ELLORA PAPER MILLS LIMITED versus THE STATE OF MADHYA PRADESH on 4 January 2022

[2022] 16 S.C.R. 399

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 SeventhSchedule – 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 ofthe originally constituted Arbitral Tribunal called as “StationeryPurchase Committee” on the ground that the Committee comprisedof officers of the Respondent and as such had rendered themselvesineligible to continue as arbitrators in view of s.12(5) read withSeventh Schedule – The petition further requested for the–appointment of a new arbitrator High Court held that theAmendment Act, 2015 which inserted s.12(5) was effective w.e.f.23.10.2015 and could not have retrospective operation in thearbitration proceedings already commenced unless the partiesotherwise agreed and therefore when in the present case the ArbitralTribunal was constituted much prior to the Amendment Act, 2015and the Arbitral Tribunal commenced its proceedings, s.12(5) wasnot applicable – Held: The Arbitral Tribunal-Stationery PurchaseCommittee consisted of officers of the Respondent-State – Therefore,as per Amendment Act, 2015 - sub-section (5) of s.12 r/w SeventhSchedule, all of them became ineligible to become arbitrators andto continue as arbitrators – s.12 was amended by Amendment Act,2015 based on recommendations of the Law Commission, whichspecifically dealt with the issue of “neutrality of arbitrators” – Toachieve the main purpose for amending the provision, namely, toprovide for “neutrality of arbitrators”, sub-section (5) of s.12 laysdown that notwithstanding any prior agreement to the contrary,any person whose relationship with the parties or counsel or thesubject matter of the dispute falls under any of the categoriesspecified in the Seventh Schedule, he shall be ineligible to beappointed as an arbitrator – In such an eventuality, i.e., when thearbitration clause is found to be foul with the amended provision,

399

A

B

CDEF

GH

Athe appointment of the arbitrator would be beyond the pale of thearbitration agreement, empowering the Court to appoint such anarbitrator as may be permissible – That would be the effect of thenon obstante clause contained in sub-section (5) of s.12 and theother party cannot insist upon the appointment of the arbitrator interms of the arbitration agreement – In the present case, theBStationery Purchase Committee-Arbitral Tribunal comprising ofofficers 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 cannotbe permitted to continue and therefore a fresh arbitrator has to beCappointed as per the Arbitration and Conciliation Act, 1996.

Allowing the appeal, the Court

HELD:1.1. The present application was preferred beforethe High Court invoking Section 14 read with sections 11 and 15of the Arbitration Act, 1966 seeking termination of the mandateDof the originally constituted Arbitral Tribunal and to appoint anew arbitrator. However, the fact remains that after theconstitution of the Arbitral Tribunal in the year 2001, no furthersteps whatsoever were taken in arbitration proceedings andtherefore technically it could not be said that the arbitrationEproceedings by the Arbitral tribunal- Stationery PurchaseCommittee commenced. [Para 6][408-E-H]

1.2. The Arbitral Tribunal-Stationery Purchase Committeeconsisted of officers of the Respondent-State. Therefore, as perAmendment Act, 2015-Sub-section (5) of Section 12 read withFSeventh Schedule, all of them have become ineligible to becomearbitrators and to continue as arbitrators. Section 12 has beenamended by Amendment Act, 2015 based on therecommendations of the Law Commission, which specifically dealtwith the issue of “neutrality of arbitrators”. To achieve the mainpurpose for amending the provision, namely, to provide forG“neutrality of arbitrators”, sub-section (5) of Section 12 lays downthat notwithstanding any prior agreement to the contrary, anyperson whose relationship with the parties or counsel or thesubject matter of the dispute falls under any of the categoriesspecified in the Seventh Schedule, he shall be ineligible to beH

appointed as an arbitrator. In such an eventuality, i.e., when thearbitration clause is found to be foul with the amended provision,the appointment of the arbitrator would be beyond the pale of thearbitration agreement, empowering the Court to appoint such anarbitrator as may be permissible. That would be the effect of thenon obstante clause contained in sub-section (5) of Section 12and the other party cannot insist upon the appointment of thearbitrator in terms of the arbitration agreement. It cannot bedisputed that in the present case, the employees of the Respondentas Members, has lost its mandate by operation of law in view ofSection 12(5) read with Seventh Schedule. [Para 7][409-A-E]

1.3. A former Judge of Supreme Court is appointed to actas an arbitrator to adjudicate upon/resolve the dispute betweenthe parties. [Para 11][419-F]

TRF Limited v. Energo Engineering Projects Limited(2017) 8 SCC 377 : [2017] 7 SCR 409 and BharatBroadband Network Limited v. United Telecoms Limited(2019) 5 SCC 755 : [2019] 6 SCR 97 – relied on.

