Alvin Sam* and Hari Keshav Manohar**
INTRODUCTION
Arbitration clauses in power supply contracts often come under scrutiny, particularly when they allow for the unilateral appointment of arbitrators. This issue has been examined in multiple judgements, reflecting concerns over fairness and impartiality in arbitral proceedings. A notable example is the Delhi High Court's ruling in Power Grid Corp. of India Ltd. v. Mirador Commercial Pvt. Ltd. ("Power Grid"), which questioned the validity of such clauses in the light of the Supreme Court's ("SC") landmark decision in Perkins Eastman Architects Dpc & Anr. v. HSCC (India) Ltd. ("Perkins").
The Perkins judgement addressed a fundamental concern regarding fairness in arbitration: the unilateral appointment of arbitrators by one party. In Perkins, the respondent unilaterally appointed a sole arbitrator, prompting a challenge regarding the appointment before the SC. The SC ruled that any clause permitting such unilateral appointments inherently raises justifiable doubts about the arbitrator's independence and impartiality, rendering the appointment invalid. This decision reinforced the principle that arbitration must uphold neutrality and fairness, ensuring neither party has an undue advantage in constituting the tribunal.
In Power Grid, a similar issue arose when the respondent invoked the arbitration clause and appointed an arbitrator before calling upon the petitioner to nominate their arbitrator under the terms of the contract. When the petitioner failed to do so, the respondent's appointee became the sole arbitrator per the contract's terms. The petitioner subsequently approached the Delhi High Court, seeking to terminate the arbitrator’s mandate under Section 14 of the Arbitration and Conciliation Act, 1996 (the "Act"). While the High Court decided to examine the validity of the clause in question, it left the remaining issues for the arbitral tribunal to address.
The second part of this blog explores how various High Courts have upheld the validity of such clauses. The third part examines counterarguments suggesting that arbitration clauses like the one in Power Grid are, in fact, invalid. The fourth part analyses the SC's landmark November 2024 judgement in Central Organisation for Railway Electrification v. ECI SPIC SMO MCML (JV) A Joint Venture Company ("CORE II") and its transformative impact on the legal landscape. Finally, the concluding section contrasts these opposing perspectives, incorporating the CORE II ruling, and presents the authors’ reasoning for asserting that such clauses fail to meet the standards of fairness and impartiality, rendering them invalid.
ARGUMENTS IN FAVOUR OF THE ARBITRATION CLAUSE
Background of the Arbitration Clause
In Power Grid, the Delhi High Court observed that the arbitration clause in question differs from the one scrutinised in Perkins. The relevant clause states:
“The arbitration shall be conducted by three arbitrators, one each to be nominated by the Contractor and the Employer and the third to be appointed by both the arbitrators in accordance with the … Act … If either of the parties fails to appoint its arbitrator within sixty days after receipt of a notice from the other party invoking the Arbitration clause, the arbitrator appointed by the party invoking the arbitration clause shall become the sole arbitrator to conduct the arbitration”.
A closer examination of the clause's application reveals a concerning trend. Similar clauses have been incorporated into bidding documents submitted by contractors, particularly in the power sector, across multiple states, including Bihar and Odisha. Many government power corporations have adopted these contract clauses, often leading to legal disputes.
Notably, the arbitration clause in question appears to have been replicated verbatim in numerous government bidding documents. If, as we argue, this clause is ultimately deemed invalid, the implications could be significant. Given its widespread inclusion in government contracts across India, an adverse ruling could cast doubt on the validity of arbitration agreements governing many public infrastructure projects.
High Court Judgements Supporting the Clause
The Delhi High Court in Power Grid observed that the clause in question did not explicitly provide for the unilateral appointment of an arbitrator. Instead, it stipulated that an arbitrator appointed by one party would assume the role of the sole arbitrator only if the other party failed to nominate its arbitrator within the stipulated timeframe. The Court further noted that such a default effectively amounted to the consenting party's acceptance of the unilateral appointment. However, while acknowledging that the arbitration clause's validity remained a contentious issue, the court refrained from delivering a definitive ruling on its legitimacy.
Similarly, disputes concerning the validity of the clause in question have previously been adjudicated by various courts. In Purvanchal Vidyut Vitaran Nigam Ltd. v. Prabha Mvomni ("Purvanchal"), the Allahabad High Court upheld the legitimacy of the arbitration clause in power supply contracts (similar to the clause in question), ruling that they do not contravene the principles established in Perkins. The Court distinguished Perkins from the case at hand, emphasising that the former relied heavily on TRF Limited v. Energo Engineering Projects Limited, where the arbitrator's appointment was deemed invalid due to a statutory embargo. In contrast, Purvanchal involved no such statutory restriction. Consequently, the Court held that the appropriate remedy was to challenge the arbitral award rather than the appointment of the sole arbitrator. The ruling further clarified that a party cannot bypass the contractual framework by seeking the appointment of an arbitrator under Section 11 of the Act.
