CONSTITUTIONALISING ARBITRAL FAIRNESS: CORE II AND THE EXCLUSION OF UNCONSCIONABILITY

    I.  Introduction

The question of whether a party to an arbitration agreement may unilaterally appoint an arbitrator has long been contested in Indian jurisprudence. The issue, though seemingly technical, strikes at the heart of arbitral fairness and the principle of party equality. Indian courts, over the last two decades, have oscillated between allowing limited forms of unilateral appointments and striking them down as incompatible with neutrality.

The debate reached its sharpest expression in TRF Ltd. v. Energo Engineering Projects Ltd., where the Supreme Court invalidated clauses permitting ineligible arbitrators to nominate others.[1] Shortly thereafter, in Perkins Eastman Architects DPC v. HSCC (India) Ltd., the Court extended this reasoning to strike down unilateral appointment powers vested in one contracting party.[2] Yet in Central Organisation for Railway Electrification v. ECI-SPIC-SMO-MCML (JV) (“CORE I”), the Court upheld a government contract clause allowing the Railways to curate a panel of arbitrators, suggesting that sufficient “counter-balance” existed.[3]

This divergence culminated in Union of India v. Tantia Constructions Ltd., where the Court referred the matter to a Constitution Bench.[4] In its recent decision in Central Organisation for Railway (“CORE II”) case, the Bench held unilateral appointment clauses invalid, relying on Section 18 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) and Article 14 of the Constitution.[5] However, the Court declined to employ the doctrine of unconscionability, even as minority opinions emphasised party autonomy and statutory flexibility.

This article revisits CORE II by situating it within prior jurisprudence, assessing the competing opinions, and arguing that unconscionability remains a vital tool for addressing inequality in arbitral appointments, especially for smaller entities contracting with dominant actors.

  II.  Evolution of Jurisprudence on Arbitrator Appointments

Indian arbitration law has consistently grappled with the compatibility of unilateral appointment mechanisms with the fundamental principles of neutrality and party equality. The trajectory of decisions leading up to CORE II illustrates a gradual tightening of judicial scrutiny.

The debate first sharpened in Voestalpine Schienen GmbH v. Delhi Metro Rail Corporation Ltd., where the Supreme Court discouraged narrow, one-sided panels of government officers and directed the creation of “broad-based panels” to enhance neutrality.[6] This approach signalled judicial concern with appointments emanating from interested parties.

The turning point arrived in TRF Ltd. v. Energo Engineering Projects Ltd. Here, a contractual clause empowered the Managing Director, who was himself ineligible to act as arbitrator, to nominate another arbitrator. The Court invalidated the clause, reasoning that an ineligible arbitrator could not indirectly achieve what he could not do directly. This decision underscored the concern with derivative bias.

In Perkins Eastman Architects DPC v. HSCC (India) Ltd., the principle was extended. The Court distinguished between two scenarios: first, where an ineligible person appoints, and second, where a party with a vested interest retains unilateral appointment power. In both situations, the Court held, the likelihood of bias taints the process.

However, in CORE I, the Court upheld Clause 64(3)(b) of the General Conditions of Contract of the Railways.⁴ The clause allowed the Railways to propose a panel of serving officers, from which the private contractor could select names for the tribunal. The Court found that the “counter-balance” afforded by such selection preserved fairness. This reasoning, however, appeared inconsistent with Perkins Eastman, since unilateral control over the pool of arbitrators remained with one party.

The inconsistency prompted referral in Tantia Constructions Ltd., where the Court noted that the matter raised questions of constitutional significance.⁵ The stage was thus set for CORE II, where the Constitution Bench was tasked with clarifying whether equality and impartiality are compatible with unilateral appointment provisions.

III.  The Constitution Bench in CORE II

The Constitution Bench in CORE II provided the most authoritative pronouncement on unilateral appointment of arbitrators. The decision, though unanimous in striking down unilateral clauses, reflected a deep divide in the reasoning between the majority and the minority.

A.    Majority Opinion

The majority opinion, authored by Chief Justice D.Y. Chandrachud, anchored its reasoning in Section 18 of the Arbitration Act.[7] Section 18 guarantees equal treatment of parties and fair opportunity of participation. The Court reasoned that this principle is not confined to hearings but extends to every stage of arbitral proceedings, including appointment.[8] Thus, unilateral appointment clauses were deemed inherently violative of statutory equality.

Further, the Court invoked Article 14 of the Constitution to reinforce its conclusion.[9] It emphasised that arbitral tribunals exercise quasi-judicial powers in adjudicating rights and obligations, and hence, appointment mechanisms must conform to constitutional guarantees of fairness. The majority thus constitutionalised the appointment process, extending equality principles into the contractual domain.

Importantly, the Court rejected the argument that the doctrine of unconscionability could serve as an alternate ground.[10] According to the majority, arbitration agreements in the present case were executed between sophisticated commercial actors, thereby eliminating concerns of unequal bargaining power. By presuming parity of bargaining strength, the majority declined to employ unconscionability as a basis of invalidation.