Voestalpine Schienen GMBH v. Delhi Metro RailCorporation Limited (2017) 4 SCC 665 : [2017] 1 SCR798; Aravali Power Co. Power Ltd. v. Era InfraEngineering (2017) 15 SCC 32; Indian Oil CorporationLtd. 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. ParmarConstruction Co. (2019) 15 SCC 682 : [2019] 5 SCR1009; Union of India v. Pradeep Vinod ConstructionCo. (2020) 2 SCC 464 : [2012] 17 SCR 64; S. P. SinglaConstructions Pvt. Ltd. v. State of Himachal Pradesh(2019) 2 SCC 488 : [2018] 14 SCR 1005; ExecutiveEngineer, Irrigation Division, Puri v. GangaramChhapolia (1984) 3 SCC 627; Secretary to GovernmentTransport Department, Madras v. Munusamy Mudaliar(1988) Supp SCC 651 : [1988] 2 Suppl. SCR 673;International Authority of India v. K. D. Bali (1988) 2

AB

C

D

E

F

G

H

ASCC 360 : [1988] 3 SCR 370; S. Rajan v. State ofKerala (1992) 3 SCC 608 : [1992] 3 SCR 649; IndianDrugs & Pharmaceuticals v. Indo-Swiss Synthetics GermManufacturing Co. Ltd. (1996) 1 SCC 54 : [1995] 5Suppl. SCR 180; Denel (Proprietary) Ltd. v. Govt. ofIndia, Ministry of Defence (2012) 2 SCC 759 : [2012]B2 SCR 897; Bipromasz Bipron Trading SA v. BharatElectronics 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 –Creferred to.

H

ELLORA PAPER MILLS LIMITED v. THE STATE OF MADHYAPRADESH

From the Judgment and Order dated 27.08.2021 of the High Courtof Judicature for Madhya Pradesh at Jabalpur in Arbitration Case No.100 of 2019.

Sandeep Bajaj, Soayib Qureshi, Ms. Vipul Jai, Advs. for theAppellant.

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 judgmentand order dated 27.08.2021 passed by the High Court of Madhya Pradeshin A.C. No. 100/2019, by which the application preferred by the appellantunder Section 14 read with Sections 11 and 15 of the Arbitration andConciliation Act, 1996 (hereinafter referred to as the ‘Arbitration Act,1996’) seeking termination of the mandate of originally constituted ArbitralTribunal and to appoint a new arbitrator has been dismissed, the originalapplicant before the High Court has preferred the present appeal.

2. That the respondent herein issued a tender for supply of thecream wove paper and duplicating paper for the year 1993-94. Theappellant herein participated in the said tender process and was awardedthe contract vide supply order dated 22.09.1993. A dispute arose betweenthe appellant and the respondent. According to the appellant herein, thoughit supplied 420 MT of cream wove paper and 238 MT of duplicatingpaper to the respondent, the latter not only did not make the payment of90% of the amount as per the terms of the contract, but also rejectedsome consignments without any justification, causing loss to it. Therespondent herein vide letter dated 15.11.1993 informed the appellantthat the paper supplied by it did not conform to the specification andtherefore could not be utilized.

2.1 Thereafter, the appellant herein filed a civil suit in the year1994 seeking the relief of permanent injunction against the respondent inthe Civil Court at Bhopal seeking to restrain it from awarding the supplyorder to a third party. The respondent, in the meantime, awarded thecontract to the third party for the remaining supply. Therefore, theaforesaid civil suit became infructuous.

