Bias, Balance, and Beyond: Revisiting Section 3G(5) through CORE II and Tarsem Singh Judgment- Part I

Introduction

The Arbitration and Conciliation Act in India is designed to uphold neutrality, fairness and party autonomy. These principles become very important when the State is one of the parties, as any imbalance in the proceedings can undermine the public confidence in justice. These principles become paramount in the light of decision being given in a free, fair and impartial manner, by a neutral adjudicating authority. This was highlighted in Arbitration in a recent ruling by Delhi High Court in the case of Engineering Projects India Ltd. v. Allied Construction,[1] wherein it was held that under Section 12(5) of Arbitration and Conciliation Act[2] [A&C Act], 1996, the unilateral appointment of Arbitrator, done by any party employee is void ab initio.

Land acquisition disputes under the National Highways Act, 1956 bring this issue into sharp relief, since compensation determinations often involve the government as a party on one side and normal people on the other.

 Section 3G(5)of the National Highway Act[3] [NH Act], 1956 provides that, “if the amount determined by the competent authority under sub-section (1) or sub-section (2) is not acceptable to either of the parties, the amount shall, on an application by either of the parties, be determined by the arbitrator to be appointed by the Central Government” , means this provision permits the Central government to select arbitrators in cases involving the land acquisition compensation unilaterally. This unilateral appointment has come under judicial scrutiny for allegedly tilting the scales in favour of the State. In January, 2024 Supreme Court issued a notice on a plea challenging the validity of Section 3G[4] of the NH Act, raising questions about the compatibility with constitutional principles of equality, fairness, and natural justice. The relevance of this inquiry became even sharper and stronger in light of recent judicial development i.e, Sohan Lal v. Union of India,[5] [Sohan Lal] dated March 25, 2025, the Punjab and Haryana High Court examined the constitutional validity of the provisions of the NH act where the court struck down Section 3J[6] of NH Act. In doing so, court expressed concern about the provision 3G(5) that confer powers related to unilateral appointment, and also held that Section 3G(5)  unconstitutional. However, the judgment now faces appeal before the Supreme Court in M/s Riar Builders Pvt. Ltd. & Anr. v. Union of India & Ors.,[7] [Riar Builders] wherein the Supreme Court has stayed the ruling and has ruled to continue the proceedings under Section 3G of the NH Act in accordance with law; and the execution of arbitral awards shall continue as per law. This judgment is sub-judice in the Supreme Court.

Globally, similar clauses granting one party exclusive power to select arbitrators have been invalidated, either through local legislations or through precedents.[8] For instance, Article 1028[9] of the Netherland Code of Civil Procedure and Section 1034(2)[10] of the German Code of Civil Procedure expressly permits the underprivileged party to disregard a provision that gives one party preference in selecting the arbitrator. However, courts in the United States of America [USA], France and, Switzerland, have struck down these unequal clauses as unlawful and unconscionable, with the US decision in Rosenberg v. Merrill Lynch, Pierce, Fenner & Smith, Inc.,[11] stressing the need for equal participation of both parties in the appointment process.

Against this international backdrop, the Supreme Court of India’s ruling in Central Organisation for Railway Electrification v. M/s ECI SPIC SMO MCML (JV)[12] [CORE II], provides a foundation to analyze the section 3G(5) of the NH act. While, the judgment talked about the panel of arbitrators, its principle of natural justice, equality directly applies to section 3G(5) of the NH Act. In this judgment, the court held that the unilateral appointment clause in public-private contract is in violation of equality and principle of natural justice.

CORE II- unilateral appointment of arbitrators marks grave injustice

In the landmark judgment, CORE II, decided on 8 November, 2024, the constitutional bench addressed the legality of the clauses of unilateral appointment of arbitrator in arbitration agreement especially in public- private contracts. The proceedings on this case were conducted by a bench of five judges. The Supreme Court held that these clauses pertaining to unilateral appointment of arbitrators are unconstitutional, as they violate the principles of natural justice.

The Court examined the arbitration clause, whether it aligned with section 18[13] of the A&C Act, which talks about the equal treatment of parties and the fair opportunity to present their case. Court, further, evaluated whether it contravened section 12(5) of the A&C Act, 1996, read with the seventh schedule, which talks about what should be the grounds for challenging the arbitrator. Thus, the section aims to uphold the fairness and impartiality of arbitrators. The court held that the parties have the autonomy to determine the arbitration procedure, for instance, they can refuse on that arbitration clause or even if they agree, they have the option to select arbitrator from the panel but this autonomy is not absolute and this should adhere to the principle of natural justice.

The decision pointed out that unilateral appointment clauses by nature have the advantage of the party appointing them, i.e., government in this case. Such clauses create a risk of bias,[14] violating the principle of nemo judex in causa sua (no one should be a judge in their own cause). This undermines the fairness in the arbitration procedure and deprivation of the other party, a reasonable opportunity to be heard, which is in violation of the principle of audi alteram partem. As a result, such clauses were in contravention of both, the A &C Act and Article 14[15] of the Indian Constitution, which talks about equality before law.

CORE II ruling- given a Prospective effect

In order to ensure that ongoing arbitrations are not interrupted, the court further explained that this judgment[16] would have prospective application, meaning it would apply to arbitrator appointments made after this judgment. In order to strike a compromise between justice and the necessity of maintaining unilateral appointment in ongoing arbitration procedures, the Court limited the retrospective and retroactive effect. This judgment has far-reaching implications for public-private contracts. Government agencies and public sector undertakings shall review and adjust their arbitration clause in accordance with the principles established in this case. The decision highlights the need for impartiality and fairness in arbitration, especially in cases between state actors. It seeks to rebuild the confidence in arbitration as a proper tool for dispute resolution by lessening any tendencies that may jeopardize its honesty.

---

This blog has been authored by Muskan, 5th Year student at Gujrat National Law University, Gandhinagar

---

REFERENCES

[1] Engineering Projects India Ltd. v. Allied Construction 2026 SCC OnLine Del 4000.

[2] Arbitration and Conciliation Act 1996, s 12(5).

[3] National Highway Act 1956, s 3G(5).

[4] National Highway Act 1956, s 3G.

[5] Sohan Lal v Union of India CWP-19799-2023.

[6] National Highway Act 1956, s 3J.

[7] M/s Riar Builders Pvt Ltd &Anr v Union of India & Ors SLP (C)-26933-2025.

[8] Pareekshit Bishnoi, ‘Invalidity of a Solo Run for the “sole Arbitrator” under the Indian Arbitration Act’ (Oxford Law Blogs, 7 July 2020) <https://blogs.law.ox.ac.uk/business-law-blog/blog/2020/07/invalidity-solo-run-sole-arbitrator-under-indian-arbitration-act> accessed 25 May 2025.                               

[9] Wetboek van BurgerlijkeRechtsvordering, art 1028.

[10] BürgerlichesGesetzbuch, s 1034(2).

[11] Rosenberg v Merrill Lynch, Pierce, Fenner & Smith, Inc 995 F Supp 190 (D Mass 1998).

[12] Central Organisation for Railway Electrification v M/s ECI SPIC SMO MCML (JV) 2024 SCC OnLine SC 3219.

[13] Arbitration and Conciliation Act 1996, s 18.

[14] AK Kraipak v Union of India (1969) 2 SCC 262.

[15] The Constitution of India 1950, art 14.

[16] Central Organisation for Railway Electrification v M/s ECI SPIC SMO MCML (JV) 2024 SCC OnLine SC 3219.