Supreme Court Strikes Down Unilateral Arbitrator Appointments, But Sidesteps Broader Issue of Contractual Unfairness

NEW DELHI – In a landmark decision clarifying a contentious area of arbitration law, a Constitution Bench of the Indian Supreme Court has decisively invalidated contractual clauses that grant one party the unilateral power to appoint an arbitrator. The ruling in Central Organisation for Railway v. ECI-SPIC-SMO-MCML (JV) , widely referred to as CORE II , anchors the principles of arbitral fairness in both statutory and constitutional mandates, offering a significant victory for procedural equality in dispute resolution.

However, in a move that has drawn critical analysis, the Court explicitly declined to employ the doctrine of unconscionability to address the underlying issue of unequal bargaining power, a decision with profound implications for startups, small enterprises, and other commercial entities contracting with dominant players. While the judgment fortifies the impartiality of the arbitral process, it leaves weaker parties vulnerable to other forms of systemic unfairness embedded in standard-form contracts.

The majority opinion, penned by Chief Justice D.Y. Chandrachud, held that unilateral appointment clauses are inherently incompatible with the principles of fairness and impartiality. "The Court reasoned that this principle is not confined to hearings but extends to every stage of arbitral proceedings, including appointment," thus deeming such clauses a violation of Section 18 of the Arbitration and Conciliation Act, 1996, which guarantees equal treatment of parties.

Crucially, the Bench elevated this reasoning by invoking Article 14 of the Constitution, which ensures equality before the law. By doing so, the Court has constitutionalised the arbitrator appointment process, affirming that mechanisms for quasi-judicial functions must adhere to fundamental guarantees of fairness, even when arising from private contracts.

The Long Road to CORE II

The CORE II decision resolves a period of judicial inconsistency. Previous Supreme Court rulings had oscillated on the issue. In TRF Ltd. v. Energo Engineering Projects Ltd. , the Court held that a person ineligible to be an arbitrator could not nominate another, establishing a key precedent against derivative bias. This was expanded in Perkins Eastman Architects DPC v. HSCC (India) Ltd. , which struck down unilateral appointment powers vested directly in one of the contracting parties.

However, a conflicting note was struck in CORE I , where the Court upheld a Railway contract clause allowing the government entity to provide a panel of arbitrators from which the private contractor could choose. The court found this provided a sufficient "counter-balance," a reasoning that many legal experts found inconsistent with the spirit of Perkins Eastman . This divergence led to the matter being referred to a five-judge Constitution Bench, culminating in the recent, authoritative pronouncement.

The Unconscionability Debate: A Missed Opportunity?

While the outcome of invalidating unilateral appointments was unanimous, the reasoning revealed a deep judicial divide. The majority opinion dismissed the relevance of the doctrine of unconscionability, a legal principle used to invalidate contracts that are excessively one-sided or oppressive due to a significant disparity in bargaining power. The Court reasoned that "arbitration agreements in the present case were executed between sophisticated commercial actors, thereby eliminating concerns of unequal bargaining power."

This assumption has become the focal point of criticism. In practice, the commercial landscape is far from a level playing field. Startups, MSMEs, and smaller suppliers are frequently compelled to accept standard-form agreements from large corporations and public sector undertakings (PSUs) on a "take-it-or-leave-it" basis. As one legal analysis points out, "The broader problem persists even when unilateral clauses have been declared void, as the weaker party is forced to accept other unfavourable terms and concessions in the form of prohibitive costs, exclusive jurisdiction clauses or foreign seat provisions, all of which function as barriers to access."

Indian jurisprudence has previously acknowledged this reality. In the landmark case of Central Inland Water Transport Corp. v. Brojo Nath Ganguly , the Supreme Court invalidated a termination clause in an employment contract, deeming it "unconscionable" and "against public policy." The Court recognised that freedom of contract does not permit the exploitation of a vulnerable party. This principle was further reinforced in LIC of India v. Consumer Education & Research Centre , where the court held that standard-form contracts, particularly those from public corporations, are subject to judicial scrutiny for fairness.

Moreover, the Law Commission of India, in its 199th Report on "Unfair (Procedural and Substantive) Terms in Contracts," explicitly recommended legal recognition of unconscionable clauses even in commercial dealings, noting the particular vulnerability of small enterprises. By sidestepping this established line of reasoning and reform recommendations, the CORE II bench has limited its own ability to intervene in cases of substantive contractual unfairness.

Global Perspectives and Implications for Indian Business

The Court's reluctance to engage with unconscionability places India at odds with trends in other major common law jurisdictions. In the United States, the Uniform Commercial Code (UCC) allows courts to strike down unconscionable clauses in commercial contracts. Similarly, Australia’s Contract Review Act, 1980 and subsequent amendments provide protections against unfair terms for small businesses, recognising that economic dependence can create vulnerabilities akin to those faced by consumers.

For India’s burgeoning startup ecosystem, the implications are significant. Early-stage ventures often lack the legal resources or negotiating leverage to challenge onerous terms in investment, supply, or service agreements. While CORE II removes one specific unfair practice, it leaves the door open for dominant parties to impose other disadvantageous conditions. The absence of a flexible judicial standard like unconscionability means that arbitration, intended as a mechanism for efficient justice, could instead entrench economic inequality.

The Future of Commercial Contracting and Legal Practice

The CORE II decision solidifies a crucial procedural safeguard in Indian arbitration, bringing greater transparency and fairness to the appointment of tribunals. It reinforces the demand for skilled legal professionals who can navigate complex dispute resolution clauses. Educational platforms are already responding; for instance, a course offered by Lawctopus Law School on the Insolvency and Bankruptcy Code (IBC) explicitly trains participants to "draft essential documents" and handle real-world cases, reflecting a market need for practical, enforceable legal drafting skills.

Simultaneously, the legal tech sector is innovating to address efficiency and risk. As noted in a recent industry analysis, "Generative AI is emerging as a transformative solution, not only automating routine tasks but also fundamentally changing how legal work is performed." AI tools can now flag risky or non-standard clauses, empowering even smaller legal teams to identify potential pitfalls during contract review. This technological shift may partially mitigate the risks left unaddressed by the Court's narrow ruling.

Ultimately, while CORE II is a progressive step for arbitral impartiality, its refusal to engage with the doctrine of unconscionability highlights a persistent tension in Indian contract law: balancing the principle of contractual autonomy with the need to protect against systemic unfairness. The challenge for the legal community now is to advocate for legislative or further judicial clarity that recognizes the realities of unequal bargaining power in the modern commercial world.