Equal Say in Choosing Arbitrators: A Non-Negotiable Right

[Vanshaj and Utkarsh are Law Clerks-cum-Research Associates at Supreme Court of India.]

On 7 November 2024, a three-judge Bench of the Supreme Court of India (SC) delivered its decision in the case of Aslam Ismail Khan Deshmukh v. ASAP Fluids Private Limited (ASAP Fluids) wherein the SC was approached under Section 11(6) of the Arbitration and Conciliation Act 1996 (Act), seeking appointment of an arbitrator for disputes arising out of a shareholders agreement. The petitioner, a non-resident Indian and former director of the respondent company (ASAP Fluids), alleged non-transfer and non-issuance of equity shares as contractually promised. Despite the respondents’ contention that the claims were time-barred and meritless due to alleged breach of a lock-in period and early resignation, the SC held that such issues could not be conclusively determined at the referral stage. Relying on Vidya Drolia, BSNL v. Nortel, and later clarifications in SBI General v. Krish Spinning, the SC ruled that only a prima facie review of limitation is permissible under Section 11(6), and deeper questions, including whether the claims are barred by time, must be left to the arbitral tribunal. The petition was allowed, and a sole arbitrator was appointed, with liberty to the tribunal to impose costs if the claims were ultimately found to be time-barred. 

In this case, a sole arbitrator was appointed, despite the dispute resolution clause providing for the appointment of a three-member arbitral tribunal wherein two arbitrators were to be appointed by Gumpro and one by the other shareholder. This was done since an arbitral tribunal comprising a sole arbitrator has already been constituted for the adjudication of disputes between the same parties in relation to a service agreement. Therefore, the court found it appropriate to constitute an arbitral tribunal comprising the same sole arbitrator for the adjudication of the disputes about the shareholders agreement. However, it is important to note that the court did not validate or rule upon the legality of the clause allowing one party to appoint a majority of arbitrators. The deviation from the original clause was driven by procedural efficiency and overlapping disputes, not by a judicial endorsement of the clause’s validity. As such, the issue of unequal appointment remained undecided.

In this article, the authors attempt to analyze whether the principle of party autonomy is limitless and whether it extends to the extent of allowing one party to unilaterally appoint the majority of the arbitrators in the arbitral tribunal. While Indian courts have taken significant strides in reinforcing arbitrator neutrality, the precise question of law, whether such an unequal appointment mechanism is legally sustainable, remains largely unsettled. The SC in ASAP Fluids had an opportunity to provide clarity on this contentious issue, but fell short of conclusively settling this grey area. This article critically analyses the limits of party autonomy in arbitrator appointments and argues that unequal appointment structures are incompatible with Indian arbitration law and public policy.

The Principle of Party Autonomy

The Act, being a party-centric legislation, provides for the principle of minimal judicial intervention under Section 5 of the Act. Section 10 of the Act allows parties to determine the number of arbitrators. Further, Section 11 of the Act empowers the parties to shape key aspects, including the procedure, their method of appointment, and the seat of arbitration. Such autonomy is designed to foster the efficiency and adaptability of arbitration, enabling dispute resolution mechanisms to be tailored to the specific needs of the parties. 

Although the Act does not define ‘procedure for appointment’, Indian courts have identified arrangements that violate fundamental principles of fairness. The SC in Perkins Eastman held that unilateral appointment clauses undermine the very spirit of arbitration. The court stressed that if one party alone controls the appointment, the process is inherently tainted by the risk of bias. However, the question that remains is whether, in the guise of party autonomy, one party could be allowed to appoint a majority of the arbitrators, such as 2 out of 3, or 3 out of 5. 

The Need for an Independent and Impartial Arbitral Tribunal

Arbitration must not only be done for the sake of it, but it must also be perceived to be done impartially. The theme resonates with the decision of the SC in Voestalpine Schienen v. DMRC, where it emphasized that independence and impartiality of the arbitrator are the hallmarks of arbitration proceedings. Yet, true independence from bias is arguably a myth. Arbitrators, as human beings, inevitably carry implicit biases shaped by experience and perception. 

