ELLORA PAPER MILLS LIMITED versus THE STATE OF MADHYA PRADESH
[2022] 16 S.C.R. 399, Supreme Court of India, 2022
Outcome: Appeal(s) allowed (Granted)
Segment: Ratio
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ELLORA PAPER MILLS LIMITED
v.
THE STATE OF MADHYA PRADESH
(Civil Appeal No. 7697 of 2021)
JANUARY 04, 2022
[M. R. SHAH AND B. V. NAGARATHNA, JJ.]
Arbitration and Conciliation Act, 1966 – s.12(5) r/w Seventh
Schedule – Arbitration and Conciliation (Amendment) Act, 2015 –
Appellant filed petition before High Court under s.14 r/w ss.11 &
15 of the Arbitration Act, 1966 seeking termination of mandate of
the originally constituted Arbitral Tribunal called as “Stationery
Purchase Committee” on the ground that the Committee comprised
of officers of the Respondent and as such had rendered themselves
ineligible to continue as arbitrators in view of s.12(5) read with
Seventh Schedule – The petition further requested for the
appointment of a new arbitrator – High Court held that the
Amendment Act, 2015 which inserted s.12(5) was effective w.e.f.
23.10.2015 and could not have retrospective operation in the
arbitration proceedings already commenced unless the parties
otherwise agreed and therefore when in the present case the Arbitral
Tribunal was constituted much prior to the Amendment Act, 2015
and the Arbitral Tribunal commenced its proceedings, s.12(5) was
not applicable – Held: The Arbitral Tribunal-Stationery Purchase
Committee consisted of officers of the Respondent-State – Therefore,
as per Amendment Act, 2015 - sub-section (5) of s.12 r/w Seventh
Schedule, all of them became ineligible to become arbitrators and
to continue as arbitrators – s.12 was amended by
Amendment Act,
2015 based on 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 s.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,
[2022] 16 S.C.R. 399
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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 s.12 and the
other party cannot insist upon the appointment of the arbitrator in
terms of the arbitration agreement – In the present case, the
Stationery Purchase Committee-Arbitral Tribunal comprising of
officers of the respondent-State were all ineligible to become and/
or to continue as arbitrators in view of the mandate of sub-section
(5) of s.12 r/w Seventh Schedule – Such an Arbitral Tribunal cannot
be permitted to continue and therefore a fresh arbitrator has to be
appointed as per the Arbitration and Conciliation Act, 1996.
Allowing the appeal, the Court
HELD:1.1. The present application was preferred before
the High Court invoking Section 14 read with sections 11 and 15
of the Arbitration Act, 1966 seeking termination of the mandate
of the originally constituted Arbitral Tribunal and to appoint a
new arbitrator. However, the fact remains that after the
constitution of the Arbitral Tribunal in the year 2001, no further
steps whatsoever were taken in arbitration proceedings and
therefore technically it could not be said that the arbitration
proceedings by the Arbitral tribunal- Stationery Purchase
Committee commenced. [Para 6][408-E-H]
1.2. The Arbitral
Tribunal-Stationery Purchase Committee
consisted of officers of the Respondent-State. Therefore, as per
Amendment Act, 2015-Sub-section (5) of Section 12 read with
Seventh Schedule, all of them have become ineligible to become
arbitrators and to continue as arbitrators. 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
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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. It cannot be
disputed that in the present case, the employees of the Respondent
as Members, has lost its mandate by operation of law in view of
Section 12(5) read with Seventh Schedule. [Para 7][409-A-E]
1.3. A former Judge of Supreme Court is appointed to act
as an arbitrator to adjudicate upon/resolve the dispute between
the parties. [Para 11][419-F]
TRF Limited v. Energo Engineering Projects Limited
(2017) 8 SCC 377 : [2017] 7 SCR 409 and Bharat
Broadband Network Limited v. United Telecoms Limited
(2019) 5 SCC 755 : [2019] 6 SCR 97 – relied on.
Voestalpine Schienen GMBH v. Delhi Metro Rail
Corporation Limited (2017) 4 SCC 665 : [2017] 1 SCR
798; Aravali Power Co. Power Ltd. v. Era Infra
Engineering (2017) 15 SCC 32; Indian Oil Corporation
Ltd. v. Raja Transport Pvt. Ltd. (2009) 8 SCC 520 :
[2009] 13 SCR 510; ACE Pipeline Contracts (P) Ltd. v.
