[Appointment Of An Arbitrator] “Central Govt Should Inspire Confidence of Private Investors in Arbitration”: CJI Chandrachud

The Supreme Court Yesterday (Aug 29) highlighted the importance of private investment in a country’s progress and the role that arbitration plays in promoting such progress. A Constitution Bench Led by CJI DY Chandrachud said that the arbitration process has to be fair to inspire the confidence of private investors.

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NEW DELHI: On August 29, the Supreme Court underscored the critical role of private investment in a nation’s development and emphasized the importance of a fair arbitration process in fostering such investments.

A Constitution Bench comprising Chief Justice of India (CJI) DY Chandrachud and Justices Hrishikesh Roy, PS Narasimha, JB Pardiwala, and Manoj Misra asserted that the integrity of the arbitration process is essential to maintain the confidence of private investors.

“Private investment is crucial for the economic advancement, and for the government as a nation-state, it is vital that the process of arbitration is fair. Government representing the nation has to ensure that the faith of the private sector, including foreign and domestic investors, is intact in the process of arbitration,”

-CJI Chandrachud stated, responding to arguments presented by Solicitor General Tushar Mehta.

The Bench was deliberating on a series of petitions addressing significant questions of law, including:

• Whether an individual who is ineligible to be an arbitrator can appoint an arbitrator?

• Whether courts can deviate from the agreed procedure for appointing arbitrators under Section 11 of the Arbitration Act?

• Whether retired employees are ineligible to act as arbitrators in disputes involving their former employers?

In February, the Supreme Court referred to a larger bench the question of whether courts can modify arbitral awards under Sections 34 and 37 of the Arbitration and Conciliation Act, 1996. Further, in July of the previous year, the Central government established a committee to review legislatively whether courts could deviate from the agreed procedures for arbitrator appointments as stipulated under Section 11 of the Act.

During the August 29 hearing, the issue of party autonomy in arbitrator appointments was a focal point of the arguments.

Solicitor General Mehta argued,

“Party autonomy is ingrained throughout the architecture of the Arbitration Act,”

-emphasizing the fundamental importance of this principle.

CJI Chandrachud shared an anecdote related to tribunal appointments to illustrate the challenges inherent in the arbitrator selection process. He remarked,

“I have been chairing selection committees to appoint the chairman of many tribunals. The moment we circulate an advertisement for the post, the senior ones do not apply. That is why we call it a search cum selection committee. There is an element of good faith also when the CJI or a senior judge is on board. Now if railways is constituting a panel, it is headed by a GM—then how would selection be made? The devil lies in the fine print. There are very good arbitrators, but there is another end of the spectrum also. So will the Government of India undertake the exercise of having panels for each ministry? See how complex it will become.”

Kamath, representing the Bengaluru Metro Rail Corporation Limited, defended the practice of contractual autonomy in forming arbitration panels. He argued,

“It falls within party autonomy under Section 11(2) of the Arbitration Act. Parties are free to bargain their rights as long as it is not contrary to public policy or law. Adding names to a panel is not conferment of any right or giving any remuneration. Perception-based challenges to the appointment procedure are not sustainable in law. The statute lays down a four-tiered structure for safeguards of the appointments, including mandatory disclosure that is akin to a conscientious oath by a judge. Appointments can be challenged. Formation of the panel should be divested from the way it operates.”

Advocate Kumar added that the statute does not explicitly prohibit the unilateral appointment of arbitrators, reinforcing the autonomy of parties in arbitration agreements.

Representing Mahindra & Mahindra Financial Services Limited, a non-banking financial company, Senior Advocate Divan argued in favor of unilateral appointments by such companies. However, CJI Chandrachud expressed concern over the potential for injustice in such arrangements, particularly for vulnerable parties. He pointed out,

“Ms. Divan, the point is only about the unilateral arbitration clause by virtue of which you say ‘look, I will appoint a lawyer as an arbitrator, as a finance company,’ and the matter will proceed ex parte and the poor taxi or truck driver will be dispossessed. That is the reality—that then the drivers will be thrown out in the middle of the night by goons who will take the truck away. That is happening. This is turning arbitration on its head and giving it a bad name. I have dealt with n number of cases at the Bombay High Court where the less said, the better. Speaking from my experience even in Division Benches, I have seen how defaulters are dealt with under unilateral arbitration. Harshly against poor drivers, (it) has perverted the system.”

The hearing is set to continue at 2 PM today, with the case likely to be reserved for judgment.

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