B.     Minority Opinion

Justices Hrishikesh Roy and P.S. Narasimha authored separate opinions, concurring in the result but diverging sharply in reasoning. Both emphasised that unilateral appointments are not expressly prohibited by the Arbitration Act. Justice Roy underlined that Section 12(5) read with the Fifth and Seventh Schedules already provided a comprehensive mechanism for assessing arbitrator independence.[11] He argued that if impartiality is ensured through these safeguards, unilateral appointment in itself does not offend equality.

Justice Narasimha drew a clear distinction between ineligibility and unilateral appointment.[12] While ineligibility, as in TRF Ltd., renders an arbitrator legally incapable of acting, unilateral appointment is a matter of contractual design. He also stated that the “unconscionability” argument would not stand because commercial contracts between parties of equal power do not hold would not give rise to such a situation.

C.    Critical Note

The majority opinion included constitutional equality while considering procedural aspects of arbitration, but failed to consider the practical implications of parties with skewed power to bargain. The minority opinion restricted itself to the word of the Arbitration Act, but failed to correctly asses the risk of bias, which is a consideration in unilateral employment. Both approaches did not consider the unconscionability argument, thus refusing to employ a flexible tool with great potential to address inequality in standard-form contracts.

IV.  The Doctrine of Unconscionability: Comparative Perspectives

The doctrine of unconscionability has been developed in several jurisdictions as a safeguard against unfair contractual terms, particularly in situations marked by disparities in bargaining power. Its treatment in the United States of America and Australia could serve as a guide for the Indian pproach as well.

A. United States

In the United States, the Uniform Commercial Code (“UCC”) codifies unconscionability under section 2-302.[13] Courts applying this provision recognise both procedural unconscionability, which concerns the manner of contract formation, and substantive unconscionability, which relates to the unfairness of terms themselves.[14] The doctrine is not limited to consumer disputes; it has also been applied in commercial contexts.

In Mobile Home Fact Outlet v. Butler, a court confirmed that arbitration agreements, like other contracts, are subject to unconscionability defences.[15] This recognition is significant, as it undermines the presumption that commercial entities are always equals in negotiations. The commentary appended to § 2-302 further instructs courts to examine the commercial setting and background at the time of contracting, acknowledging that context often determines fairness.[16]

B. Australia

Australia has similarly embraced statutory interventions to address unfair terms. The Contract Review Act, 1980 empowers courts to review “unjust” contracts, taking into account the purpose, effect, and surrounding circumstances, without excluding business-to-business dealings.[17] Section 17 prohibits parties from contracting out of its protections, ensuring that even arbitration agreements may be scrutinised for unconscionability.[18]

Further, reforms through the Treasury Laws Amendment (More Competition, Better Prices) Act, 2022 extended protections against unfair contract terms to small businesses.[19] Australian courts have applied this regime to franchise and supply contracts, striking down arbitration clauses that entrenched the superior bargaining position of one party.

The American and Australian jurisdictions approach unconscionability as a tool to both protect consumers as well as to broadly target imbalance in bargaining powers, even when it pertains to commercial arbitration contracts. Considering this, India could follow their lead and reconsider its complete rejection of the unconscionability doctrine in the CORE II case.

  V.  The Indian Position on Unconscionability

It is recognised in Indian contract law that any obtained consent in a situation with unequal bargaining power can be vitiated. In the Indian Contract Act, 1872, Section 16 defines undue influence as the misuse of a dominant position to obtain an advantage unfairly; and Section 23 declares contracts with objects or considerations opposed to public policy to be void in their entirety.[20] Courts use these provisions to target and invalidate contracts where one party in unable to choose freely and thus may have entered into an unequal or exploitative agreement.

In Central Inland Water Transport Corp. v. Brojo Nath Ganguly, the Supreme Court held a termination clause in an employment contract of a state enterprise to be invalid because it was “unconscionable” and “against public policy”.[21]  The Court stated that freedom to contract could not allow or authorise clauses that exploit the vulnerable party or disturb the conscience. Although the case was regarding an employment contract, the principle laid down by the Court broadly recognised that skewed bargaining power could exist even in a seemingly voluntary arrangement.

In LIC of India v. Consumer Education & Research Centre, the Court restated that a standard form of contract, specifically those used by public corporations, could and should be inspected for unfair terms.[22]  It was observed that smaller entities or individuals party to such contracts realistically often have little choice except accepting whatever is imposed upon them by the stronger party, and judicial supervision was important to prevent this.

The Law Commission’s 2006 Report on “Unfair (Procedural and Substantive) Terms in Contracts” also brought up such concerns, and recommended legal recognition of unconscionable clauses even in commercial relationships.[23] The Report also noted that smaller enterprises contracting with larger enterprises or state corporations are especially vulnerable to unconscionable terms.

However, the Supreme Court in CORE II chose to disregard this jurisprudence and reform recommendations and rejected the unconscionability argument, assuming that entities enter into commercial relationships with equal power. This narrow interpretation and assumption has disregarded the reality of the Indian market, where smaller franchisees, contractors or suppliers are often severely dependent on larger parties.