2.2 The appellant thereafter filed another suit seeking recoveryof an amount of Rs.95,32,103/- bearing Civil Suit No. 2-B/1998 before A

B

CD

E

FG

H

Athe Civil Court at Bhopal. In the said suit, the respondent preferred anapplication under Section 8 of the Arbitration Act, 1996 seeking stay ofthe proceedings on the ground that there exists an arbitration clause inthe agreement between the parties. The Civil Court rejected the saidapplication vide order dated 27.02.1999. The respondent filed revisionpetition No. 1117/1999 before the High Court which came to be allowedBby the High Court vide order dated 03.05.2000. The High Court referredthe parties to arbitration by the Stationery Purchase Committee comprisingof the officers of the respondent.

2.3 Against the order passed by the High Court allowing the revisionpetition and referring the parties to the arbitration, the appellant hereinCfiled a special leave petition bearing S.L.P.(Civil) No. 13914/2000 beforethis Court. The same came to be dismissed as withdrawn vide orderdated 28.09.2000.

2.4 The Arbitral Tribunal was constituted called as “StationeryPurchase Committee” comprising the officers of the respondent. TheDappellant filed its objections to the constitution of the Arbitral Tribunal/Stationery Purchase Committee on 12.09.2000. The appellant hereinalso challenged its jurisdiction by filing an application under Section 13of the Arbitration Act, 1996. The Arbitral Tribunal vide order dated2.2.2001 rejected the said application. Aggrieved thereby, the appellantEherein filed a writ petition before the High Court being Writ Petition No.1824/2001 which came to be dismissed vide order dated 24.01.2017with liberty to the appellant to raise objections before the appropriateforum.

2.5 Subsequently, the appellant filed the present application beforeFthe High Court being AC No. 100/2019 under Section 14 read withSections 11 & 15 of the Arbitration Act, 1996 seeking termination of themandate of originally constituted Arbitral Tribunal – Stationery PurchaseCommittee comprising of officers of the respondent and for appointmentof a new arbitrator. Before the High Court, the appellant herein heavilyrelied upon Section 12(5) of the Arbitration Act, 1996. Relying upon theGdecision of this Court in the case of TRF Limited v. Energo EngineeringProjects Limited, reported in (2017) 8 SCC 377, it was submitted onbehalf of the appellant that all the five officers constituting the StationeryPurchase Committee, being the employees of the respondent hadrendered themselves ineligible to continue as arbitrators. It was submittedHthat since they had become ineligible to continue as arbitrators, they also could not appoint another person as arbitrator. It was also contendedthat the original members of the Arbitral Tribunal, who initiated theproceedings had since ceased to hold their respective offices, in anycase, a new Arbitral Tribunal had to be constituted and therefore animpartial and independent arbitrator was required to be appointed in termsof Section 11 of the Arbitration Act, 1996.

2.6 However, after referring to and considering the decisions ofthis Court in the cases of Aravali Power Co. Power Ltd. v. Era InfraEngineering, reported in (2017) 15 SCC 32; Indian Oil CorporationLtd. 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, reportedin (2004) 10 SCC 504; Union of India v. Parmar ConstructionCompany, reported in (2019) 15 SCC 682; Union of India v. PradeepVinod Construction Company, reported in (2020) 2 SCC 464; andS.P. Singla Constructions Pvt. Ltd. v. State of Himachal Pradesh,reported in (2019) 2 SCC 488, the High Court has not agreed with thesubmission(s) on behalf of the appellant. Referring to the aforesaiddecisions of this Court, it is observed and held by the High Court that theAmendment Act, 2015 shall be made effective w.e.f. 23.10.2015 andcannot have retrospective operation in the arbitration proceedings alreadycommenced unless the parties otherwise agree and therefore when inthe present case the Arbitral Tribunal was constituted much prior to theAmendment Act, 2015 and the Arbitral Tribunal commenced itsproceedings, the Amendment Act, 2015 – Section 12(5) of the ArbitrationAct, 2016 shall not be applicable. Observing so, the High Court by theimpugned judgment and order has dismissed the application filed by theappellant herein under Section 14 read with Sections 11 & 15 of theArbitration Act, 1996 and has observed that it would be open for theappellant to participate in proceedings before the Arbitral Tribunalconstituted by the respondent as Stationery Purchase Committee.

2.7 Feeling aggrieved and dissatisfied with the impugned judgmentand order passed by the High Court, the original applicant before theHigh Court has preferred the present appeal.

