A level playing field: Supreme Court removes asymmetry in PPP contracts

The Supreme Court has helped the investment environment in the country by ruling as invalid clauses allowing public-sector undertakings (PSUs) to unilaterally appoint arbitrators to resolve disputes with private contracts. A five-judge Constitution Bench led by outgoing Chief Justice of India D Y Chandrachud ruled the practice of unilateral appointment violated Article 14 of the Constitution, which guarantees equality before the law and equal protection of the law to all people within India.  The case, which had been referred to a larger Bench by a three-judge Supreme Court Bench in 2021 and dates back to 2018, concerns a dispute between the Central Organisation for Railway Electrification and the ECI-SPIC-SMO-MCML joint venture for failure to complete a contract for electrification within the stipulated time. It involved the validity of an arbitration clause involving the appointment of arbitrators from a panel curated by the PSU partner. 

The Bench has ruled PSUs are entitled to maintain a panel of arbitrators but they cannot compel private partners to select their arbitrator from that panel. As the apex court has pointed out, the practice of unilateral appointment of arbitrators contradicts the basic judicial precept of “nemo judex in causa sua”, which means one cannot be a judge in one’s own cause. The ruling, which will apply prospectively, will compel PSUs to reorient contracts with private corporations and remove the element of asymmetry that has long been one of the weaknesses of public-private partnership (PPP).  Ensuring a level playing in arbitration is critical, given the rapidly expanding involvement of the private sector in the government’s infrastructure programme. For instance, the Public Private Appraisal Committee recommended 77 projects, collectively worth Rs 2.4 trillion, between FY15 and FY24. Add in viability-gap funding for socially desirable PPP projects, financial support for the India Infrastructure Project Development Fund, the National Monetisation Pipeline, and various rural road-building and flood control projects, the private sector is expected to do the heavy lifting as far as infrastructure building is concerned in the near future. 

One impact of the ruling could be to nudge PSUs towards opting for the institutional arbitration process rather than ad hoc procedures, which often weaken the bargaining power of private partners and encourage them to steer clear of the PPP process altogether. These issues of contractual arbitration could benefit immensely if India were to make progress in establishing itself as a hub of international arbitration, an ambition that has long eluded the country for a variety of reasons. The fact is that the Arbitration and Conciliation Act, 1996, has clearly laid down procedures for appointing arbitrators — of any nationality. The Act stipulates mutual agreement to a procedure for appointing arbitrators plus a process if the parties fail to reach agreement. The latter can, however, be a somewhat long-drawn and contentious process involving judicial intervention, which could benefit from modification.  In February this year, an expert committee headed by former law secretary T K Vishwanath submitted its report on arbitration reforms, principally aimed at reducing the burden on courts, including fee structures and a framework arbitration system. But with experts stating that the recommendations would mark a setback for arbitration law, the issue has been in limbo. The Supreme Court’s ruling, therefore, offers one critical point of clarity.