caselaws
Supreme Court of India
Ellora Paper Mills Limited vs The State Of Madhya Pradesh on 4 January, 2022Author: M.R. Shah
Bench: M.R. Shah, B.V. Nagarathna
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 7697 OF 2021
Ellora Paper Mills Limited …Appellant
Versus
The State of Madhya Pradesh …Respondent
J UD G M E N T
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
Signature Not Verified
Digitally signed by R
Natarajan
Arbitration and Conciliation Act, 1996 (hereinafter referred to as the
Date: 2022.01.04
16:52:35 IST
Reason:
‘Arbitration Act, 1996’) seeking termination of the mandate of originally
1
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.
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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 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
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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 could not appoint another person as arbitrator. It
was also contended that the original members of the Arbitral Tribunal,
4
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
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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
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
6
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.
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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 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
8
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
9
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.
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
10
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
12
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 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
13
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 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:
14
“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
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
15
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
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
16
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 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*
17
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 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
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
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
19
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 only way in which this
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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
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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 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.”
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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 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.
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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
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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.
…………………………………..J. [M.R. SHAH]
NEW DELHI; …………………………………..J.
JANUARY 04, 2022. [B.V. NAGARATHNA]
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