Bharat Petroleum Corporation Ltd. (2007) 5 SCC 304
: [2007] 4 SCR 777; Union of India v. M. P. Gupta
(2004) 10 SCC
504; Union of India v. Parmar
Construction Co. (2019) 15 SCC 682 : [2019] 5 SCR
1009; Union of India v. Pradeep Vinod Construction
Co. (2020) 2 SCC 464 : [2012] 17 SCR 64; S. P. Singla
Constructions Pvt. Ltd. v. State of Himachal Pradesh
(2019) 2 SCC 488 : [2018] 14 SCR 1005; Executive
Engineer, Irrigation Division, Puri v. Gangaram
Chhapolia (1984) 3 SCC 627; Secretary to Government
Transport Department, Madras v. Munusamy Mudaliar
(1988) Supp SCC 651 : [1988] 2 Suppl. SCR 673;
International Authority of India v. K. D. Bali (1988) 2
ELLORA PAPER MILLS LIMITED v. THE STATE OF MADHYA
PRADESH
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SCC 360 : [1988] 3 SCR 370; S. Rajan v. State of
Kerala (1992) 3 SCC 608 : [1992] 3 SCR 649; Indian
Drugs & Pharmaceuticals v. Indo-Swiss Synthetics Germ
Manufacturing Co. Ltd. (1996) 1 SCC 54 : [1995] 5
Suppl. SCR 180; Denel (Proprietary) Ltd. v. Govt. of
India, Ministry of Defence (2012) 2 SCC 759 : [2012]
2 SCR 897; Bipromasz Bipron Trading SA v. Bharat
Electronics Ltd. (2012) 6 SCC 384 : [2012] 5 SCR 743
– referred to.
Jaipur Zila Dugdh Utpadak Sahkari Sangh Limited v.
Ajay Sales & Suppliers 2021 SCC OnLine SC 730 –
referred to.
Case Law Reference
[2017] 7 SCR 409
relied on
Para 8
[2009] 13 SCR 510
referred to
Para 2.6
[2007] 4 SCR 777
referred to
Para 2.6
[2012] 17 SCR 64
referred to
Para 2.6
[2019] 5 SCR 1009
referred to
Para 2.6
[2018] 14 SCR 1005
referred to
Para 2.6
[2017] 1 SCR 798
referred to
Para 8
[2017] 7 SCR 409
referred to
Para 8
[1988] 2 Suppl. SCR 673
referred to
Para 8
[1988] 3 SCR 370
referred to
Para 8
[1992] 3 SCR 649
referred to
Para 8
[1995] 5 Suppl. SCR 189
referred to
Para 8
[2012] 2 SCR 897
referred to
Para 8
[2012] 5 SCR 743
referred to
Para 8
[2019] 6 SCR 97
relied on
Para 8.1
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 7697
of 2021.
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From the Judgment and Order dated 27.08.2021 of the High Court
of Judicature for Madhya Pradesh at Jabalpur in Arbitration Case No.
100 of 2019.
Sandeep Bajaj, Soayib Qureshi, Ms. Vipul Jai, Advs. for the
Appellant.
Sunny Choudhary, Nachiketa Joshi, Advs. for the Respondent.
The Judgment of the Court was delivered by
M. R. SHAH, J.
1. Feeling aggrieved and dissatisfied with the impugned judgment
and order dated 27.08.2021 passed by the High Court of Madhya Pradesh
in A.C. No. 100/2019, by which the application preferred by the appellant
under Section 14 read with Sections 11 and 15 of the Arbitration and
Conciliation Act, 1996 (hereinafter referred to as the ‘Arbitration Act,
1996’) seeking termination of the mandate of originally constituted Arbitral
Tribunal and to appoint a new arbitrator has been dismissed, the original
applicant before the High Court has preferred the present appeal.
2. That the respondent herein issued a tender for supply of the
cream wove paper and duplicating paper for the year 1993-94. The
appellant herein participated in the said tender process and was awarded
the contract vide supply order dated 22.09.1993. A dispute arose between
the appellant and the respondent. According to the appellant herein, though
it supplied 420 MT of cream wove paper and 238 MT of duplicating
paper to the respondent, the latter not only did not make the payment of
90% of the amount as per the terms of the contract, but also rejected
some consignments
without any justification, causing loss to it. The
respondent herein vide letter dated 15.11.1993 informed the appellant
that the paper supplied by it did not conform to the specification and
therefore could not be utilized.
2.1 Thereafter, the appellant herein filed a civil suit in the year
1994 seeking the relief of permanent injunction against the respondent in
the Civil Court at Bhopal seeking to restrain it from awarding the supply
order to a third party. The respondent, in the meantime, awarded the
contract to the third party for the remaining supply. Therefore, the
aforesaid civil suit became infructuous.
2.2 The appellant thereafter filed another suit seeking recovery
of an amount of Rs.95,32,103/- bearing Civil Suit No. 2-B/1998 before
ELLORA PAPER MILLS LIMITED v. THE STATE OF MADHYA
PRADESH
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the Civil Court at Bhopal. In the said suit, the respondent preferred an
application under Section 8 of the Arbitration Act, 1996 seeking stay of
the proceedings on the ground that there exists an arbitration clause in
the agreement between the parties. The Civil Court rejected the said
application vide order dated 27.02.1999. The respondent filed revision
petition No. 1117/1999 before the High Court which came to be allowed
by the High Court vide order dated 03.05.2000. The High Court referred
the parties to arbitration by the Stationery Purchase Committee comprising
of the officers of the respondent.
2.3 Against the order passed by the High Court allowing the revision
petition and referring the parties to the arbitration, the appellant herein
filed a special leave petition bearing S.L.P.(Civil) No. 13914/2000 before
this Court. The same came to be dismissed as withdrawn vide order
dated 28.09.2000.