Moreover, in Deepak Cables (India) Ltd. v. Hubli Electricity Supply Company Ltd. and Ors., the Karnataka High Court did not cast any doubt on the validity of the arbitration clause, proceeding with the implicit assumption that such an arbitration agreement was valid. Similarly, in Utkal Galvanizers Ltd. v. Power Grid Corporation of India Ltd. ("Utkal"), the Delhi High Court examined a comparable arbitration clause and affirmed the validity of appointing a sole arbitrator by one party. In Utkal, one party appointed a sole arbitrator after the other party failed to do so within the timeframe stipulated in the contract. The Court, relying on several SC decisions, emphasised that the parties must adhere to the procedure specified in their contract. It further held that any alternative method of appointing an arbitrator would be deemed invalid unless the contractual terms were respected. Therefore, the party that appointed the sole arbitrator was well within its rights to do so.
The English Perspective
The reasoning underlying the aforementioned decisions is rooted in the enduring influence of Section 13 of the English Common Law Procedure Act, 1854, which provided that “when reference is to two arbitrators and one party fails to appoint, the other party may appoint an arbitrator to act alone.” This principle was later incorporated into Section 6 of the English Arbitration Act, 1889, which retained the substance of the 1854 provision, thereby affirming the validity of appointing a sole arbitrator in cases where one party defaulted.
In modern English law, this principle is now codified in Section 17 of the English Arbitration Act, 1996, which states that if each party is required to appoint an arbitrator but one party fails or refuses to do so, the other party may notify them of their intent to appoint their arbitrator as the sole arbitrator. If the defaulting party does not act within seven days of receiving such notice, the arbitrator appointed by the other party becomes the sole arbitrator. A key distinction between this approach and the arbitration clause in question lies in the requirement under English law for an additional notice to be sent after the initial time period has lapsed.
These rules form part of the standard framework for arbitration in England and are designed to enhance the efficiency of the arbitral process. Notably, the appointment of an umpire is not typically included in English national arbitration regulations but remains a distinctive feature of maritime arbitrations held in London. To streamline proceedings and reduce costs, maritime parties often establish an arbitral tribunal with only two arbitrators appointed by the parties, relying on their technical expertise to reach a joint resolution. If a deadlock arises, the arbitrators, the parties, a supervising body, or a court may appoint an umpire to resolve the impasse or determine the dispute's outcome.
The English Arbitration Act 1996 facilitates this practice by recognising the role of an umpire, thereby promoting quicker and more cost-effective arbitration. This approach was applied in Lord Marine Co. S.A v. Vimeksim SRB D.O.O, a 2024 English case concerning maritime arbitration. In this case, the arbitration agreement allowed one party to appoint a sole arbitrator if the other failed to do so. When one party did not appoint its arbitrator within the stipulated timeframe, the other proceeded to appoint a sole arbitrator. This case reaffirms that Section 17 of the English Arbitration Act 1996 continues to be widely applied, particularly in maritime disputes, but also in general arbitration matters.
The English position simultaneously supports and challenges the reasoning in Power Grid. On the one hand, it aligns with Power Grid, as English law permits one party's arbitrator to become the sole arbitrator under certain circumstances. However, it also diverges from the reasoning in Power Grid, as English law mandates an additional notice requirement before appointing a sole arbitrator. This safeguard—where the defaulting party is warned of the risk of a sole arbitrator being appointed—has no equivalent in Indian law or in the arbitration clause in question, highlighting a significant procedural difference.
WHY THE CLAUSE IS PROBLEMATIC
Does the arbitration clause violate the principle of impartiality?
There are arguments that judgements to be made that judgements which curtail party autonomy, including those such as the majority opinion in CORE II, corrupt the soul of arbitration by allowing ease of interference from the courts and not sufficiently maintaining the sanctity of the arbitration clause and the contract between the parties.
The SC illustrated the concept of party autonomy in Centrotrade Minerals & Metal Inc. v. Hindustan Copper Ltd. and PASL Wind Solutions (P) Ltd. v. GE Power Conversion (India) (P) Ltd.. Perkins declared that parties cannot enter into agreements that compromise the arbitration process's impartiality. This reasoning was also displayed in the majority opinion in CORE II, where it was pronounced that “a unilateral appointment clause is against the principle of arbitration, that is, impartial resolution of disputes between parties”. If we apply this line of decisions and reasoning to the arbitration clause in question, it can be seen that the arbitration clause in question forces both parties to agree to the other party appointing a sole arbitrator in the case of one party defaulting, which violates the principle of impartiality, because a sole arbitrator appointed unilaterally by one party would likely be biased.
The clause in the context of the Government e-marketplace
Another indication that the clause in question is problematic can be seen in the recent developments regarding the Government e-Marketplace ("GEM"). GEM, an online marketplace for public procurements (often issued by power corporations to invite tenders), issued a General Terms and Conditions dated 6 September 2024, which provided for a multi-tiered dispute resolution mechanism including negotiation, a Dispute Resolution Committee and, finally, arbitration. Here, the clause is similar to the one in question with one difference: upon the other party fails to appoint an arbitrator, the court appoints an arbitrator, which shows the government's realisation that unilateral appointment was a real threat that must be addressed.
