The Supreme Court of India has delivered a landmark ruling that could significantly impact the way public sector units (PSUs) handle disputes. The court’s decision, made on Chief Justice D. Y. Chandrachud’s final day in office, restricts the power of state-run companies to unilaterally appoint arbitrators. This ruling follows a directive from the finance ministry in June, urging all government entities, including PSUs, to avoid arbitration for disputes exceeding ₹10 crore. The move aims to reduce arbitration costs for PSUs, which have been a significant financial burden on the government. However, the decision has left PSUs facing a dilemma. If they continue to arbitrate, they lose the advantage of selecting arbitrators; if they choose not to arbitrate, India’s ambition of becoming a global arbitration hub could be hampered. The Supreme Court’s judgment, delivered by a five-judge constitutional bench, stemmed from concerns regarding the fairness and impartiality of the arbitration process. The court recognized that when one party, particularly a government entity, has the sole authority to appoint arbitrators, it creates an inherent power imbalance that undermines the fairness of the process. Chief Justice Chandrachud emphasized that the arbitration process must be genuinely fair, not just appear fair, to ensure confidence in the system. This ruling, according to legal experts, will benefit private contractors who will now have greater discretion and control in appointing their arbitral tribunals, leading to greater trust in the process. The court’s decision has also generated debate among legal practitioners. While the majority opinion clearly stated the need for fairness in arbitrator appointment, two judges offered dissenting views. Justice Roy argued that not all unilateral appointments should be invalidated, as long as the appointed arbitrator meets the criteria for independence and impartiality. He suggested that the judiciary should not automatically nullify appointments unless there is evidence of bias or ineligibility. Justice Narasimha agreed with the need for scrutiny of unilateral appointments but cautioned against judicial overreach, stating that the court should only interfere if a party challenges the appointment process. The Supreme Court’s ruling is a significant development in India’s legal landscape. It reflects the government’s commitment to promoting fairness and transparency in arbitration proceedings while also prioritizing cost-effective dispute resolution methods. The government’s preference for mediation as an alternative dispute resolution method is becoming increasingly evident, particularly in light of the recent passage of the Mediation Act in 2023. The government’s stance on mediation indicates a shift towards a more consensual and collaborative approach to resolving disputes. This shift is expected to encourage PSUs to explore mediation as a viable alternative to arbitration, reducing financial exposure and fostering a spirit of cooperation among parties. The Supreme Court’s ruling, combined with the government’s emphasis on mediation, suggests a broader change in India’s legal landscape, moving towards a more equitable and efficient system of dispute resolution.