3. Shri Sandeep Bajaj, learned Advocate appearing on behalf ofthe appellant has vehemently submitted that the impugned judgment andorder passed by the High Court rejecting the application submitted bythe appellant under Section 14 read with Sections 11 & 15 of the AB

C

D

E

F

G

H

AArbitration Act, 1996 is just contrary to the recent decision of this Courtin the case of Jaipur Zila Dugdh Utpadak Sahkari Sangh Limited v.Ajay Sales & Suppliers, 2021 SCC OnLine SC 730. It is submittedthat as held by this Court in the aforesaid decision, in view of the mandateunder sub-section (5) of Section 12 read with Seventh Schedule, theArbitral Tribunal constituted in the present case – Stationery PurchaseBCommittee consisting of the officers of the respondent has lost itsmandate. It is submitted that continuation of such Arbitral Tribunal wouldbe frustrating the object and purpose of the Amendment Act, 2015, bywhich sub-section (5) to Section 12 read with Seventh Schedule wasinserted. It is submitted that as held by this Court, Section 12 has beenCamended by Amendment Act, 2015 to provide for ‘neutrality of arbitrators’and in order to achieve this, sub-section (5) to Section 12 provides thatnotwithstanding any prior agreement to the contrary, any person whoserelationship with the parties or counsel or the subject matter of the disputefalls under any of the categories specified in the Seventh Schedule, heshall be ineligible to be appointed as an arbitrator.D3.1 It is submitted that in the aforesaid decision, this Courtnegatived the submission that once the contractor participated in thearbitration proceedings before the Arbitral Tribunal by filing a statementof claim, thereafter it would not be open for him to approach the Courtinvoking sub-section (5) to Section 12 and pray for appointment of aEfresh Arbitral Tribunal. It is submitted that unless and until there is anexpress agreement in writing to continue with the arbitration proceedingsby the earlier Arbitral Tribunal, such an application to terminate themandate of the earlier Arbitral Tribunal and to appoint a fresh arbitratorwould be maintainable.F

3.2 It is further submitted by the learned counsel appearing onbehalf of the appellant that in the present case, as such, the High Courthas committed a grave error in observing and holding that the arbitrationproceedings before the Stationery Purchase Committee – ArbitralTribunal had commenced and that the appellant had participated. It isGurged that in the present case, the Stationery Purchase Committee –arbitral Tribunal did not commence the arbitration proceedings in viewof 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 infact the earlier incumbents of the Stationery Purchase Committee –Arbitral Tribunal retired and no steps were taken to constitute a freshH

Arbitral Tribunal. It is therefore contended, it cannot be said that anyfurther steps were taken by the earlier Arbitral Tribunal in the arbitrationproceedings. It is submitted that in any case in view of the mandateunder Section 12(5) read with Seventh Schedule, the members of theearlier Arbitral Tribunal have lost their mandate and are ineligible tocontinue as members of the Arbitral Tribunal and therefore a fresh ArbitralTribunal is to be constituted.

4. While opposing the present appeal, Shri Nachiketa Joshi, learnedAdvocate appearing on behalf of the respondent-State has vehementlysubmitted that in the facts and circumstances of the case and moreparticularly when the Arbitral Tribunal as per the agreement enteredinto between the parties was constituted in the year 2000, the High Courthas rightly refused to appoint a fresh Arbitral Tribunal by holding thatSection 12(5) read with Seventh Schedule which has been inserted inthe statute by Amendment Act, 2015 w.e.f. 23.10.2015 shall not beapplicable retrospectively.

4.1 It is submitted that in the present case, on one ground or theother, and by initiating the proceedings one after another, the appellantdid not permit the earlier Arbitral Tribunal to proceed further with thearbitration proceedings.

4.2 It is urged that the impugned judgment and order passed bythe High Court is a well-reasoned order after considering catena ofdecisions of this Court referred to in the impugned order and thereforethe same may not be interfered with by this Court.

4.3 Learned counsel appearing on behalf of the respondent hasalso submitted that in the facts and circumstances of the case, the decisionof this Court in the case of Jaipur Zila Dugdh Utpadak Sahkari SanghLimited (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 appointedapproximately 20 years prior thereto and thereafter the arbitrationproceedings commenced and even the appellant also participated. It istherefore contended that the amended Section 12(5) of the ArbitrationAct which is brought in the statute by way of amendment in 2015 shallnot be applicable retrospectively. It is submitted that Section 12(5) of theArbitration Act shall have to be made applicable prospectively.

