Arbitral Tribunal Constituted Before 2015 Amendment Cannot Operate If It Violates Neutrality Mandate Under Section 12(5) : Supreme Court

A bench comprising Justices M.R. Shah and B.V. Nagarathna allowed an appeal filed by Ellora Paper Mills Limited, assailing the order of the Madhya Pradesh High Court, which rejected its application filed under Section 14 read with Sections 11 and 15 of the Arbitration and Conciliation Act, 1996 ("Act") to appoint a new arbitrator, stating that Amendment Act, 2015 shall be made effective from 23.10.2015 and cannot have retrospective operation in the arbitration proceedings already commenced unless the parties otherwise agree.

Factual Background

The State of Madhya Pradesh issued a tender for supply of cream wove paper and duplicating paper for the year 1993-94. Ellora Paper Mills Limited ("Ellora") participated in the tender process and was eventually awarded the contract on 22.09.1993. Subsequently, a dispute arose when the State of Madhya Pradesh did not make 90% of the payments for the paper supplied by Ellora as per the terms of the contract and rejected some consignments without providing any justifications. By a letter dated 15.11.1993, the State of Madhya Pradesh informed Ellora that the paper so supplied did not conform to the specifications. In 1994, Ellora filed a civil suit for permanent injunction against the State in Civil Court, Bhopal restraining it from awarding the contract to a third party. However, the suit became infructuous as the State had already awarded the supply order to a third party. Thereafter, Ellora filed another suit to recover Rs. 95,32,103. The State preferred an application under Section 8 of the Arbitration and Conciliation Act, 1996 ("Act") and sought stay of proceedings before the Civil Court, which was rejected. On revision the Madhya Pradesh High Court allowed the application and referred the parties to arbitration by the Stationery Purchase Committee comprising officers of the State of Madhya Pradesh [Additional Secretary, Department of Revenue as President and (i) Deputy Secretary, Department of Revenue, (ii) Deputy Secretary, General Administration Department, (iii) Deputy Secretary, Department of Finance, (iv) Deputy Secretary/Under Secretary, General Administration Department and (v) Senior Deputy Controller of Head Office, Printing as Members]. Against the order of the High Court a Special Leave Petition was preferred, but was eventually withdrawn.

As the Arbitral Tribunal was constituted, Ellora filed an objection to its constitution and challenged its jurisdiction by filing an application under Section 13 of the Act, which was rejected. Thereafter, the High Court dismissed its Writ Petition. Ellora filed an application under Section 14 read with Section 11 and 15 of the Act before the High Court seeking termination of the mandate of originally constituted Tribunal and for appointment of a new arbitrator. The High Court rejected the said application.

Contentions raised by the Appellant

Advocate, Mr. Sandeep Bajaj appearing on behalf of Ellora argued that the impugned order of the Madhya Pradesh High Court was in derogation to the law laid down by the Supreme Court in Jaipur Zila Dugdh Utpadak Sahkari Sangh Limited v. Ajay Sales & Suppliers, 2021 SCC OnLine SC 730. It was contended that the continuation of a Tribunal consisting of officers of the State would frustrate the object of the Amendment Act, 2015, by which sub-section (5) to Section 12 read with Seventh Schedule was inserted to keep in check the impartiality and neutrality of the arbitrators. Section 12(5) reads as under -

"(5) Notwithstanding any prior agreement to the contrary, any person whose relationship, with the parties or counsel or the subject-matter of the dispute, falls under any of the categories specified in the Seventh Schedule shall be ineligible to be appointed as an arbitrator:

Provided that parties may, subsequent to disputes having arisen between them, waive the applicability of this sub-section by an express agreement in writing."

It was further averred that in Jaipur Zila Dugdh Utpadak Sahkari Sangh Limited (supra), the Apex Court did not accept the submission that once a party participates in the arbitration proceeding, it would not be permitted to invoke Section 12(5) and seek appointment of a fresh Arbitral Tribunal. It was emphasised that without an express waiver, an application invoking Section 12(5) would be maintainable. It was submitted that the Tribunal was constituted in 2001, but it did not commence and a stay on the proceedings was in force till 2017. Moreover, some officers of the Tribunal had retired in the course of 20 years, yet no step was taken to constitute a fresh Tribunal.

Contentions raised by the Respondent

Advocate, Mr. Nachiketa Joshi appearing on behalf of the State of Madhya Pradesh submitted that the Arbitral Tribunal was constituted in the year 2000, and Section 12(5) read with the Seventh Schedule was inserted into the statute with effect from 23.10.2015. Therefore, it would not be applicable in the present fact scenario, as had been held in the impugned order.

Analysis by the Supreme Court

The Supreme Court observed that the Arbitral Tribunal - Stationery Purchase Committee was constituted as per the agreement entered into between the parties. It further noted that though the Tribunal was constituted in 2001, it could not commence due to the proceedings initiated by Ellora. In the meanwhile, the officers of the originally constituted Tribunal had also retired. The Court was of the view that given the circumstances, technically the arbitration proceedings had not commenced. The Court observed that in Jaipur Zila Dugdh Utpadak Sahkari Sangh Limited (supra), the Apex Court had negatived the submission of the petitioner that the agreement was entered into prior to the 2015 Amendment to the Act and in view of the same the High Court was not justified in appointing a new arbitrator, moreso, when the arbitration proceedings had already been initiated. The Court noted -

"Section 12 has been amended by Amendment Act, 2015 based on the recommendations of the Law Commission, which specifically dealt with the issue of "neutrality of arbitrators". To achieve the main purpose for amending the provision, namely, to provide for "neutrality of arbitrators", sub-section (5) of Section 12 lays down that notwithstanding any prior agreement to the contrary, any person whose relationship with the parties or counsel or the subject matter of the dispute falls under any of the categories specified in the Seventh Schedule, he shall be ineligible to be appointed as an arbitrator. In such an eventuality, i.e., when the arbitration clause is found to be foul with the amended provision, the appointment of the arbitrator would be beyond the pale of the arbitration agreement, empowering the Court to appoint such an arbitrator as may be permissible. That would be the effect of the non obstante clause contained in sub-section (5) of Section 12 and the other party cannot insist upon the appointment of the arbitrator in terms of the arbitration agreement."

Citing Bharat Broadband Network Limited v. United Telecoms Limited (2019) 5 SCC 755, the Court observed that in the said judgment, it had negated the submission that if a contractor participated in arbitration proceedings, they cannot seek fresh appointment of arbitrator under Section 12(5). The Court held that the impugned order was contrary to the judgments of the Apex Court in TRF Limited v. Energo Engineering Projects Limited, (2017) 8 SCC 377, Bharat Broadband (supra) and Jaipur Zila Dugdh Utpadak Sahkari Sangh Limited (supra). It further held that the Tribunal, comprising officers of the State of Madhya Pradesh had lost its mandate in view of Section 12(5) read with Seventh Schedule of the Act. Considering that the dispute was pending since 2000, instead of remanding the matter back to the High Court, the Supreme Court decided to appoint Justice Abhay Manohar Sapre, a former Judge of the Supreme Court as the new arbitrator.

Case Name: Ellora Paper Mills Limited v. State of Madhya Pradesh

Citation: 2022 LiveLaw (SC) 8

Case No. and Date: Civil Appeal No. 7697 of 2021 | 4 Jan 2022

Coram: Justices M.R. Shah and B.V. Nagarathna