Supreme Court Ruling Reshapes Arbitration Landscape for Public Sector Units

Author. - mentblue

The Supreme Court of India has made a landmark ruling that significantly impacts public sector units (PSUs) regarding arbitration practices. On November 8, 2024, Chief Justice D. Y. Chandrachud, on his last day in office, led a five-judge bench that ruled PSUs cannot unilaterally appoint arbitrators in disputes with private contractors, declaring such clauses in contracts invalid. This decision is poised to reshape the arbitration landscape for PSUs and may give an indirect boost to the government's broader strategy to reduce arbitration-related expenditures for PSUs.

𝗞𝗲𝘆 𝗗𝗲𝘁𝗮𝗶𝗹𝘀 𝗼𝗳 𝘁𝗵𝗲 𝗖𝗮𝘀𝗲

𝗕𝗮𝗰𝗸𝗴𝗿𝗼𝘂𝗻𝗱: The case 𝘊𝘦𝘯𝘵𝘳𝘢𝘭 𝘖𝘳𝘨𝘢𝘯𝘪𝘴𝘢𝘵𝘪𝘰𝘯 𝘧𝘰𝘳 𝘙𝘢𝘪𝘭𝘸𝘢𝘺 𝘌𝘭𝘦𝘤𝘵𝘳𝘪𝘧𝘪𝘤𝘢𝘵𝘪𝘰𝘯 𝘷. 𝘔/𝘴 𝘌𝘊𝘐 𝘚𝘗𝘐𝘊 𝘚𝘔𝘖 𝘔𝘊𝘔𝘓 (𝘑𝘝) involved a dispute between the Central Organisation for Railway Electrification (CORE) and the joint venture company ECI-SPIC-SMO-MCML regarding the termination of a work contract due to non-completion of tasks within the stipulated timeframe.

The dispute began when CORE terminated the contract with ECI-SPIC-SMO-MCML on November 1, 2017, citing inadequate progress in completing the work as per the contract terms. The initial completion date was August 3, 2012, but extensions were granted multiple times, ultimately extending to December 31, 2017. However, CORE noted that ECI failed to meet the agreed-upon targets.

𝗟𝗲𝗴𝗮𝗹 𝗣𝗿𝗼𝗰𝗲𝗲𝗱𝗶𝗻𝗴𝘀: Following the termination, ECI filed a petition in the Allahabad High Court challenging CORE's decision. The High Court dismissed this petition on November 28, 2017, directing ECI to seek arbitration as a remedy. ECI subsequently requested CORE to appoint an arbitral tribunal to resolve their disputes and claims amounting to ₹73.35 crores.

𝗔𝗿𝗯𝗶𝘁𝗿𝗮𝘁𝗼𝗿 𝗔𝗽𝗽𝗼𝗶𝗻𝘁𝗺𝗲𝗻𝘁 𝗗𝗶𝘀𝗽𝘂𝘁𝗲: CORE provided two lists of potential arbitrators, including serving and retired railway officers. However, ECI did not respond to these lists and instead filed an application under Section 11 of the Arbitration and Conciliation Act, 1996, seeking the appointment of a sole arbitrator from the High Court. ECI contended that since CORE's General Manager was ineligible to serve as an arbitrator under Section 12(5) of the Act, he could not nominate arbitrators.

𝗦𝘂𝗽𝗿𝗲𝗺𝗲 𝗖𝗼𝘂𝗿𝘁'𝘀 𝗜𝗻𝘃𝗼𝗹𝘃𝗲𝗺𝗲𝗻𝘁: The Supreme Court took up the matter after CORE challenged the High Court's decision appointing an arbitrator outside the procedure outlined in their arbitration agreement. The court examined whether it could appoint an arbitrator independently of the established procedures in their agreement.

𝗞𝗲𝘆 𝗔𝘀𝗽𝗲𝗰𝘁𝘀 𝗼𝗳 𝘁𝗵𝗲 𝗥𝘂𝗹𝗶𝗻𝗴

𝗜𝗻𝘃𝗮𝗹𝗶𝗱𝗮𝘁𝗶𝗼𝗻 𝗼𝗳 𝗨𝗻𝗶𝗹𝗮𝘁𝗲𝗿𝗮𝗹 𝗔𝗽𝗽𝗼𝗶𝗻𝘁𝗺𝗲𝗻𝘁 𝗖𝗹𝗮𝘂𝘀𝗲𝘀: The Supreme Court determined that allowing PSUs to unilaterally appoint arbitrators violates Article 14 of the Constitution, which ensures equality before the law. This ruling emphasizes the need for impartiality in arbitration proceedings, crucial for maintaining trust in public contracts.