2.4 The Arbitral Tribunal was constituted called as “Stationery
Purchase Committee” comprising the officers of the respondent. The
appellant filed its objections to the constitution of the Arbitral Tribunal/
Stationery Purchase Committee on 12.09.2000. The appellant herein
also challenged its jurisdiction by filing an application under Section 13
of the Arbitration Act, 1996. The Arbitral Tribunal vide order dated
2.2.2001 rejected the said application. Aggrieved thereby, the appellant
herein filed a writ petition before
the High Court being Writ Petition No.
1824/2001 which came to be dismissed vide order dated 24.01.2017
with liberty to the appellant to raise objections before the appropriate
forum.
2.5 Subsequently, the appellant filed the present application before
the High Court being AC No. 100/2019 under Section 14 read with
Sections 11 & 15 of the Arbitration Act, 1996 seeking termination of the
mandate of originally constituted Arbitral Tribunal – Stationery Purchase
Committee comprising of officers of the respondent and for appointment
of a new arbitrator. Before the High Court, the appellant herein heavily
relied upon Section 12(5) of the Arbitration Act, 1996. Relying upon the
decision of this Court in the case of TRF Limited v. Energo Engineering
Projects Limited, reported in (2017) 8 SCC 377, it was submitted on
behalf of the appellant that all the five officers constituting the Stationery
Purchase Committee, being the employees of the respondent had
rendered themselves ineligible to continue as arbitrators. It was submitted
that since they had become ineligible to continue as arbitrators, they also
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could not appoint another person as arbitrator. It was also contended
that the original members of the Arbitral Tribunal, who initiated the
proceedings had since ceased to hold their respective offices, in any
case, a new Arbitral Tribunal had to be constituted and therefore an
impartial and independent arbitrator was required to be appointed in terms
of Section 11 of the Arbitration Act, 1996.
2.6 However, after referring to and considering the decisions of
this Court in the cases of Aravali Power Co. Power Ltd. v. Era Infra
Engineering, reported in (2017) 15 SCC 32; Indian Oil Corporation
Ltd. v. Raja Transport Pvt. Ltd., reported in (2009) 8 SCC 520;
ACE Pipeline Contracts (P) Ltd. v. Bharat Petroleum Corpn. Ltd.,
reported in (2007) 5 SCC 304; Union of India v. M.P. Gupta, reported
in (2004) 10 SCC 504; Union of India v. Parmar Construction
Company, reported in (2019) 15 SCC 682; Union of India v. Pradeep
Vinod Construction Company, reported in (2020) 2 SCC 464; and
S.P. Singla Constructions Pvt. Ltd. v. State of Himachal Pradesh,
reported in (2019) 2 SCC 488, the High Court has not agreed with the
submission(s) on behalf of the appellant. Referring to the aforesaid
decisions of this Court, it is observed and held by the High Court that the
Amendment Act, 2015 shall be made effective w.e.f. 23.10.2015 and
cannot have retrospective operation in the arbitration proceedings already
commenced unless the parties otherwise agree and therefore when in
the
present case the Arbitral Tribunal was constituted much prior to the
Amendment Act, 2015 and the Arbitral Tribunal commenced its
proceedings, the Amendment Act, 2015 – Section 12(5) of the Arbitration
Act, 2016 shall not be applicable. Observing so, the High Court by the
impugned judgment and order has dismissed the application filed by the
appellant herein under Section 14 read with Sections 11 & 15 of the
Arbitration Act, 1996 and has observed that it would be open for the
appellant to participate in proceedings before the Arbitral Tribunal
constituted by the respondent as Stationery Purchase Committee.
2.7 Feeling aggrieved and dissatisfied with the impugned judgment
and order passed by the High Court, the original applicant before the
High Court has preferred the present appeal.
3. Shri Sandeep Bajaj, learned Advocate appearing on behalf of
the appellant has vehemently submitted that the impugned judgment and
order passed by the High Court rejecting the application submitted by
the appellant under Section 14 read with Sections 11 & 15 of the
ELLORA PAPER MILLS LIMITED v. THE STATE OF MADHYA
PRADESH [M. R. SHAH, J.]
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Arbitration Act, 1996 is just contrary to the recent decision of this Court
in the case of Jaipur Zila Dugdh Utpadak Sahkari Sangh Limited v.
Ajay Sales & Suppliers, 2021 SCC OnLine SC 730. It is submitted
that as held by this Court in the aforesaid decision, in view of the mandate
under sub-section (5) of Section 12 read with Seventh Schedule, the
Arbitral Tribunal constituted in the present case – Stationery Purchase
Committee consisting of the officers of the respondent has lost its
mandate. It is submitted that continuation of such Arbitral Tribunal would
be frustrating the object and purpose of the Amendment Act, 2015, by
which sub-section (5) to Section 12 read with Seventh Schedule was
inserted. It is submitted that as held by this Court, Section 12 has been
amended by Amendment Act, 2015 to provide for ‘neutrality of arbitrators’
and in order to achieve this, sub-section (5) to Section 12 provides 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.