VI.  Implications for Startups and Small Enterprises

The exclusion of unconscionability from arbitration jurisprudence in CORE II has particularly adverse implications for startups and small enterprises. In India’s contemporary economy, many such entities are compelled to contract with larger corporations, state instrumentalities, or public sector undertakings to access markets or resources. The bargaining asymmetry in these relationships is evident, yet the Court assumed that commercial actors always negotiate on an equal footing.

Startups often depend on investment or supply agreements drafted entirely by dominant parties. Arbitration clauses in these agreements may designate the forum, language, and seat of arbitration, and occasionally permit unilateral appointment of arbitrators. 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.[24] By disregarding the doctrine of unconscionability, Indian courts do not have a standard flexible enough to oversee any such unfair terms.

In comparison, the Australian and United States jurisdictions protect even small businesses entering into agreements with larger firms under the unconscionability doctrine.[25] Such protections recognise that economic dependence may lead to vulnerability that is usually seen in consumers and not contracting parties. The Indian approach, in contrast, confuses “commercial” with “equal”, thus failing to recognise the variations in commercial actors.

This may impact commercial policy in India. India’s startup ecosystem, often celebrated as a driver of innovation, is particularly exposed to contractual overreach. Early-stage enterprises rarely have the legal or financial capacity to negotiate balanced arbitration clauses.[26] The absence of a judicial mechanism to intervene in cases of procedural or substantive unfairness increases the risk that arbitration becomes a tool for entrenching inequality rather than delivering justice.

Thus, while CORE II marks a progressive step in eliminating unilateral appointment of arbitrators, its refusal to engage with unconscionability undercuts protection for weaker commercial entities. The challenge ahead lies in reconciling the principles of contractual autonomy with safeguards against systemic unfairness in arbitration agreements.

VII.  Conclusion

The CORE II decision decisively invalidated unilateral appointment of arbitrators, reinforcing equality under Section 18 and Article 14. Yet, by excluding unconscionability, the Court overlooked the vulnerabilities of startups and small enterprises contracting with dominant parties. Comparative experiences from the United States and Australia illustrate that unconscionability is not confined to consumer protection but serves as a safeguard in commercial contexts as well. For India, striking a balance between contractual autonomy and fairness remains essential. Without this, arbitration risks becoming an instrument of inequality rather than a mechanism of justice.

[1] TRF Ltd. v. Energo Eng’g Projects Ltd., (2017) 8 SCC 377.

[2] Perkins Eastman Architects DPC v. HSCC (India) Ltd., (2020) 20 SCC 760.

[3] Cent. Org. for Ry. Electrification v. ECI-SPIC-SMO-MCML (JV), (2020) 14 SCC 712.

[4] Union of India v. Tantia Constrs. Ltd., (2021) 10 SCC 385.

[5] Cent. Org. for Ry. Electrification v. ECI-SPIC-SMO-MCML (JV), 2024 SCC OnLine SC 123.

[6] Voestalpine Schienen GmbH v. Delhi Metro Rail Corp. Ltd., (2017) 4 SCC 665.

[7] Arbitration and Conciliation Act, No. 26 of 1996, § 18.

[8] Cent. Org. for Ry. Electrification v. ECI-SPIC-SMO-MCML (JV), 2024 SCC OnLine SC 123, ¶ 54.

[9] Id. ¶ 61.

[10] Id. ¶ 72.

[11] Arbitration and Conciliation Act, No. 26 of 1996, § 12(5) & Schs. V, VII.

[12] Cent. Org. for Ry. Electrification v. ECI-SPIC-SMO-MCML (JV), 2024 SCC OnLine SC 123, Narasimha, J., dissenting, ¶ 32.

[13] U.C.C. § 2-302 (Am. L. Inst. & Unif. L. Comm’n 2022) (U.S.).

[14] Williams v. Walker-Thomas Furniture Co., 350 F.2d 445, 449–50 (D.C. Cir. 1965) (U.S.).

[15] Mobile Home Fact Outlet v. Butler, 564 S.E.2d 728, 732 (N.C. Ct. App. 2002) (U.S.).

[16] U.C.C. § 2-302 cmt. 1 (U.S.).

[17] Contract Review Act 1980 (NSW) §§ 9(1), 9(2)(l) (Austl.).

[18] Id. § 17(1), § 17(5).

[19] Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Cth) (Austl.).

[20] Indian Contract Act, No. 9 of 1872, §§ 16, 23 (India).

[21] Cent. Inland Water Transp. Corp. v. Brojo Nath Ganguly, (1986) 3 S.C.C. 156, 209.

[22] LIC of India v. Consumer Educ. & Research Ctr., (1995) 5 S.C.C. 482, 510.

[23] Law Comm’n of India, 199th Report on Unfair (Procedural & Substantive) Terms in Contracts 25–27 (2006).

[24] Itek Corp. v. Compagnie Int’l Pour l’Informatique CII Honeywell Bull S.A., 566 F. Supp. 1210, 1215 (D. Mass. 1983) (U.S.).

[25] U.C.C. § 2-302 (Am. L. Inst. & Unif. L. Comm’n 2022); Contract Review Act 1980 (NSW) § 9 (Austl.).

[26] Law Comm’n of India, 199th Report on Unfair (Procedural & Substantive) Terms in Contracts 38–39 (2006).