A

B

C

D

E

F

G

H

A5. We have heard the learned counsel for the respective partiesat length. Having heard learned counsel for the respective parties andon considering the impugned judgment and order passed by the HighCourt, the short question which is posed for consideration of this Courtis, whether, the Stationery Purchase Committee – Arbitral Tribunalconsisting of the officers of the respondent has lost the mandate,Bconsidering Section 12(5) read with Seventh Schedule of the ArbitrationAct, 1996. If the answer is in the affirmative, in that case, whether afresh arbitrator has to be appointed as per the Arbitration Act, 1996?

6. It is not in dispute that the High Court earlier constituted theArbitral Tribunal of Stationery Purchase Committee comprising of officersCof the respondent, viz, Additional Secretary, Department of Revenue asPresident and (i) Deputy Secretary, Department of Revenue, (ii) DeputySecretary, General Administration Department, (iii) Deputy Secretary,Department of Finance, (iv) Deputy Secretary/Under Secretary, GeneralAdministration Department and (v) Senior Deputy Controller of HeadDOffice, Printing as Members. It may be true that the earlier ArbitralTribunal – Stationery Purchase Committee was constituted as per theagreement entered into between the parties. It is also true that initiallythe said Arbitral Tribunal was constituted by the High Court in the year2001, however, thereafter Stationery Purchase Committee – ArbitralTribunal could not commence the arbitration proceedings in view of numberEof proceedings initiated by the appellant. There was a stay granted bythe High Court from 4.5.2001 to 24.01.2017 and thereafter in the year2019, the present application was preferred before the High Court invokingSection 14 read with Sections 11 & 15 of the Arbitration Act, 1996 seekingtermination of the mandate of the originally constituted Arbitral TribunalFand to appoint a new arbitrator. It has also come on record that inbetween, the officers who were members of the Stationery PurchaseCommittee – Arbitral Tribunal had retired. At this stage, we are notconsidering whether those persons could have been continued asmembers of the Stationery Purchase Committee – Arbitral or not.

However, the fact remains that after the constitution of the ArbitralGTribunal in the year 2001, no further steps whatsoever have been takenin the arbitration proceedings and therefore technically it cannot be saidthat the arbitration proceedings by the Arbitral Tribunal – StationeryPurchase Committee has commenced.

7. As observed hereinabove, the Arbitral Tribunal – StationeryPurchase Committee consisted of officers of the respondent-State.Therefore, as per Amendment Act, 2015 – Sub-section (5) of Section 12read with Seventh Schedule, all of them have become ineligible to becomearbitrators and to continue as arbitrators. Section 12 has been amendedby Amendment Act, 2015 based on the recommendations of the LawCommission, which specifically dealt with the issue of “neutrality ofarbitrators”. To achieve the main purpose for amending the provision,namely, to provide for “neutrality of arbitrators”, sub-section (5) of Section12 lays down that notwithstanding any prior agreement to the contrary,any person whose relationship with the parties or counsel or the subjectmatter of the dispute falls under any of the categories specified in theSeventh Schedule, he shall be ineligible to be appointed as an arbitrator.In such an eventuality, i.e., when the arbitration clause is found to befoul with the amended provision, the appointment of the arbitrator wouldbe beyond the pale of the arbitration agreement, empowering the Courtto appoint such an arbitrator as may be permissible. That would be theeffect of the non obstante clause contained in sub-section (5) of Section12 and the other party cannot insist upon the appointment of the arbitratorin terms of the arbitration agreement. It cannot be disputed that in thepresent case, the Stationery Purchase Committee -Arbitral Tribunalcomprising of officers of the respondent-State are all ineligible to becomeand/or to continue as arbitrators in view of the mandate of sub-section(5) of Section 12 read with Seventh Schedule. Therefore, by operationof 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 AdministrationDepartment, (iii) Deputy Secretary, Department of Finance, (iv) DeputySecretary/Under Secretary, General Administration Department and (v)Senior Deputy Controller of Head Office, Printing as Members, has lostits mandate and such an Arbitral Tribunal cannot be permitted to continueand therefore a fresh arbitrator has to be appointed as per ArbitrationAct, 1996.