3.1 It is submitted that in the aforesaid decision, this Court
negatived the submission that once the contractor participated in the
arbitration proceedings before the Arbitral Tribunal by filing a statement
of claim, thereafter it would not
be open for him to approach the Court
invoking sub-section (5) to Section 12 and pray for appointment of a
fresh Arbitral Tribunal. It is submitted that unless and until there is an
express agreement in writing to continue with the arbitration proceedings
by the earlier Arbitral Tribunal, such an application to terminate the
mandate of the earlier Arbitral Tribunal and to appoint a fresh arbitrator
would be maintainable.
3.2 It is further submitted by the learned counsel appearing on
behalf of the appellant that in the present case, as such, the High Court
has committed a grave error in observing and holding that the arbitration
proceedings before the Stationery Purchase Committee – Arbitral
Tribunal had commenced and that the appellant had participated. It is
urged that in the present case, the Stationery Purchase Committee –
arbitral Tribunal did not commence the arbitration proceedings in view
of the stay granted by the High Court in Writ Petition No. 1824/2001,
which was operative from 4.5.2001 to 24.01.2017. It is submitted that in
fact the earlier incumbents of the Stationery Purchase Committee –
Arbitral Tribunal retired and no steps were taken to constitute a fresh
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Arbitral Tribunal. It is therefore contended, it cannot be said that any
further steps were taken by the earlier Arbitral Tribunal in the arbitration
proceedings. It is submitted that in any case in view of the mandate
under Section 12(5) read with Seventh Schedule, the members of the
earlier Arbitral Tribunal have lost their mandate and are ineligible to
continue as members of the Arbitral Tribunal and therefore a fresh Arbitral
Tribunal is to be constituted.
4. While opposing the present appeal, Shri Nachiketa Joshi, learned
Advocate appearing on behalf of the respondent-State has vehemently
submitted that in the facts and circumstances of the case and more
particularly when the Arbitral Tribunal as per the agreement entered
into between the parties was constituted in the year 2000, the High Court
has rightly refused to appoint a fresh Arbitral Tribunal by holding that
Section 12(5) read with Seventh Schedule which has been inserted in
the statute by Amendment Act, 2015 w.e.f. 23.10.2015 shall not be
applicable retrospectively.
4.1 It is submitted that in the present case, on one ground or the
other, and by initiating the proceedings one after another, the appellant
did not permit the earlier Arbitral Tribunal to proceed further with the
arbitration proceedings.
4.2 It is urged that the impugned judgment and order passed by
the High Court is a well-reasoned order after considering catena of
decisions of this Court referred to in the impugned order and
therefore
the same may not be interfered with by this Court.
4.3 Learned counsel appearing on behalf of the respondent has
also submitted that in the facts and circumstances of the case, the decision
of this Court in the case of Jaipur Zila Dugdh Utpadak Sahkari Sangh
Limited (supra) is not applicable. It is submitted that in the said case,
the arbitrator was appointed after amendment of the Arbitration Act,
2015. However, in the present case, the arbitrator was appointed
approximately 20 years prior thereto and thereafter the arbitration
proceedings commenced and even the appellant also participated. It is
therefore contended that the amended Section 12(5) of the Arbitration
Act which is brought in the statute by way of amendment in 2015 shall
not be applicable retrospectively. It is submitted that Section 12(5) of the
Arbitration Act shall have to be made applicable prospectively.
ELLORA PAPER MILLS LIMITED v. THE STATE OF MADHYA
PRADESH [M. R. SHAH, J.]
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5. We have heard the learned counsel for the respective parties
at length. Having heard learned counsel for the respective parties and
on considering the impugned judgment and order passed by the High
Court, the short question which is posed for consideration of this Court
is, whether, the Stationery Purchase Committee – Arbitral Tribunal
consisting of the officers of the respondent has lost the mandate,
considering Section 12(5) read with Seventh Schedule of the Arbitration
Act, 1996. If the answer is in the affirmative, in that case, whether a
fresh arbitrator has to be appointed as per the Arbitration Act, 1996?
6. It is not in dispute that the High Court earlier constituted the
Arbitral Tribunal of Stationery Purchase Committee comprising of officers
of the respondent, viz, 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. It may be true that the earlier Arbitral
Tribunal – Stationery Purchase Committee was constituted as per the
agreement entered into between the parties. It is also true that initially
the said Arbitral Tribunal was constituted by the High Court in the year
2001, however, thereafter Stationery
Purchase Committee – Arbitral
Tribunal could not commence the arbitration proceedings in view of number
of proceedings initiated by the appellant. There was a stay granted by
the High Court from 4.5.2001 to 24.01.2017 and thereafter in the year
2019, the present application was preferred before the High Court invoking
Section 14 read with Sections 11 & 15 of the Arbitration Act, 1996 seeking
termination of the mandate of the originally constituted Arbitral Tribunal
and to appoint a new arbitrator. It has also come on record that in
between, the officers who were members of the Stationery Purchase
Committee – Arbitral Tribunal had retired. At this stage, we are not
considering whether those persons could have been continued as
members of the Stationery Purchase Committee – Arbitral or not.
However, the fact remains that after the constitution of the Arbitral
Tribunal in the year 2001, no further steps whatsoever have been taken
in the arbitration proceedings and therefore technically it cannot be said
that the arbitration proceedings by the Arbitral Tribunal – Stationery
Purchase Committee has commenced.