𝗥𝗲𝗾𝘂𝗶𝗿𝗲𝗺𝗲𝗻𝘁 𝗳𝗼𝗿 𝗠𝘂𝘁𝘂𝗮𝗹 𝗔𝗴𝗿𝗲𝗲𝗺𝗲𝗻𝘁: While PSUs can create a panel of potential arbitrators, they cannot compel private parties to choose their arbitrator from this panel. This change promotes a more balanced approach in dispute resolution, ensuring that both parties have equal input in selecting an arbitrator.

𝗜𝗺𝗽𝗮𝗰𝘁 𝗼𝗻 𝗘𝘅𝗶𝘀𝘁𝗶𝗻𝗴 𝗖𝗼𝗻𝘁𝗿𝗮𝗰𝘁𝘀: Following this ruling, PSUs may have to revise their existing contracts to comply with the new legal standards. Contracts with unilateral appointment clauses will be invalidated, necessitating adjustments in ongoing arbitration processes.

𝗚𝗼𝘃𝗲𝗿𝗻𝗺𝗲𝗻𝘁 𝗦𝘁𝗿𝗮𝘁𝗲𝗴𝘆 𝗼𝗻 𝗔𝗿𝗯𝗶𝘁𝗿𝗮𝘁𝗶𝗼𝗻 𝗦𝗽𝗲𝗻𝗱𝗶𝗻𝗴

This ruling, probably unintentionally, coincides with the Indian government's efforts to minimize arbitration-related costs incurred by PSUs. The Finance Ministry had recently issued guidelines recommending that arbitration should only be included in contracts for disputes valued below ₹10 crore. This approach aims to prevent the routine inclusion of arbitration clauses in large contracts, which can lead to lengthy and expensive arbitration processes.

𝗥𝗲𝗱𝘂𝗰𝘁𝗶𝗼𝗻 𝗼𝗳 𝗘𝘅𝗽𝗼𝘀𝘂𝗿𝗲 𝘁𝗼 𝗔𝗿𝗯𝗶𝘁𝗿𝗮𝘁𝗶𝗼𝗻: With the Supreme Court's ruling and the government's guidelines, PSUs are expected to reduce their exposure to arbitration significantly. The emphasis on mutual agreement in appointing arbitrators and limiting arbitration to lower-value disputes will likely lead to fewer cases entering arbitration.

𝗦𝗵𝗶𝗳𝘁 𝗧𝗼𝘄𝗮𝗿𝗱𝘀 𝗠𝗲𝗱𝗶𝗮𝘁𝗶𝗼𝗻: The government is also encouraging a shift towards mediation as a preferred method for resolving disputes. This strategy aims to foster amicable settlements and reduce the backlog in courts while minimizing costs associated with arbitration.

𝗖𝗼𝗻𝗰𝗹𝘂𝘀𝗶𝗼𝗻

This landmark ruling marks a pivotal moment for arbitration in India, particularly concerning public sector undertakings. By reinforcing the need for impartiality and equality in arbitration processes, the Supreme Court aims to restore confidence among private contractors engaging with PSUs. As these changes take effect, both public and private entities will need to navigate this new legal landscape carefully.

𝗖𝗮𝘀𝗲 𝗡𝗮𝗺𝗲: 𝗖𝗲𝗻𝘁𝗿𝗮𝗹 𝗢𝗿𝗴𝗮𝗻𝗶𝘀𝗮𝘁𝗶𝗼𝗻 𝗳𝗼𝗿 𝗥𝗮𝗶𝗹𝘄𝗮𝘆 𝗘𝗹𝗲𝗰𝘁𝗿𝗶𝗳𝗶𝗰𝗮𝘁𝗶𝗼𝗻 𝘃. 𝗠/𝘀 𝗘𝗖𝗜 𝗦𝗣𝗜𝗖 𝗦𝗠𝗢 𝗠𝗖𝗠𝗟 (𝗝𝗩)

#supremecourt hashtag#arbitration hashtag#CORE hashtag#PSU hashtag#mediation hashtag#ADR hashtag#arbitrator hashtag#fairness hashtag#appointment hashtag#cost hashtag#legal hashtag#law hashtag#india hashtag#news