8. An identical question came to be considered by this Court inthe case of Jaipur Zila Dugdh Utpadak Sahkari Sangh Limited(supra), and after considering the decisions of this Court in the case of ABC

DEF

G

H

ATRF (supra) and other decisions on the point, in paragraphs 13, 14and 15, it is observed and held as under:

“13. So far as the submission on behalf of the petitioners that theagreement was prior to the insertion of Sub-section (5) of Section12 read with Seventh Schedule to the Act and therefore thedisqualification under Sub-section (5) of Section 12 read withSeventh Schedule to the Act shall not be applicable and that oncean arbitrator - Chairman started the arbitration proceedingsthereafter the High Court is not justified in appointing an arbitratorare concerned the aforesaid has no substance and can to beaccepted in view of the decision of this Court in Trf Ltd. v. EnergoEngineering Projects Ltd., (2017) 8 SCC 377; BharatBroadband Network Limited v. United Telecoms Limited, (2019)5 SCC 755; Voestalpine Schienen GMBH v. Delhi Metro RailCorporation Limited, (2017) 4 SCC 665. In the aforesaiddecisions this Court had an occasion to consider in detail the objectand purpose of insertion of Subsection (5) of Section 12 read withSeventh Schedule to the Act. In the case of Voestalpine SchienenGMBH (Supra) it is observed and held by this Court that the mainpurpose for amending the provision was to provide for ‘neutralityof arbitrators’. It is further observed that in order to achieve this,Sub-section (5) of Section 12 lays down that notwithstanding any B

C

D

E

prior agreement to the contrary, any person whose relationshipwith the parties or counsel or the subject-matter of the disputefalls under any of the categories specified in the Seventh Schedule,he shall be ineligible to be appointed as an arbitrator. It is furtherobserved that in such an eventuality i.e. when the arbitration clauseFfinds foul with the amended provisions (Sub-section (5) of Section12 read with Seventh Schedule) the appointment of an arbitratorwould be beyond pale of the arbitration agreement, empoweringthe court to appoint such arbitrator as may be permissible. It isfurther observed that, that would be the effect of non obstanteclause contained in sub-section (5) of Section 12 and the otherGparty cannot insist on appointment of the arbitrator in terms of thearbitration agreement.

14. It is further observed and held by this Court in the aforesaiddecision that independence and impartiality of the arbitrator arethe hallmarks of any arbitration proceedings. Rule against bias is H

one of the fundamental principles of natural justice which apply toall judicial and quasi-judicial proceedings. It is further observedthat it is for this reason that notwithstanding the fact thatrelationship between the parties, to the arbitration and thearbitrators themselves are contractual in nature and the source ofan arbitrator’s appointment is deduced from the agreement enteredinto between the parties, notwithstanding the same non-independence and non-impartiality of such arbitrator would renderhim ineligible to conduct the arbitration. It is further observed thatthe genesis behind this rational is that even when an arbitrator isappointed in terms of contract and by the parties to the contract,he is independent of the parties. In paragraphs 16 to 18 it isobserved and held as under:

“16. Apart from other amendments, Section 12 was also amendedand the amended provision has already been reproduced above.This amendment is also based on the recommendation of the LawCommission which specifically dealt with the issue of ‘neutralityof arbitrators’ and a discussion in this behalf is contained in paras53 to 60 and we would like to reproduce the entire discussionhereinbelow:

“NEUTRALITY OF ARBITRATORS

53. It is universally accepted that any quasi-judicial process,including the arbitration process, must be in accordance withprinciples of natural justice. In the context of arbitration, neutralityof arbitrators, viz. their independence and impartiality, is critical tothe 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 tohis 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 isclear that there can be many such circumstances and situations.The test is not whether, given the circumstances, there is anyactual bias for that is setting the bar too high; but, whether the AB

C

D

E

F

G

H

A

B

C

D

E

F

G

H

circumstances in question give rise to any justifiable apprehensionsof bias.

