Imagine you sign a contract, a dispute erupts, and then you discover that the arbitration clause in the contract lets the other side (usually the dominating party) pick the arbitrator on its own, or it hands you a panel it draws and tells you to choose from that. Doesn’t it feel one-sided? Yes, it does, and the Supreme Court now agrees as well. This article explains why a unilateral appointment of an arbitrator is largely impermissible, how Section 12(5) of the Arbitration & Conciliation Act 1996 (“Act”) rules on the ineligibility of arbitrator function, and what you can do about it.
What Section 12(5) of the Act and the Seventh Schedule say
Post the 2015 Amendment, the foundation of any challenge lies in Section 12 of the Act. Section 12(5) of the Act says that, whatever the parties may have agreed earlier, a person whose relationship with a party, its counsel or the subject-matter falls within the Seventh Schedule, drawn from the IBA Guidelines on Conflicts of Interest cannot be appointed as an arbitrator. The ineligibility thus operates by force of the law, and any appointment made in defiance of it is void.
The Evolution of Court’s Authority
As most people, the courts’ worry was that a person who has a stake in the outcome, or who answers to one of the parties, should not be the one choosing who decides the dispute.
In order to ensure this is followed, the Hon’ble Court in TRF Ltd. v. Energo Engineering Projects Ltd. (2017) 8 SCC 377 [1]held that once a person is held ineligible to act as an arbitrator by operation of law, he cannot nominate someone else to do the job either (what you cannot do directly, cannot be done indirectly). This reasoning was carried forward two years later in Perkins Eastman Architects DPC & Anr. v. HSCC (India) Ltd. AIR 2020 SUPREME COURT 59[2], wherein it was held that if one party alone holds the power to appoint the sole arbitrator, that exclusivity itself raises a reasonable apprehension of bias, and thus the appointment cannot stand.
These principles were given real teeth in Bharat Broadband Network Limited v. United Telecoms Limited 2019 (5) SCC 755 where the Court held that Section 12(5) is mandatory and cannot be contracted out and any appointment made in the teeth of it is void from the very start.
However, these decisions left one loophole named the curated panel, exploited mostly by the public sector, completely untouched. In the Central Organisation for Railway Electrification v. M/s ECI SPIC SMO MCML (JV) AIRONLINE 2019 SC 1904, often called “CORE I”, a three-judge bench upheld a railway clause that allowed Railways itself to draw up a panel of its own retired officers, offer four names and required the contractor to pick two, with the General Manager making the final appointment. This decision, however, did not sit well with TRF and Perkins and hence was referred the question to a larger Bench.
The answer came in “CORE II” (Central Organisation for Railway Electrification v. M/s ECI-SPIC-SMO-MCML (JV) 2024 INSC 857) whereby a majority, the Court held that a clause that allows the interested party in the dispute to unilaterally appoint a sole arbitrator is invalid and that this rule runs even through curated panels. The Bench held that the one-sided appointment clauses in public-private contracts violate Article 14 of the Constitution and, in doing so, the Court overruled CORE I. Thus, a panel maintained by a public-sector body is acceptable only if it is genuinely broad-based and the selection process leaves both sides on an equal footing.
Options to Challenge the Unilateral Appointment
Here’s what you can do if you face a one-sided clause or an unwanted arbitrator:
- Object at the threshold and move the court under Section 11: Do not comply, decline to concur and invoke arbitration by your own notice under Section 21, and apply to the relevant High Court or Supreme Court (if an international commercial arbitration) under Section 11(6) for an independent arbitrator.
- If an arbitrator has already entered into reference, challenge the arbitrator under Sections 12 and 13.
- Use the remedy endorsed by the Supreme Court in Bharat Broadband (supra) by seeking termination of the mandate under Section 14.
- Use Section 34 of the Act to set aside an award by an ineligible or unilaterally appointed arbitrator on the ground that the tribunal was improperly constituted.
- https://indiankanoon.org/doc/192167806/
- https://indiankanoon.org/doc/155925871/
FAQs
Can the sole arbitrator be appointed by the opposing party on its own?
No. After the decisions of the Court in Perkins Eastman and the CORE-II Constitution Bench, a party interested in the dispute cannot hold the exclusive power to appoint a sole arbitrator and thus such a clause is unenforceable.
Does taking part in the proceedings waive my right to object?
A waiver of the right of objection under Section 12(5) needs an explicit agreement in writing to be made after the dispute arises. Hence, participation alone is not enough.
Can a PSU give me a panel to choose from?
This is allowed if the panel is broad-based and the process leaves both parties on an equal footing. After CORE II, a panel curated unilaterally by the other party will not stand up to scrutiny.
What grounds make an arbitrator ineligible?
If an arbitrator has a relationship with a party, its counsel, or if the subject-matter falls within the Seventh Schedule of the Act he/she becomes ineligible under Section 12(5) of the Act.
What can be the quickest remedy?
The quickest remedy involves declining the unilateral appointment, issuing a Section 21 notice, and applying for a court-appointed independent arbitrator under Section 11(6) before the tribunal is constituted.
