In a landmark decision, a 5-Judge Constitution Bench of the Supreme Court of India declared the unilateral appointment of arbitrators as a violation of the principles of fairness, impartiality, and equality in arbitration.
This pivotal judgment, delivered in Central Organisation for Railway Electrification v. M/s ECI SPIC SMO MCML (JV), reinforced the notion that even the perception of bias in the appointment process is sufficient to invalidate arbitration proceedings.
As a natural consequence, institutional arbitration offered by entities like CADRE ODR stands out as the most transparent and effective alternative to unilateral appointment clauses.
What Is Unilateral Appointment of Arbitrators and Why Is It Problematic?
Unilateral appointment of arbitrators occurs when one party is granted the exclusive authority to select the arbitrator (or arbitrators) who will decide the case. For example, in lending agreements, clauses like the one below highlight the issue (problematic parts are in bold):
“All disputes, differences and/or claims arising out of this Agreement, whether during its subsistence or thereafter, shall be settled by arbitration in accordance with the provisions of the Arbitration and Conciliation Act, 1996, or any statutory amendments thereof, and shall be referred to the sole arbitration of an “arbitrator nominated by the Lender”. The award given by such an arbitrator shall be final and binding on the Borrower to this Agreement.”
These clauses pose two significant problems:
- Violation of Equal Treatment Principles: Section 18 of the Arbitration & Conciliation Act, 1996 mandates equal treatment of parties throughout arbitration proceedings. Unilateral appointments inherently breach this principle.
- Perception of Bias: An arbitrator appointed solely by one party may appear biased toward the appointing party, undermining the fairness of the arbitration process.
Key Observations from the Supreme Court Judgment
1. Equal Treatment in Arbitration: Section 18 mandates equal treatment of parties in all stages of arbitration. Unilateral appointments create doubts about an arbitrator’s independence and impartiality, as they are often perceived to favor the appointing party, particularly when remuneration depends on that party.
2. Selection from a Curated Panel: Many government contracts allow contractors to select an arbitrator from a panel curated by the government department. While better than unilateral appointments, this practice is also impermissible, as the panel itself is created by one party. Such clauses breach Article 14 of the Indian Constitution, which guarantees equality.
3. Consent Overrides Impermissibility: The court held that unilateral appointments remain invalid unless the disadvantaged party provides express written consent or waiver under Section 12(5) of the Arbitration and Conciliation Act, 1996.
Addressing Unilateral Arbitration Clauses
Unilateral arbitration clauses are now impermissible under Indian law, with the courts emphasizing that even the perception of bias in arbitrator appointments can invalidate the arbitration process.
In a dispute, where trust between parties is already strained, agreeing on an arbitrator becomes a contentious issue. The solution lies in adopting Institutional Arbitration as the default method for dispute resolution.
Why Institutional Arbitration Is the Best Alternative
Institutional arbitration offers a transparent, neutral, and efficient resolution process. Arbitration institutions, serve as impartial entities providing Dispute Resolution as a Service without favoring any party. Their services include:
- Providing standardized rules and procedures for disputes.
- Offering a diverse pool of qualified arbitrators.
- Having effective infrastructure to manage the entire arbitration process, ensuring transparency and efficiency.
Entities like CADRE ODR operate digitally and implement several steps to for additional layers of efficiency and transparency:
- Neutral Arbitrator Allocation: Arbitrators are assigned from a diverse pool, ensuring no prior interaction with either party.
- Rotation Policy: Arbitrators are rotated to prevent over-familiarity with specific parties.
- Cooling-Off Periods: Implemented where necessary to uphold fairness.
- Bias Handling: Allegations of bias are swiftly addressed, and replacements are provided from the pool, when needed.
- Performance Monitoring: Arbitrator performance is assessed on various parameters to maintain quality and accountability.
How to Transition to Institutional Arbitration
Operationalising Institutional Arbitration in contracts is not as difficult as it sounds. The key steps are:
- Revising Existing Agreements by removing any unilateral actions in the arbitration clauses.
- Adopting Institutional Arbitration Clauses by incorporating clear and unambiguous language in all new agreements where it is the institution which appoints the arbitrator and not any one of the parties. Examples of CADRE ODR arbitration clauses can be found here.
- Seek Counterparty Consent for existing agreements through a written or digital request in line with the amendment sections of the agreement.
Conclusion
The Supreme Court’s decision marks a significant shift toward fairness and impartiality in arbitration. By transitioning to institutional arbitration, parties can eliminate concerns about bias and ensure compliance with modern arbitration standards. Platforms like CADRE ODR provide an efficient, impartial, and technology-driven framework for dispute resolution, fostering trust and delivering justice in a streamlined manner.
Institutional arbitration is not just a solution to the problem of unilateral appointments — it is a cornerstone of fair and equitable dispute resolution in today’s legal landscape.