56. The limits of this provision has been tested in the IndianSupreme Court in the context of contracts with State entitiesnaming particular persons/designations (associated with that entity)as a potential arbitrator. It appears to be settled by a series ofdecisions of the Supreme Court (See Executive Engineer,Irrigation Division, Puri v. Gangaram Chhapolia, (1984) 3SCC 627; Secretary to Government Transport Department,Madras v. Munusamy Mudaliar, 1988 Supp SCC 651;International Authority of India v. K.D. Bali, (1988) 2 SCC360; S. Rajan v. State of Kerala, (1992) 3 SCC 608; IndianDrugs & Pharmaceuticals v. Indo-Swiss Synthetics GermManufacturing Co. Ltd., (1996) 1 SCC 54; Union of Indiav. 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 providefor arbitration by a serving employee of the department, are validand enforceable. While the Supreme Court, in Indian Oil Corp.Ltd. v. Raja Transport (P) Ltd., (2009) 8 SCC 520 carved out aminor exception in situations when the arbitrator “was the controlling or dealing authority in regard to the subjectcontract or if he is a direct subordinate (as contrasted from anofficer of an inferior rank in some other department) to theofficer whose decision is the subject matter of the dispute”(SCC p. 533, para 34) and this exception was used by theSupreme Court in Denel (Proprietary) Ltd. v. Govt. of India,Ministry of Defence, (2012) 2 SCC 759 : AIR 2012 SC817 and Bipromasz Bipron Trading SA v. Bharat ElectronicsLtd., (2012) 6 SCC 384, to appoint an independent arbitratorunder section 11, this is not enough.

57. The balance between procedural fairness and binding natureof these contracts, appears to have been tilted in favour of thelatter by the Supreme Court, and the Commission believes thepresent position of law is far from 18 satisfactory. Since theprinciples of impartiality and independence cannot be discardedat any stage of the proceedings, specifically at the stage ofconstitution of the arbitral tribunal, it would be incongruous to say

that party autonomy can be exercised in complete disregard ofthese principles - even if the same has been agreed prior to thedisputes having arisen between the parties. There are certainminimum levels of independence and impartiality that should berequired of the arbitral process regardless of the parties’ apparentagreement. A sensible law cannot, for instance, permit appointmentof an arbitrator who is himself a party to the dispute, or who isemployed by (or similarly dependent on) one party, even if this iswhat the parties agreed. The Commission hastens to add that Mr.PK Malhotra, the ex officio member of the Law Commissionsuggested having an exception for the State, and allow State partiesto appoint employee arbitrators. The Commission is of the opinionthat, on this issue, there cannot be any distinction between Stateand non-State parties. The concept of party autonomy cannot bestretched to a point where it negates the very basis of havingimpartial and independent adjudicators for resolution of disputes.In fact, when the party appointing an adjudicator is the State, theduty to appoint an impartial and independent adjudicator is thatmuch more onerous - and the right to natural justice cannot besaid to have been waived only on the basis of a “prior” agreementbetween the parties at the time of the contract and before arisingof the disputes.

58. Large-scale amendments have been suggested to address thisfundamental issue of neutrality of arbitrators, which theCommission believes is critical to the functioning of the arbitrationprocess in India. In particular, amendments have been proposedto sections 11, 12 and 14 of the Act.

59. The Commission has proposed the requirement of havingspecific disclosures by the arbitrator, at the stage of his *possible*appointment, regarding existence of any relationship or interest ofany kind which is likely to give rise to justifiable doubts. TheCommission has proposed the incorporation of the Fourth Schedule,which has drawn from the red and orange lists of the IBAGuidelines on Conflicts of Interest in International Arbitration, andwhich would be treated as a “guide” to determine whethercircumstances exist which give rise to such justifiable doubts. Onthe other hand, in terms of the proposed section 12(5) of the Actand the Fifth Schedule which incorporates the categories from AB