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7. As observed hereinabove, the Arbitral Tribunal – Stationery
Purchase Committee consisted of officers of the respondent-State.
Therefore, as per Amendment Act, 2015 – Sub-section (5) of Section 12
read with Seventh Schedule, all of them have become ineligible to become
arbitrators and to continue as arbitrators. 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. It cannot be disputed that in the
present case, the Stationery Purchase Committee
-Arbitral Tribunal
comprising of officers of the respondent-State are all ineligible to become
and/or to continue as arbitrators in view of the mandate of sub-section
(5) of Section 12 read with Seventh Schedule. Therefore, by operation
of law and by amending Section 12 and bringing on statute sub-section
(5) of Section 12 read with Seventh Schedule, the earlier Arbitral Tribunal
– Stationery Purchase Committee comprising of 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, has lost
its mandate and such an Arbitral Tribunal cannot be permitted to continue
and therefore a fresh arbitrator has to be appointed as per Arbitration
Act, 1996.
8.  An identical question came to be considered by this Court in
the case of Jaipur Zila Dugdh Utpadak Sahkari Sangh Limited
(supra), and after considering the decisions of this Court in the case of
ELLORA PAPER MILLS LIMITED v. THE STATE OF MADHYA
PRADESH [M. R. SHAH, J.]
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TRF (supra) and other decisions on the point, in paragraphs 13, 14
and 15, it is observed and held as under:
“13. So far as the submission on behalf of the petitioners that the
agreement was prior to the insertion of Sub-section (5) of Section
12 read with Seventh Schedule to the Act and therefore the
disqualification under Sub-section (5) of Section 12 read with
Seventh Schedule to the Act shall not be applicable and that once
an arbitrator - Chairman started the arbitration proceedings
thereafter the High Court is not justified in appointing an arbitrator
are concerned the aforesaid has no substance and can to be
accepted in view of the decision of this Court in Trf Ltd. v. Energo
Engineering Projects Ltd., (2017) 8 SCC 377; Bharat
Broadband Network Limited v. United Telecoms Limited, (2019)
5 SCC 755; Voestalpine Schienen GMBH v. Delhi Metro Rail
Corporation Limited, (2017) 4 SCC 665. In the aforesaid
decisions this Court had an occasion to consider in detail the object
and purpose of insertion of Subsection (5) of Section 12 read with
Seventh Schedule to the Act. In the case of Voestalpine Schienen
GMBH (Supra) it is observed and held by this Court that the main
purpose for amending the provision was to provide for ‘neutrality
of arbitrators’. It is further observed that in order to achieve this,
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. It is further
observed that in such an eventuality i.e. when the arbitration clause
finds foul with the amended provisions (Sub-section (5) of Section
12 read with Seventh Schedule) the appointment of an arbitrator
would be beyond pale of the arbitration agreement, empowering
the court to appoint such arbitrator as may be permissible. It is
further observed that, that would be the effect of non obstante
clause contained in sub-section (5) of Section 12 and the other
party cannot insist on appointment of the arbitrator in terms of the
arbitration agreement.
14. It is further observed and held by this Court in the aforesaid
decision that independence and impartiality of the arbitrator are
the hallmarks of any arbitration proceedings. Rule against bias is
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one of the fundamental principles of natural justice which apply to
all judicial and quasi-judicial proceedings. It is further observed
that it is for this reason that notwithstanding the fact that
relationship between the parties, to the arbitration and the
arbitrators themselves are contractual in nature and the source of
an arbitrator’s appointment is deduced from the agreement entered
into between the parties, notwithstanding the same non-
independence and non-impartiality of such arbitrator would render
him ineligible to conduct the arbitration. It is further observed that
the genesis behind this rational is that even when an arbitrator is
appointed in terms of contract and by the parties to the contract,
he is independent of the parties. In paragraphs 16 to 18 it is
observed and held as under:
“16. Apart from other amendments, Section 12 was also amended
and the amended provision has already been reproduced above.
This amendment is also based on the recommendation of the Law
Commission which specifically dealt with the issue of ‘neutrality
of arbitrators’ and a discussion in this behalf is contained in paras
53 to 60 and we would like to reproduce the entire discussion
hereinbelow:
“NEUTRALITY OF ARBITRATORS
53. It is universally accepted that any quasi-judicial process,
including the arbitration process, must be in accordance with
principles of natural justice. In the context of arbitration, neutrality
of arbitrators, viz. their independence and
impartiality, is critical to
the entire process.
54. In the Act, the test for neutrality is set out in Section 12(3)
which provides -
‘12.(3) ”An arbitrator may be challenged only if -
(a) circumstances exist that give rise to justifiable doubts as to
his independence or impartiality…”
55. The Act does not lay down any other conditions to identify the
“circumstances” which give rise to “justifiable doubts”, and it is
clear that there can be many such circumstances and situations.
The test is not whether, given the circumstances, there is any
actual bias for that is setting the bar too high; but, whether the
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circumstances in question give rise to any justifiable apprehensions
of bias.
