Unilateral Arbitrator Appointment Clauses in PPP Contracts Violate Article 14

In a landmark judgment, a five-judge bench of the Hon’ble Supreme Court of India in the case of Central Organisation for Railway Electrification v M/s ECI SPIC SMO MCML (JV), [2024 SCC OnLine Blog Exp 85], dated November 8, 2024, ruled that unilateral appointment clauses in Public-Private-Partnership (PPP) contracts violate Article 14 of the Indian Constitution, 1950. The decision came while addressing two references to a larger Bench of the Hon’ble Supreme Court of India regarding the correctness of the decision in Central Organisation for Railway Electrification v. ECI-SPIC-SMO-MCML (JV), [(2020) 14 SCC 712] (“ECI-SPIC”). The Hon’ble Supreme Court of India also examined the issue of whether a person ineligible to act as an arbitrator can nominate another arbitrator.

The case stemmed from a contractual dispute between the Central Organisation for Railway Electrification (CORE) and ECI-SPIC-SMO-MCML (Joint Venture) (“ECI’s”). ECI failed to complete the contractual work within the stipulated time, leading to the termination of the contract by CORE under Clause 62 of the General Conditions of the Contract (GCC). Aggrieved, ECI filed a petition in the Hon’ble High Court of Allahabad, which was dismissed on November 28, 2017. The Hon’ble High Court of Allahabad directed ECI to invoke the arbitration clause as an alternative remedy.

Following the Hon’ble High Court of Allahabad’s directive, ECI requested CORE to constitute an arbitral tribunal to resolve disputes amounting to Rs. 73.35 crores. CORE provided two lists of potential arbitrators comprising Railway Electrification Officers and retired Railway officers, asking ECI to select two names. ECI, however, did not respond and instead filed an application under Section 11 of the Arbitration and Conciliation Act, 1996, seeking the appointment of a sole arbitrator.

The Hon’ble High Court of Allahabad, on January 3, 2019, dismissed ECI’s argument that the arbitrator must be appointed as per GCC Clauses 64 (3)(a)(ii) and 64 (3)(b). It appointed Justice Rajesh Dayal Khare, a retired judge of the High Court, as the sole arbitrator. Dissatisfied, CORE filed a Special Leave Petition before the Hon’ble Supreme Court of India. The Hon’ble Supreme Court of India, however, rejected ECI’s contention that the General Manager of CORE, being ineligible under Section 12(5) read with Schedule VII of the Arbitration Act, could not nominate arbitrators. Instead, it held that the General Manager was competent to appoint arbitrators, a stance subsequently upheld in ECI-SPIC.

The ECI-SPIC ruling diverged from earlier Hon’ble Supreme Court of India decisions, notably TRF Ltd. v. Energo Engineering Projects Ltd., [(2017) 8 SCC 377], dated July 3, 2017, and Perkins Eastman Architects DPC v. HSCC (India) Ltd., [(2020) 20 SCC 760], dated November 26, 2019. In TRF Ltd.(supra), the Hon’ble Supreme Court of India held that an arbitrator who is disqualified under the law cannot nominate another arbitrator. Similarly, in Perkins Eastman (supra), the Hon’ble Supreme Court of India ruled that unilateral appointment clauses in arbitration agreements are inherently unfair.

The disagreement over ECI-SPIC resurfaced in Union of India v. Tantia Constructions Ltd., [2021 SCC OnLine SC 271], dated January 11, 2021, where the Hon’ble Supreme Court of India opined that once the appointing authority becomes ineligible to appoint arbitrators, it cannot delegate this power. This divergence in judicial opinion led to the matter being referred to a five-judge Constitution Bench of the Apex Court for further clarification. 

The Constitution Bench, in a unanimous opinion, concluded that arbitration clauses permitting unilateral appointment of arbitrators from a curated panel violate the principle of equal treatment enshrined under Section 18 of the Arbitration and Conciliation Act, 1996. The Constitution Bench clarified that while PSUs may propose panels of potential arbitrators, they cannot mandate that the other party select its arbitrator exclusively from this panel. Such clauses, the Court held, are inherently exclusive and unfair, depriving the other party of an equal opportunity to participate in the appointment process. A critical aspect of the judgment was the Court’s interpretation of Section 12(5) of the Arbitration and Conciliation Act, 1996, which disqualifies individuals with conflicts of interest from serving as arbitrators.

This judgment has far-reaching implications for arbitration clauses in PPP contracts. It reaffirms the necessity of impartiality and fairness in the arbitration process and strengthens the principle that arbitration, as an alternative dispute resolution mechanism, must remain impartial, transparent, and in compliance with constitutional guarantees of equality.