In Ellora Paper Mills Limited v. State of MP, the SC examined the validity of a tribunal composed of officers of the respondent. Relying on the 2015 amendment to the Act, it held that such appointments were impermissible under Section 12(5) read with the Seventh Schedule, which mandates arbitrator neutrality and disqualifies individuals with specific relationships to the parties. Further, the Constitutional Bench of the SC in the case of Central Organisation for Railway Electrification v. ECI observed that the principles of impartiality/independence are critical pillars of the Act. Moreover, it was affirmed that equal participation is a sine qua non of a fair process. Even the 246th Law Commission Report (2014) clarified that the principles of impartiality and independence must be upheld at every stage, including the constitution of the arbitral tribunal. Thus, the equal involvement in the appointment of arbitrators is essential to ensure a tribunal that is genuinely independent and impartial.

Spectre of Imbalance in Appointment

Prof Jan Paulsson, in Moral Hazard in International Dispute Resolution, notes that 95% of dissenting opinions in arbitral awards are authored by the arbitrator nominated by the losing party, often reflecting shared perspectives on law or fact. The equal participation in selecting arbitrators is a key safeguard against bias. In Perkins Eastman Architects v. HPCC Limited (Perkins), the SC emphasized the importance of counter-balancing, ensuring each party can appoint an arbitrator to maintain parity and fairness. This structure prevents either party from gaining an undue advantage and upholds the integrity of the process. Crucially, at least one arbitrator must be unquestionably independent. In Margo Networks v. Railtel Corporation Limited, the Delhi High Court reaffirmed that fairness is compromised when one party selects an arbitrator from a panel and also appoints the remaining two in a three-member tribunal.

Unconscionability Test: An International Perspective

An unconscionable contract is one that no rational person would offer, and no fair person would accept. Rooted in equity, the doctrine of unconscionability in India finds statutory footing in Sections 16 and 23 of the Indian Contract Act 1872. However, its application has been significantly narrowed, particularly in commercial contracts involving parties with roughly equal bargaining power.

While Indian jurisprudence has largely applied the test to general contracts, its relevance to arbitration agreements remains underexplored. Yet, the need for its application in arbitration is arguably more pressing. Unconscionable arbitration clauses can covertly skew the process by restricting remedies, limiting procedural safeguards, or enabling the appointment of biased arbitrators. The doctrine thus serves as a critical check on drafting overreach, especially where powerful parties engineer dispute resolution mechanisms that preordain outcomes. Recognizing the issue without empowering courts to correct it only perpetuates unfairness. Thus, a balanced approach is needed.

Appointment of One More is Too Many

In Swiss Timings v. Commonwealth Games, the SC considered whether a court may refuse to refer a dispute to arbitration if the arbitration agreement is void ab initio. The court held that a prima facie reference to arbitration should not be denied merely on the basis of an allegation challenging the agreement’s validity. However, if the agreement is clearly void on the face of the document, requiring no further factual inquiry, the court may decline reference. Similarly, in Perkins Eastman, the apex court invalidated a dispute resolution clause that empowered the Chairman and Managing Partner of one party to act as, or appoint, the sole arbitrator. The court found that such unilateral authority, especially when vested in an interested party, undermines the integrity of the process. While Perkins dealt with a sole arbitrator, its logic should apply equally to multi-member tribunals, where one party’s power to appoint two arbitrators in a three-member panel similarly distorts the balance. The consistent thread across these decisions is clear: impartiality and independence are non-negotiable throughout the arbitral process. Allowing one party to appoint a majority of arbitrators compromises the neutrality of the tribunal and risks eroding public confidence.

Conclusion

Arbitration is based on the principle of party autonomy, but that autonomy must never come at the cost of fairness. When one party appoints a majority of the tribunal, the perception and risk of bias becomes too real to ignore. Indian jurisprudence has rightly recognized that equality in the appointment process is essential to ensuring impartiality. The principle is simple: every party deserves an equal say in who decides their dispute. Upholding this standard not only protects the legitimacy of the arbitral process but also aligns with the core values of justice and procedural fairness. In arbitration, as in all adjudication, when one more is too many, equal say is non-negotiable.