56. The limits of this provision has been tested in the Indian
Supreme Court in the context of contracts with State entities
naming particular persons/designations (associated with that entity)
as a potential arbitrator. It appears to be settled by a series of
decisions of the Supreme Court (See Executive Engineer,
Irrigation Division, Puri v. Gangaram Chhapolia, (1984) 3
SCC 627; Secretary to Government Transport Department,
Madras v. Munusamy Mudaliar, 1988 Supp SCC 651;
International Authority of India v. K.D. Bali, (1988) 2 SCC
360; S. Rajan v. State of Kerala, (1992) 3 SCC 608; Indian
Drugs & Pharmaceuticals v. Indo-Swiss Synthetics Germ
Manufacturing Co. Ltd., (1996) 1 SCC 54; Union of India
v. M.P. Gupta, (2004) 10 SCC 504; Ace Pipeline Contract Pvt.
Ltd. v. Bharat Petroleum Corporation Ltd., (2007) 5 SCC 304)
that arbitration agreements in government contracts which provide
for arbitration by a serving employee of the department, are valid
and enforceable. While the Supreme Court, in Indian Oil Corp.
Ltd. v. Raja Transport (P) Ltd., (2009) 8 SCC 520 carved out a
minor exception in situations when the arbitrator
“was the controlling or dealing authority in regard to the subject
contract or if he is a direct subordinate (as contrasted from an
officer of an inferior rank in some other department) to the
officer whose decision is the
subject matter of the dispute”
(SCC p. 533, para 34) and this exception was used by the
Supreme Court in Denel (Proprietary) Ltd. v. Govt. of India,
Ministry of Defence, (2012) 2 SCC 759 : AIR 2012 SC
817 and Bipromasz Bipron Trading SA v. Bharat Electronics
Ltd., (2012) 6 SCC 384, to appoint an independent arbitrator
under section 11, this is not enough.
57. The balance between procedural fairness and binding nature
of these contracts, appears to have been tilted in favour of the
latter by the Supreme Court, and the Commission believes the
present position of law is far from 18 satisfactory. Since the
principles of impartiality and independence cannot be discarded
at any stage of the proceedings, specifically at the stage of
constitution of the arbitral tribunal, it would be incongruous to say
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that party autonomy can be exercised in complete disregard of
these principles - even if the same has been agreed prior to the
disputes having arisen between the parties. There are certain
minimum levels of independence and impartiality that should be
required of the arbitral process regardless of the parties’ apparent
agreement. A sensible law cannot, for instance, permit appointment
of an arbitrator who is himself a party to the dispute, or who is
employed by (or similarly dependent on) one party, even if this is
what the parties agreed. The Commission hastens to add that Mr.
PK Malhotra, the ex officio member of the Law Commission
suggested having an exception for the State, and allow State parties
to appoint employee arbitrators. The Commission is of the opinion
that, on this issue, there cannot be any distinction between State
and non-State parties. The concept of party autonomy cannot be
stretched to a point where it negates the very basis of having
impartial and independent adjudicators for resolution of disputes.
In fact, when the party appointing an adjudicator is the State, the
duty to appoint an impartial and independent adjudicator is that
much more onerous - and the right to natural justice cannot be
said to have been waived only on the basis of a “prior” agreement
between the parties at the time of the contract and before arising
of the disputes.
58. Large-scale amendments have been suggested to address this
fundamental issue of neutrality
of arbitrators, which the
Commission believes is critical to the functioning of the arbitration
process in India. In particular, amendments have been proposed
to sections 11, 12 and 14 of the Act.
59. The Commission has proposed the requirement of having
specific disclosures by the arbitrator, at the stage of his *possible*
appointment, regarding existence of any relationship or interest of
any kind which is likely to give rise to justifiable doubts. The
Commission has proposed the incorporation of the Fourth Schedule,
which has drawn from the red and orange lists of the IBA
Guidelines on Conflicts of Interest in International Arbitration, and
which would be treated as a “guide” to determine whether
circumstances exist which give rise to such justifiable doubts. On
the other hand, in terms of the proposed section 12(5) of the Act
and the Fifth Schedule which incorporates the categories from
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the red list of the IBA Guidelines (as above), the person proposed
to be appointed as an arbitrator shall be *ineligible* to be so
appointed, notwithstanding any prior agreement to the contrary.
In the event such an ineligible person is purported to be appointed
as an arbitrator, he shall be de jure deemed to be unable to perform
his functions, in terms of the proposed explanation to section 14.
Therefore, while the *disclosure* is required with respect to a
broader list of categories (as set out in the Fourth Schedule, and
as based on the Red and Orange lists of the IBA Guidelines), the
*ineligibility* to be appointed as an arbitrator (and the consequent
de jure inability to so act) follows from a smaller and more serious
sub-set of situations (as set out in the Fifth Schedule, and as based
on the Red list of the IBA Guidelines).
60. The Commission, however, feels that *real* and *genuine*
party autonomy must be respected, and, in certain situations, parties
should be allowed to waive even the categories of ineligibility as
set in the proposed Fifth Schedule. This could be in situations of
family arbitrations or other arbitrations where a person commands
the blind faith and trust of the parties to the dispute, despite the
existence of objective “justifiable doubts” regarding his
independence and impartiality. To deal with such situations, the
Commission has proposed the proviso to section 12(5), where
parties may,
subsequent to disputes having arisen between them,
waive the applicability of the proposed section 12(5) by an express
agreement in writing. In all other cases, the general rule in the
proposed section 12(5) must be followed. In the event the High
Court is approached in connection with appointment of an arbitrator,
the Commission has proposed seeking the disclosure in terms of
section 12(1) and in which context the High Court or the designate
is to have “due regard” to the contents of such disclosure in
appointing the arbitrator.”
