BHAYANA BUILDERS PVT. LTD. V. ORIENTAL STRUCTURAL ENGINEERS PVT. LTD 2025 INSC 1073:

DATE: 18/08/2025

COURT: Supreme Court of India

BENCH: Justice Manoj Misra and Justice Ujjal Bhuyan

FACTS:

The dispute arose from a subcontract work agreement between the appellant and the respondents, which contained an arbitration clause (Clause 9.03). The clause provided that any dispute would be finally resolved by a sole arbitrator nominated by the Managing Director of the first party (respondent company). When disputes arose, the Managing Director appointed a sole arbitrator in terms of the agreement. The appellant challenged this appointment by filing petitions before the Delhi High Court under Section 14(2) of the Arbitration and Conciliation Act, 1996, seeking termination of the arbitrator’s mandate on the ground that such unilateral appointment violated the principles of neutrality and independence of arbitrators.

The High Court of Delhi, however, dismissed the petitions on 21.02.2018, upholding the validity of the appointment. Aggrieved, the appellant approached the Supreme Court, relying on the precedents in TRF Ltd. v. Energo Engg. Projects Ltd. (2017) 8 SCC 377, and subsequent judgments, which held that unilateral appointment of arbitrators by one party’s official (such as a Managing Director) was invalid. During the pendency of the appeals, the Constitution Bench in Central Organization for Railway Electrification (CORE) v. ECI SPIC SMO MCML (2025) 4 SCC 641 reaffirmed this principle, strengthening the appellant’s case before the Supreme Court.

ISSUES:

The main issue was whether the arbitration clause allowing the Managing Director of the respondent company to unilaterally nominate a sole arbitrator was valid, or whether such unilateral appointment created justifiable doubts regarding independence and impartiality, thereby requiring the termination of the arbitrator’s mandate under Section 14(2) of the Arbitration and Conciliation Act, 1996.

JUDGEMENT WITH REASONING:

The Supreme Court allowed the appeals, terminated the mandate of the sole arbitrator nominated by the Managing Director, and referred the matter to the Delhi International Arbitration Centre for nomination of a neutral and suitable arbitrator.

The Court relied heavily on its earlier decision in TRF Ltd. v. Energo Engg. Projects Ltd. (2017), where it was categorically held that if a person is ineligible to act as an arbitrator under the law, he is equally disqualified from nominating another arbitrator. In the present case, since the Managing Director of the respondent company fell within the category of ineligible persons under Section 12(5) read with the Fifth Schedule of the Arbitration and Conciliation Act, 1996, he could not have either acted as an arbitrator himself or nominated another person as a sole arbitrator. This principle was subsequently reinforced in Perkins Eastman Architects DPC v. HSCC (India) Ltd. (2020) 20 SCC 760, where the Court stressed that unilateral appointment by one party undermines impartiality and the equality of arms in arbitration.

The Constitution Bench in CORE (2025) conclusively affirmed this reasoning, holding that clauses giving one party exclusive authority to appoint a sole arbitrator are invalid as they compromise neutrality and fairness, core tenets of the arbitration framework. Applying this settled position, the Court found the arbitration clause in the present case to be defective and the appointment of the arbitrator by the Managing Director impermissible. Since the independence of the arbitral process had been compromised, the mandate of the arbitrator had to be terminated. The referral of the matter to the Delhi International Arbitration Centre ensured that a neutral and impartial arbitrator would be appointed, thereby restoring fairness in the arbitral process.

ANALYSIS:

This case reaffirms the judiciary’s strict stance against unilateral appointment of arbitrators, ensuring that arbitration proceedings remain impartial and consistent with the principles of natural justice. By invalidating clauses that allow one party, particularly through its own official such as a Managing Director, to appoint the sole arbitrator, the Supreme Court strengthens the autonomy and neutrality of the arbitral process. The decision highlights how the Court continues to apply a consistent line of reasoning from TRF Ltd., Perkins Eastman, and now the Constitution Bench ruling in CORE, to protect parties from potentially biased arbitral proceedings. It demonstrates the Court’s commitment to harmonizing Indian arbitration law with global standards of fairness and independence.

Furthermore, the judgment carries significant implications for contract drafting in India, especially in government and corporate contracts where such unilateral clauses are common. The ruling signals that parties must now adopt mutually acceptable methods of arbitrator appointment, such as institutional arbitration or neutral third-party mechanisms. By directing the matter to the Delhi International Arbitration Centre, the Court not only terminated an unfair appointment but also promoted institutional arbitration, thereby aligning with the legislative intent of the Arbitration and Conciliation Act, 1996 to encourage transparency, neutrality, and credibility in dispute resolution.