Author DefaultTo apply or not to apply, Section 12(5) of Arbitration and Conciliation Act: That is the question!
-By Ms. Aasthita Dutta Majumder, Rizvi Law College, University of Mumbai
The Law Commission of India via the Arbitration and Conciliation Bill, 2015, introduced some much-needed revisions in the Arbitration and Conciliation Act, 1996, (The Act) which inter alia envisaged strengthening of the arbitration regime. Pursuant to this amended Act, a significant change was incorporated in the form of Section 12(5) that was responsible for ensuring “neutrality of arbitrators”.
On 4th January 2022, the Supreme Court of India in Ellora Paper Mills Limited v. The State of Madhya Pradesh laid down a decision involving appointment of a new arbitrator subsequent to the termination of mandate of an originally constituted Arbitral tribunal, with regards to Section 12(5) of the Act.
This aforesaid judgment clarified the position of law under Section 12(5) of the Act whilst being caught under the dilemma of choosing between the binding nature of contracts and procedural fairness coupled with the question of retrospective application of Section 12(5) of the Act.
The Facts
In 1993, both the parties entered into a contract wherein Ellora Paper Mills Limited (Appellant) was to supply cream wove paper and duplicating paper to the State of Madhya Pradesh (Respondent). Shortly, disputes arose between them. According to the Appellant, even though it supplied certain amounts of cream wove paper and duplicating paper, the Respondent refused to make the requisite payment as per the terms of the contract.
Subsequently, the Appellant filed a recovery suit before the Civil Court of Bhopal wherein an application under Section 8 of the Act was made by the Respondent 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 application. Owing to this, the Respondent filed a revision petition before the High Court which came to be allowed, thereby referring the parties to arbitration by the Stationery Purchase Committee comprising of the officers of the Respondent.
After a series of unsuccessful appeals, the Appellant filed an application before the High Court under Section 14 read with Sections 11 & 15 of the Act seeking termination of the mandate of originally constituted Arbitral Tribunal contending that officers constituting the Stationery Purchase Committee, being the employees of the Respondent had rendered themselves ineligible to continue as arbitrators as per Section 12(5) of the Act.
The Impugned Order
The High Court rejecting the submissions of the Appellant opined 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.
Feeling aggrieved by the Impugned Order passed by the High Court, the Appellant preferred an appeal before the Supreme Court of India.
The Adjudgment
The Supreme Court of India setting aside the Impugned Order held that, as per Section 12(5) read with Seventh Schedule of the Amendment Act, 2015, the arbitral tribunal consisting of officers of the Respondent had lost their mandate to continue as arbitrators and a fresh arbitrator had to be appointed under the provisions of the Arbitration Act, 1996.
The Hon’ble Court primarily dealt with the following questions while giving the aforesaid decision;
1. Whether the Arbitral Tribunal consisting of the officers of the Respondent had lost the mandate, considering Section 12(5) read with Seventh Schedule of the Arbitration Act, 1996?
The Hon’ble Court after careful perusal of the chronology of events stated that, the arbitration proceedings did not commence even after the arbitral tribunal was duly constituted as per the Impugned Order of the High Court and no further steps had been taken in the arbitration proceedings. Hence, technically arbitration proceedings had not commenced as averred by the Respondent.
With regards to the submission of the Respondent, wherein it asserts that, the Appellant participated in the arbitration proceedings and hence couldn’t approach the Court declaring ineligibility of the arbitral tribunal and subsequent appointment of fresh arbitrator, had no merit. To clarify the same, reliance was placed on Bharat Broadband Network Limited v. United Telecoms Limited, wherein the Hon’ble Court remarked that, the only way ineligibility could be removed is when there exists an “express agreement” i.e there shall be an agreement in writing between parties after disputes have arisen between them, to waive off the applicability of Section 12(5) of the Act.
Further, the bench relied on Trf Ltd. v. Energo Engineering Projects Ltd to highlight the very purpose and importance of the amended provision that provides for impartial arbitration proceedings.
Considering the facts and merits of the case, the Hon’ble Court opined that, the arbitral tribunal comprising the officers of the Respondent had become ineligible to continue as arbitrators as per Section 12(5) read with Seventh Schedule of the Arbitration Act, 1996.
2. If the Arbitral Tribunal had indeed lost its mandate, whether a fresh arbitrator had to be appointed as per the Arbitration Act, 1996?
The Hon’ble Court relying on Voestalpine Schienen GMBH v. Delhi Metro Rail Corporation Limited highlighted the essence of Section 12(5) of the Act and opined that any agreement that is contrary to the amended provision is untenable and, in such cases, the courts are empowered to appoint an arbitrator if it finds fit.
The learned judges further, reiterating the concept of “neutrality of arbitrators” stated that rule against bias is of cardinal importance and anything contrary to the principles of natural justice is grossly violative towards the independence and impartiality of the arbitration proceedings.
Lastly, the Hon’ble Court drew attention to the effect of the non-obstante clause contained in sub-section (5) of Section 12 and the fact that, in such case, the other party cannot insist upon the appointment of the arbitrator in terms of the arbitration agreement.
As per the aforementioned remarks, it was held that the arbitral tribunal had lost its mandate and therefore a fresh arbitrator had to be appointed as per the Arbitration Act, 1996.
The Analysis
The Supreme Court of India in this judgment has rightly interpreted the effect of the non-obstante clause that Section 12(5) of the Act has, by expounding that; any agreement that is in contrast to such a clause shall be contra legem and void. Additionally, the Hon’ble Court has duly upheld the principle of “rule against bias” and the importance of procedural fairness over the binding nature of contracts between parties.
It is pertinent to note that there exists a considerable level of judicial intervention in arbitration proceedings but there is a plausible question that arises pertaining to the extent of the same. We know, that Arbitration as a form of dispute resolution mechanism aims to provide cost-effective and speedy resolutions. However, when parties to disputes are faced with a situation wherein, the mandate of an arbitrator gets terminated (contrary to their original agreement), the very purpose of having a consensus ad idem between the parties gets diluted.
In such cases, the institution of fresh arbitration proceedings leads to additional arbitration costs not to mention the delay and the wastage of various legal resources. Hence, the judicial intervention and resolution of courts ideally should be to an extent wherein, it doesn’t dilute and render the process of arbitration futile and ineffectual.
Sayyam Jain