(emphasis supplied)
17. We may put a note of clarification here. Though, the Law
Commission discussed the aforesaid aspect under the heading
“Neutrality of Arbitrators”, the focus of discussion was on
impartiality and independence of the arbitrators which has
relation to or bias towards one of the parties. In the field of
international arbitration, neutrality is generally related to the
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nationality of the arbitrator. In international sphere, the
“appearance of neutrality” is considered equally important,
which means that an arbitrator is neutral if his nationality is
different from that of the parties. However, that is not the
aspect which is being considered and the term “neutrality”
used is relatable to impartiality and independence of the
arbitrators, without any bias towards any of the parties. In
fact, the term “neutrality of arbitrators” is commonly used in
this context as well.
18. Keeping in mind the aforequoted recommendation of the
Law Commission, with which spirit, Section 12 has been
amended by the Amendment Act, 2015, it is manifest that the
main purpose for amending the provision was to provide for
neutrality of arbitrators. In order to achieve this, 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 finds foul with
the amended provisions extracted above, the appointment of
an arbitrator would be beyond pale of the arbitration agreement,
empowering the court to appoint such arbitrator(s) as may be
permissible. That would be the effect of non obstante clause
contained in sub-section (5) of Section 12 and
the other party
cannot insist on appointment of the arbitrator in terms of
arbitration agreement.”
15. In the case of Bharat Broadband Network Limited (Supra),
it is observed that Sub-section (5) of Section 12 read with Seventh
Schedule made it clear that if the arbitrator falls in any one of the
categories specified in the Seventh Schedule, he becomes
‘ineligible’ to act as an arbitrator. It is further observed that once
he becomes ‘ineligible’, it is clear that he then become dejure
unable to perform his functions inasmuch as in law, he is regarded
as ‘ineligible’. It further is observed in the said decision that where
a person becomes ineligible to be appointed as an arbitrator there
is no question of challenge to such arbitrator before such arbitrator
in such a case i.e. a case which falls under Section 14(1)(a) of
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the Act gets attracted inasmuch as the arbitrator becomes, as a
matter of law (i.e., de jure), unable to perform his functions under
Section 12(5), being ineligible to be appointed as an arbitrator and
this being so, his mandate automatically terminates, and he shall
then be substituted by another arbitrator.”
8.1 In the aforesaid decision, this Court also negatived the
submission that as the contractor participated in the arbitration proceedings
before the arbitrator therefore subsequently, he ought not to have
approached the High Court for appointment of a fresh arbitrator under
Section 11 of the Arbitration Act, 1996. After referring to the decision of
this Court in the case of Bharat Broadband Network Limited v. United
Telecoms Limited, reported in (2019) 5 SCC 755, it is observed and
held in paragraph 20 as under:
“20. Now so far as the submission on behalf of the petitioners
that the respondents participated in the arbitration proceedings
before the sole arbitrator - Chairman and therefore he ought not
to have approached the High Court for appointment of arbitrator
under Section 11 is concerned, the same has also no substance.
As held by this Court in the case of Bharat Broadband Network
Limited (Supra) there must be an ‘express agreement’ in writing
to satisfy the requirements of Section 12(5) proviso. In paragraphs
15 & 20 it is observed and held as under:
“15. Section 12(5), on the other hand, is a new
provision which
relates to the de jure inability of an arbitrator to act as such.
Under this provision, any prior agreement to the contrary is
wiped out by the non-obstante clause in Section 12(5) the
moment any person whose relationship with the parties or the
counsel or the subject matter of the dispute falls under the
Seventh Schedule. The sub-section then declares that such
person shall be “ineligible” to be appointed as arbitrator. The
only way in which this ineligibility can be removed is by the
proviso, which again is a special provision which states that
parties may, subsequent to disputes having arisen between
them, waive the applicability of Section 12(5) by an express
agreement in writing. What is clear, therefore, is that where,
under any agreement between the parties, a person falls within
any of the categories set out in the Seventh Schedule, he is, as
a matter of law, ineligible to be appointed as an arbitrator. The
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only way in which this ineligibility can be removed, again, in
law, is that parties may after disputes have arisen between
them, waive the applicability of this sub-section by an “express
agreement in writing”. Obviously, the “express agreement in
writing” has reference to a person who is interdicted by the
Seventh Schedule, but who is stated by parties (after the
disputes have arisen between them) to be a person in whom
they have faith notwithstanding the fact that such person is
interdicted by the Seventh Schedule.
xxx xxx xxx
20. This then brings us to the applicability of the proviso to Section
12(5) on the facts of this case. Unlike Section 4 of the Act which
deals with deemed waiver of the right to object by conduct, the
proviso to Section 12(5) will only apply if subsequent to disputes
having arisen between the parties, the parties waive the applicability
of sub-section (5) of Section 12 by an express agreement in writing.
