The Supreme Court of India, through a five-judge Constitution Bench, delivered a significant judgment on 8 November 2024 striking down clauses in government contracts that permit one party to unilaterally appoint the sole arbitrator. The Bench comprising Chief Justice D.Y. Chandrachud, Justice Hrishikesh Roy, Justice J.B. Pardiwala, Justice P.S. Narasimha, and Justice Manoj Misra held that such clauses violate Article 14 of the Constitution and the fundamental principles of natural justice, creating a real likelihood of bias in the arbitral process.
Background
Government contracts in India — particularly those issued by the Railways, public sector undertakings, and central government departments — have historically contained arbitration clauses empowering the employer (the government entity) to unilaterally appoint the sole arbitrator or to appoint an arbitrator from a panel of its own officers. Contractors and vendors challenging this arrangement had argued that an arbitrator appointed by one party, often a serving or retired officer of that very party, cannot be independent or impartial.
The issue had generated a body of conflicting Supreme Court precedent. Several earlier decisions, including Perkins Eastman Architects v. HSCC (2020), had questioned the validity of such unilateral appointment mechanisms but stopped short of declaring them per se unconstitutional. The 2015 amendment to the Arbitration and Conciliation Act, 1996 introduced Section 12(5) and the Seventh Schedule, which created a framework of ineligibility for persons with specified relationships to the parties. However, the interaction between these statutory provisions and existing government contract clauses remained contested, prompting the Constitution Bench reference.
Key Holdings
The Constitution Bench established the following principles:
Unilateral appointment clauses unconstitutional: Clauses in government contracts that allow one party to unilaterally appoint the sole arbitrator or to constitute the arbitral tribunal from its own panel are unconstitutional. Such clauses violate Article 14 (right to equality before law) and offend the principle that no person should be a judge in their own cause.
Real likelihood of bias: The Court held that where a government entity is both a party to the dispute and the appointing authority for the arbitrator, there exists a real likelihood of bias — even if no actual bias is demonstrated. The structural arrangement itself undermines the independence and impartiality that are foundational to arbitration.
Section 12(5) read with Seventh Schedule operates as a prohibition: The mandatory disqualification framework under Section 12(5) of the Arbitration and Conciliation Act, read with the Seventh Schedule, must be given full effect. A party-appointed arbitrator who falls within the categories of ineligibility specified in the Seventh Schedule cannot serve regardless of the arbitration clause.
Prior inconsistent decisions overruled: The Bench overruled several earlier decisions that had upheld unilateral appointment mechanisms in government contracts, including those that had drawn a distinction between the appointment of a named individual and appointment from a panel.
Appointment to be made by courts in default: Where an arbitration clause is rendered inoperative by this judgment, the appointment of the arbitrator shall be made by the competent court under Section 11 of the Arbitration Act, ensuring an independent appointment process.
Implications for Practitioners
This judgment will have sweeping consequences for government contract arbitration, which constitutes a substantial proportion of commercial arbitration in India. Practitioners representing contractors and vendors in disputes with government entities should immediately assess whether existing arbitration clauses in their clients' contracts contain unilateral appointment provisions that are now rendered inoperative.
For government entities, the judgment necessitates a comprehensive review and redrafting of standard contract templates. All future contracts must provide for a neutral appointment mechanism — either through institutional arbitration, mutual agreement, or court appointment under Section 11. Existing contracts with ongoing disputes will require fresh arbitrator appointments through compliant mechanisms.
Arbitration practitioners should prepare for a surge in Section 11 applications before the Supreme Court and High Courts as parties in ongoing disputes challenge the validity of arbitrators appointed under now-invalidated unilateral clauses. Previously concluded arbitrations are unlikely to be reopened, but pending proceedings may face challenges.