New Delhi: Freedom versus Equality is a frequently debated topic in political thought. The premise of the discourse being that there is always a trade-off between Freedom and Equality, meaning thereby, that absolute freedom translates to absolute inequality and vice versa. It is argued that for establishing equality, freedom has to be curtailed and for establishing freedom, equality has to be curtailed. Similar dynamic exists between the principle of party autonomy and the principle of equality in the realm of arbitration.
The Constitution Bench of the Hon’ble Supreme Court faced this very conundrum as it was deciding the validity of unilateral appointments of arbitrators. While on the one hand the principle of party autonomy mandates that the parties must enjoy the absolute freedom to decide the procedure for appointment of arbitrators, on the other hand the principle of equality mandates that lopsided procedure, where a dominant party is allowed to unilaterally appoint arbitrators ought to be avoided.
The Constitution Bench, while deciding the above debate with respect to unilateral appointments, favoured the principle of equality over autonomy with a 3:2 majority in its recent judgment in Central Organization for Railway Electrification (CORE) Vs. M/s. ECI SPIC SMO MCML . The Hon’ble Court has held that unilateral appointment of arbitrators is impermissible as it violates the principle of equality enshrined under Section 18 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act” or “Act”). Apart from Section 18, the majority led by Justice DY Chandrachud also relied on Section 23 of the Contract Act, 1872 (“Contract Act”) read with Article 14 of the Constitution of India, 1950.
The two points of disagreement between the majority and the minority views of the Court were broadly with respect to: (1) sourcing of the principle of equality from the Constitution and (2) permissibility of unilateral appointment of arbitrators. The aforesaid disagreement has led to questions of both practical and academic nature which the present article endeavours to analyse.
The majority in CORE (Supra) led by Justice DY Chandrachud held that Section 18 of the Arbitration Act which provides for the principle of equality, is a mandatory provision of under the Act, meaning thereby, it cannot be ‘opted out’ from or waived by the parties and is applicable to the entire arbitral proceedings right from its inception. Apart from Section 18, the majority led by Justice Chandrachud also sourced the ‘equality requirement’ from Section 23 of the Contract Act and by extension it sourced the said requirement from Article 14 of the Constitution.
The principle of equality under the Constitution has been sourced by the majority via Section 23 of the Contract Act. Section 23 of the Contract Act describes the cases where the object of an agreement can be regarded as ‘unlawful’, thereby, rendering the said agreement void for that reason. As per Section 23 the object of agreement is unlawful if the Court regards it as immoral, or opposed to ‘public policy’. has not been defined under the Contract Act. Therefore, the majority has referred to the judgment in Delhi Transport Corporation vs. DTC Mazdoor Congress to hold that the Courts may rely on the Constitution as a source of public policy while refusing to enforce unreasonable or lopsided terms of a contract. Thus, the majority concluded that unilateral appointment of arbitrators is violative of Article 14 of the Constitution of India. However, it also held that the principle of ‘express waiver’ as envisaged under the proviso to Section 12(5) is also applicable to unilateral appointments.
Section 12(5) of the Arbitration Act has been enacted to ensure impartiality and independence of the arbitrator. Section 12(5) of the Arbitration Act mandates that a person who falls under the categories as mentioned in the seventh schedule of the Arbitration Act shall be ineligible to be appointed as an arbitrator. The proviso to Section 12(5) provides that subsequent to disputes arising between the parties, they can waive the applicability of Section 12(5), thereby, waiving the grounds of ineligibility altogether. Thus, as per the majority, while the principle of equality under Section 18 is a mandatory provision, by way of the principle of ‘express waiver’ under the proviso to Section 12(5) the parties can choose to waive the allegation of bias against an arbitrator appointed unilaterally after disputes have arisen.
Both the minority judgments of Justice Hrishikesh Roy and Justice PS Narasimha disagreed with the invocation of constitutional principles for enforcing equality in arbitral proceedings. Further, the minority has held that the Arbitration Act allows for unilateral appointment of arbitrators and only in a case where there is ‘a complete lack of consensus’ regarding the appointment should the Court intervene. The above view was arrived at by the above judges in light of Section 12(5) of the Arbitration Act. Hon’ble Justice Roy and Hon’ble Justice PS Narasimha held that the Arbitration Act gives primacy to party autonomy and the same is reflected in the proviso for Section 12(5) which allows for appointment of arbitrators who may even be interested in the dispute or have a relationship with one of the parties and for the above reasons, in normal course, be ineligible for being appointed as arbitrators.