For this reason, the argument based on the analogy of Section 7
of the Act must also be rejected. Section 7 deals with arbitration
agreements that must be in writing, and then explains that such
agreements may be contained in documents which provide a
record of such agreements. On the other hand, Section 12(5) refers
to an “express agreement in writing”. The expression “express
agreement in writing” refers to an agreement made in words as
opposed to an agreement which is to be inferred by conduct. Here,
Section 9 of the Indian
Contract Act, 1872 becomes important. It
states:
“9. Promises, express and implied.—In so far as a proposal or
acceptance of any promise is made in words, the promise is
said to be express. In so far as such proposal or acceptance is
made otherwise than in words, the promise is said to be
implied.” It is thus necessary that there be an “express”
agreement in writing.
This agreement must be an agreement by which both parties,
with full knowledge of the fact that Shri Khan is ineligible to be
appointed as an arbitrator, still go ahead and say that they have
full faith and confidence in him to continue as such. The facts of
the present case disclose no such express agreement. The
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appointment letter which is relied upon by the High Court as
indicating an express agreement on the facts of the case is dated
17.01.2017. On this date, the Managing Director of the appellant
was certainly not aware that Shri Khan could not be appointed by
him as Section 12(5) read with the Seventh Schedule only went to
the invalidity of the appointment of the Managing Director himself
as an arbitrator. Shri Khan’s invalid appointment only became
clear after the declaration of the law by the Supreme Court in TRF
Ltd. (supra) which, as we have seen hereinabove, was only on
03.07.2017. After this date, far from there being an express
agreement between the parties as to the validity of Shri Khan’s
appointment, the appellant filed an application on 07.10.2017 before
the sole arbitrator, bringing the arbitrator’s attention to the judgment
in TRF Ltd. (supra) and asking him to declare that he has become
de jure incapable of acting as an arbitrator. Equally, the fact that a
statement of claim may have been filed before the arbitrator, would
not mean that there is an express agreement in words which would
make it clear that both parties wish Shri Khan to continue as
arbitrator despite being ineligible to act as such. This being the
case, the impugned judgment is not correct when it applies Section
4, Section 7, Section 12(4), Section 13(2), and Section 16(2) of
the Act to the facts of the present case, and goes on to state
that
the appellant cannot be allowed to raise the issue of eligibility of
an arbitrator, having itself appointed the arbitrator. The judgment
under appeal is also in correct in stating that there is an express
waiver in writing from the fact that an appointment letter has
been issued by the appellant, and a statement of claim has been
filed by the respondent before the arbitrator. The moment the
appellant came to know that Shri Khan’s appointment itself would
be invalid, it filed an application before the sole arbitrator for
termination of his mandate.”
 9. In view of the above and for the reasons stated hereinabove,
the impugned judgment and order passed by the High Court is contrary
to the law laid down by this Court in the cases of TRF (supra), Bharat
Broadband Network Limited (supra) and the recent decision of this
Court in the case of Jaipur Zila Dugdh Utpadak Sahkari Sangh
Limited (supra). It is held that the earlier Arbitral Tribunal – Stationery
Purchase Committee comprising of Additional Secretary, Department
of Revenue as President and (i) Deputy Secretary, Department of
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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, has lost its mandate by
operation of law in view of Section 12(5) read with Seventh Schedule
and a fresh arbitrator has to be appointed under the provisions of the
Arbitration Act, 1996. The impugned judgment and order passed by the
High Court is therefore unsustainable and deserves to be quashed and
set aside.
10. In view of the above and for the reasons stated above, the
present appeal succeeds. The impugned judgment and order passed by
the High Court of Madhya Pradesh dated 27.08.2021 passed in AC No.
100/2019 is hereby quashed and set aside and the application being AC
No. 100/2019 filed by the appellant herein before the High Court is hereby
allowed. It is declared that the earlier Arbitral Tribunal – Stationery
Purchase Committee comprising of 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 are ineligible to act/
continue as arbitrators in view of sub-section (5) of Section 12 read with
Seventh
Schedule of the Arbitration Act, 1996 and therefore a fresh
arbitrator under the provisions of the Arbitration Act, 1996 is to be
appointed to adjudicate upon and resolve the dispute between the parties.
11. Instead of remanding the matter to the High Court to name
the arbitrator, we appoint Justice Abhay Manohar Sapre, a former Judge
of this Court to act as an arbitrator to adjudicate upon/resolve the dispute
between the parties. We hope and trust that the learned arbitrator shall
conclude the arbitration proceedings and declare the award at the earliest
considering the fact that the dispute between the parties is pending since
the year 2000. Both the parties shall appear before the learned arbitrator,
at the first instance, within a period of four weeks from today. A copy of
this judgment shall be forwarded to the newly appointed arbitrator.
12. The present appeal is accordingly allowed. However, in the
facts and circumstances of the case, there shall be no order as to costs.
Devika Gujral and Amarendra Kumar
Appeal allowed.
(Assisted by : Iram Jan, LCRA)
ELLORA PAPER MILLS LIMITED v. THE STATE OF MADHYA
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