The Supreme Court's landmark judgment in Perkins Eastman Architects DPC v. HSCC (India) Limited [2019 (9) SCC OnLine SC 1517] decisively held that unilateral appointment of an arbitrator without the consent of the other party would be non-est in law. Prior to the Perkins judgement, the interpretation of a three-judge Bench in TRF Limited v. Energo Engineering Projects Ltd. [(2017) 8 SCC 377] had become unnecessarily obfuscated by two Delhi High Court decisions [DK Gupta v. Renu Munjal, 2017 SCC OnLine Del 12385 and Bhayana Builders Pvt. Ltd. v. Oriental Structural Engineers Pvt. Ltd., (2018) 249 DLT 619]. The decisive ruling of Perkins provided clarity and addressed the unnecessary ambiguity arising from the interpretation of the TRF judgement.
Previously, in the matter of Voestalpine Schienen GmbH v. Delhi Metro Rail Corporation Ltd. [(2017) 4 SCC 665], the Supreme Court had upheld the power of a party to appoint a panel of arbitrators from which the other party could select an arbitrator. The Court did, however, prescribe safeguards, including the requirement to broad base the panel. This judgement had, unfortunately, not been considered in the TRF judgement. Although the Court in Perkins referred to Voestalpine, it did not clarify the legality of one party appointing a panel of arbitrators, thereby impliedly creating an exception for such appointments.
While attempts to resolve the inherent conflicts between TRF and Perkins, on the one hand, and Voestalpine, on the other hand, were being made (see Lite Bite Foods Pvt. Ltd. v. Airport Authority of India, 2019 SCC OnLine Bom 5163), the judgement of the Supreme Court in Central Organisation For Railways Electrification v. M/s ECI-SPIC-SMO-MCML (JV) A Joint Venture Company [2019 SCC OnLine SC 1635] further confounded matters. A three-judge bench in Railway Electrification legitimised an arbitration clause consisting of current and former employees appointed by the other party. The court justified this arrangement by asserting that the appointment was balanced by an equal power of selection granted to the opposing party.
It is respectfully submitted that the judgement of Railway Electrification is flawed for several reasons. First, it contradicts TRF, a judgement delivered by a Bench of equivalent strength. In TRF, it had been held that when a party is rendered ineligible to act as an arbitrator under Section 12(5) of the Arbitration and Conciliation Act, 1996 (“ACA”), such party is also ineligible to appoint another as an arbitrator. This principle was reiterated clearly in the Perkins judgement. In Perkins, the Court explicated that there were two categories of cases: one where the managing director is named as an arbitrator and also possesses the power to appoint another arbitrator, and another, where the managing director is only authorised to appoint an arbitrator but does not act is one. Perkins categorically declared the invalidity of both categories. The Court was 'conscious' that its interpretation of TRF would prohibit a party from appointing an arbitrator, and it acknowledged this 'logical deduction’ from TRF.
Railway Electrification ignored the ineligibility criteria established in TRF and, contrary to it, allowed employees and ex-employees of the appointing party to be part of the panel. This directly contradicts the principles established by TRF (and further clarified by Perkins). The judgement also failed to consider that the waiver of Section 12(5) of the ACA can only be made after the dispute has arisen, despite the same having been argued. Furthermore, Railway Electrification cites Voestalpine with approval but completely side-steps the judgement on several important aspects, including the requirement to broad-base the panel (in Voestalpine, the panel consisted of 31 persons).
Notably, a three-judge bench of the Supreme Court in the matter of Union of India v. Tantia Construction [Special Leave to Appeal (C) No(s). 12670/2020], has expressed a prima facie disagreement with the decision of Railway Electrification, “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”. The Court in Tantia Construction had requested Hon’ble Chief Justice to constitute a larger Bench to “look into the correctness” of the Railway Electrification judgement. More recently, a similar view was taken in JSW Steel Ltd. v. Southwestern Railways [(SLP (C) No. 9462/2022].
Despite the aforesaid, Railway Electrification continues to remain the law.
Apart from the apparent conflict between two judgements of equivalent strength from the Supreme Court, permitting one party to select a panel of arbitrators creates an overtly inequitable situation for the other party involved. Furthermore, it goes against well-established principles of natural justice, particularly the fundamental principle that no party should be a judge in its own cause.
The time has come to codify the legal principles established by the TRF judgment and further elucidated by the insightful clarification provided in Perkins. It is imperative to put the controversial ruling of Railway Electrification to rest. Codifying the principles laid down by TRF and Perkins will bring certainty, clarity and consistency to the appointment process. It will also reinforce the importance of impartiality and neutrality in arbitral proceedings.
Payal Chawla is a practicing advocate specializing in arbitration and commercial litigation and is the founder of JUSCONTRACTUS.