Later, GEM issued a General Terms and Conditions of September 26th 2024, which referred to certain Guidelines for Arbitration and Mediation in Contracts of Domestic Public Procurement. These guidelines pointed out the flaws in arbitration and restricted the scenarios in which arbitration clauses could be included, as well as generally recommending that mediation and other dispute resolution methods be preferred over arbitration. This two-step manoeuvre within the same month showcases the government’s displeasure with how arbitration is conducted under such contracts. Clearly, it shows that the government perceived a threat of unilateral appointment making its way into arbitration clauses.
Why the arbitration clause should be declared to be invalid?
When explaining why the clause in question could be given the green light, the authors elaborated that the roots of the clause in question can be found in the English position on arbitration. However, it should be noted that though the English Arbitration Act, 1996 approves of the appointment of sole arbitrators, it does mandate that a notice first be issued to the defaulting party, which is not the case in the arbitration clause in question. The absence of a notice in the Indian context handicaps the rights of the defaulting party, as a sole arbitrator is appointed purely relying on the contract without receiving the defaulting party’s express waiver as required under Section 12 of the Act.
Once all these disparate developments and points are weighed together, it can clearly be seen that the combination of the principle of impartiality, the recent developments regarding the GEM, and the key difference between the English position and that taken in Power Grid makes it difficult to accept the arbitration clause in question. There seems to be definite reason to believe that multiple High Courts may have erred in upholding the validity of the arbitration clause in question.
THE SUPREME COURT'S RECENTLY EXPRESSED VIEW ON THE UNILATERAL APPOINTMENT OF ARBITRATORS
On 8 November 2024, the SC declared a landmark judgment, namely, the decision in CORE II. In this case, which was presided over by a Constitution Bench headed by the then-Chief Justice D. Y. Chandrachud, the SC ruled that a clause that allows one party to appoint a sole arbitrator unilaterally gives rise to justifiable doubts as to the independence and impartiality of the arbitrator. Furthermore, such a unilateral clause is exclusive and hinders the other party's equal participation in the arbitrators' appointment process. The majority opinion in CORE II laid special emphasis on the fact that unilateral appointment clauses in public-private contracts violate the nemo judex rule, which says that no one should be a judge in their own case; naturally, in a situation where one party appoints a sole arbitrator, the likelihood of bias would extend so far as to effectively make that party a judge in their own case.
Moreover, the SC also held that unilateral appointment clauses in public-private contracts violate Article 14 of the Constitution. This solidifies the authors' points, as the clause in question has been used, as far as the authors can see, only in public-private contracts. However, it must be noted that this judgment only possesses prospective effect and hence does not affect the pending decision in Power Grid—although, of course, the Delhi High Court may be guided by the decision in CORE II.
CONCLUSION
The Delhi High Court has not given the final order in the ongoing Power Grid case. However, it is noteworthy that the position outlined in the last order in Power Grid is in line with English jurisprudence, which generally upholds such agreements. Multiple High Courts may have found the clause in question to be valid as it possibly fulfils the arbitration principle of efficiency and speed.
However, this position goes against the law laid down by the SC in Perkins, including the principle of impartiality. In Perkins, the SC explained the crucial importance of impartiality when it comes to the appointment of arbitrators, and it must be emphasised that one of the pillars of arbitration is impartiality, which insists that the binding nature of contracts should not be relied upon to carry out an act of procedural unfairness. Clearly, one party's unilateral appointment of an arbitrator does not abide by the principles laid down in Perkins and expressed by the concept of impartiality. The authors posit that the arbitration clause in question should be declared invalid in light of the diverging judgements of various High Courts discussed in the previous parts.
The authors disagree with the stance taken by the Allahabad High Court in Purvanchal, which claims that the clause in question does not constitute a unilateral appointment as defined in Perkins. The basis of the High Court's decision in Purvanchal was the idea that appealing to the Court to appoint an arbitrator is just a duplicitous way of circumventing an existing contract. However, the authors feel that the nature of the arbitration clauses seen in Purvanchal and Power Grid are such that they provide an opportunity for bias and partiality to enter into the arbitration process, which is anathema when it comes to arbitration.
Such a stance has also been assumed by the SC in CORE II, where unilateral appointments have been said to affect the impartiality and independence of arbitrators. Moreover, arbitration clauses in public-private contracts, such as those in question, are explicitly deemed invalid, as they violate Article 14 of the Constitution. Since the SC judgement has prospectively invalidated such arbitration clauses, the arbitration clause's validity in Power Grid is still to be decided by the Delhi High Court. It remains to be seen whether the Delhi High Court takes a cue from the SC or whether a twist in the tale lies ahead.
(*) Alvin Sam is a third-year law student at the National University of Advanced Legal Studies, Kochi. He can be contacted via mail at alvinsam2004@gmail.com for any discussion related to the article.
(**) Hari Keshav Manohar is a third-year law student at the National University of Advanced Legal Studies, Kochi. He can be contacted via mail at harimanohar@gmail.com for any discussion related to the article.
(***) The authors would also like to thank Rajnandan Gadhi for their assistance in the formation of the article.
Comments