supra) and Perkins (supra) which dealt with situations dealing with sole arbitrators. Thus, TRF (supra) and Perkins (supra) have held the field for years now. However, we have disagreed with Voestalpine (supra) and CORE (supra) which dealt with the appointment of a three-member arbitral tribunal.
We are aware of the fact that giving retrospective effect to the law laid down in the present case may possibly lead to the nullification of innumerable completed and ongoing arbitration proceedings involving three-member tribunals. This will disturb the commercial bargains entered into by both the government and private entities. Therefore, we hold that the law laid down in the present reference will apply prospectively to arbitrator appointments to be made after the date of this judgment. This direction only applies to three-member tribunals.
J. Conclusion
169. In view of the above discussion, we conclude that:
a. The principle of equal treatment of parties applies at all stages of arbitration proceedings, including the stage of appointment of arbitrators;
b. 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;
c. 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. Further, such a unilateral clause is exclusive and hinders equal participation of the other party in the appointment process of arbitrators;
d. In the appointment of a three-member 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. In this situation, there is no effective counterbalance because parties do not participate equally in the process of appointing arbitrators. The process of appointing arbitrators in CORE (supra) is unequal and prejudiced in favour of the Railways;
e. Unilateral appointment clauses in public-private contracts are violative of Article 14 of the Constitution;
f. The principle of express waiver contained under the proviso to Section 12(5) also applies to situations where the parties seek to waive the allegation of bias against an arbitrator appointed unilaterally by one of the parties. After the disputes have arisen, the parties can determine whether there is a necessity to waive the nemo judex rule; and
g. The law laid down in the present reference will apply prospectively to arbitrator appointments to be made after the date of this judgment. This direction applies to three-member tribunals.
170. The reference is answered in the above terms.
171. Pending application(s), if any, shall stand disposed of.
......................CJI. [Dr. Dhananjaya Y. Chandrachud]
........................J. [J.B. Pardiwala]
........................J. [Manoj Misra]
New Delhi;
November 08, 2024.