The above disagreement between the majority and the minority views raises two questions the first having practical implications and the second being of academic nature as also having precedential implications. The first question having practical implications is whether a belated challenge is sustainable on the ground that the arbitrator was unilaterally appointed as Section 18 is a mandatory provision and the same cannot be deemed as waived. The second question being an academic one is whether the principles of public law can be invoked in arbitration.
TREATMENT OF SECTION 18 AS A MANDATORY PROVISION AND SIMULTANEOUS APPLICATION OF PRINCIPLE OF ‘EXPRESS WAIVER’
Section 4 of the Arbitration Act mandates that if a party does not object to non-compliance of a requirement under the Arbitration Act then it shall be deemed that the party has waived the compliance of such a requirement. As per the majority, Section 4 of the Act also distinguishes between mandatory and non-mandatory provisions of the Act. Thus, holding that the deemed waiver under Section 4 of the Act may be applicable to certain provisions of the Act (non-mandatory provisions) while it may not be applicable to other provisions (mandatory provisions). It has been further held that principle of equality as enshrined under Section 18 of the Arbitration Act is a mandatory provision. Therefore, waiver under Section 4 is inapplicable to the principle of equality as the same is a mandatory provision. However, the majority has also held that the principle of “express waiver” enshrined under the proviso to Section 12(5) is applicable to unilateral appointments, meaning thereby, that any allegations to a unilaterally appointed arbitrators may be “expressly waived”.
In accordance with the above interpretation, the equality requirement under Section 18 can only be expressly waived by the parties and deemed waiver under Section 4 is inapplicable as Section18 is a mandatory provision of the Act. The above interpretation can lead to a situation where the parties may depart from the equality requirement under the Act without ‘express waiver’ being given under proviso to Section 12(5). As an illustration, one can imagine a situation where one of the parties appoints the arbitrator unilaterally and the other party chooses not to give express waiver for the same, however, it continues with the arbitral proceedings and only at a belated stage raises objection under Section 18. The question that arises in the above illustration is whether a belated challenge is sustainable on the ground that the arbitrator was unilaterally appointed as Section 18 is a mandatory provision and the same cannot be deemed as waived?
The above situation is tackled better in the approach taken by the minority. Contrary to the majority view, the minority has held that unilateral appointments are permissible and the interference of the courts should only happen when there is a ‘complete lack of consensus’ with respect to the said unilateral appointment. The said view when applied to the above illustration leads to a reasonable solution and a party which has chosen not to raise objection during the appointment stage cannot claim that there was a ‘complete lack of consensus’ at a belated stage in the arbitral proceeding.
WHETHER PRINCIPLES OF PUBLIC LAW SHOULD BE INVOKED TO ENFORCE EQUALITY IN ARBITRAL PROCEEDINGS
Principles such as the Principle of Equality as enshrined under Article 14 of the Constitution govern the relationship between the State and the individual. Article 14 of the Constitution protects the individual from discriminatory or arbitrary actions of the State and does not prohibit arbitrary conduct between private parties. Under Article 15 and Article 16 of the Constitution, a very limited scope for the enforcement of equality inter se private parties has been envisaged. It was perhaps in this spirit that the minority has disagreed with the view of the majority with regards to the applicability of constitutional principles in the realm of arbitration. Therefore, taking a more laissez - faire view of the role of the State when it comes to commercial contracts, commercial disputes and arbitration. The above view is understandable in light of the recent liberalization policies pursuant to which there has been an overhaul of the legal framework for enforcement of contracts.
However, even while appreciating the laissez – faire approach, one cannot lose sight of the fact that regardless of the changing economic and legal landscape, dispensation of justice cannot be completely ‘privatized’ and it is a realm where the State ought to continue its presence, especially, under circumstances when contracting parties are unevenly placed in terms of their bargaining power.
Disclaimer: The opinions expressed in this article are solely those of the author and do not necessarily reflect the views of LawStreet Journal.