C

D

E

F

G

H

A

B

C

D

E

F

G

H

the red list of the IBA Guidelines (as above), the person proposedto be appointed as an arbitrator shall be *ineligible* to be soappointed, notwithstanding any prior agreement to the contrary.In the event such an ineligible person is purported to be appointedas an arbitrator, he shall be de jure deemed to be unable to performhis functions, in terms of the proposed explanation to section 14.Therefore, while the *disclosure* is required with respect to abroader list of categories (as set out in the Fourth Schedule, andas based on the Red and Orange lists of the IBA Guidelines), the*ineligibility* to be appointed as an arbitrator (and the consequentde jure inability to so act) follows from a smaller and more serioussub-set of situations (as set out in the Fifth Schedule, and as basedon 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, partiesshould be allowed to waive even the categories of ineligibility asset in the proposed Fifth Schedule. This could be in situations offamily arbitrations or other arbitrations where a person commandsthe blind faith and trust of the parties to the dispute, despite theexistence of objective “justifiable doubts” regarding hisindependence and impartiality. To deal with such situations, theCommission has proposed the proviso to section 12(5), whereparties may, subsequent to disputes having arisen between them,waive the applicability of the proposed section 12(5) by an expressagreement in writing. In all other cases, the general rule in theproposed section 12(5) must be followed. In the event the HighCourt is approached in connection with appointment of an arbitrator,the Commission has proposed seeking the disclosure in terms ofsection 12(1) and in which context the High Court or the designateis to have “due regard” to the contents of such disclosure inappointing the arbitrator.”

(emphasis supplied)

17. We may put a note of clarification here. Though, the LawCommission discussed the aforesaid aspect under the heading“Neutrality of Arbitrators”, the focus of discussion was onimpartiality and independence of the arbitrators which hasrelation to or bias towards one of the parties. In the field ofinternational 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 isdifferent from that of the parties. However, that is not theaspect which is being considered and the term “neutrality”used is relatable to impartiality and independence of thearbitrators, without any bias towards any of the parties. Infact, the term “neutrality of arbitrators” is commonly used inthis context as well.

18. Keeping in mind the aforequoted recommendation of theLaw Commission, with which spirit, Section 12 has beenamended by the Amendment Act, 2015, it is manifest that themain purpose for amending the provision was to provide forneutrality of arbitrators. In order to achieve this, sub-section(5) of Section 12 lays down that notwithstanding any prioragreement to the contrary, any person whose relationship withthe parties or counsel or the subject matter of the dispute fallsunder any of the categories specified in the Seventh Schedule,he shall be ineligible to be appointed as an arbitrator. In suchan eventuality i.e. when the arbitration clause finds foul withthe amended provisions extracted above, the appointment ofan arbitrator would be beyond pale of the arbitration agreement,empowering the court to appoint such arbitrator(s) as may bepermissible. That would be the effect of non obstante clausecontained in sub-section (5) of Section 12 and the other partycannot insist on appointment of the arbitrator in terms ofarbitration agreement.”

15. In the case of Bharat Broadband Network Limited (Supra),it is observed that Sub-section (5) of Section 12 read with SeventhSchedule made it clear that if the arbitrator falls in any one of thecategories specified in the Seventh Schedule, he becomes‘ineligible’ to act as an arbitrator. It is further observed that oncehe becomes ‘ineligible’, it is clear that he then become dejureunable to perform his functions inasmuch as in law, he is regardedas ‘ineligible’. It further is observed in the said decision that wherea person becomes ineligible to be appointed as an arbitrator thereis no question of challenge to such arbitrator before such arbitratorin such a case i.e. a case which falls under Section 14(1)(a) of AB

C

D

E

F

G

H

AB

C

D

E

F

G

H

the Act gets attracted inasmuch as the arbitrator becomes, as amatter of law (i.e., de jure), unable to perform his functions underSection 12(5), being ineligible to be appointed as an arbitrator andthis being so, his mandate automatically terminates, and he shallthen be substituted by another arbitrator.”

A

B8.1 In the aforesaid decision, this Court also negatived thesubmission that as the contractor participated in the arbitration proceedingsbefore the arbitrator therefore subsequently, he ought not to haveapproached the High Court for appointment of a fresh arbitrator underSection 11 of the Arbitration Act, 1996. After referring to the decision ofthis Court in the case of Bharat Broadband Network Limited v. UnitedCTelecoms Limited, reported in (2019) 5 SCC 755, it is observed andheld in paragraph 20 as under:

“20. Now so far as the submission on behalf of the petitionersthat the respondents participated in the arbitration proceedingsbefore the sole arbitrator - Chairman and therefore he ought notDto have approached the High Court for appointment of arbitratorunder Section 11 is concerned, the same has also no substance.As held by this Court in the case of Bharat Broadband NetworkLimited (Supra) there must be an ‘express agreement’ in writingto satisfy the requirements of Section 12(5) proviso. In paragraphsE15 & 20 it is observed and held as under:

D

“15. Section 12(5), on the other hand, is a new provision whichrelates to the de jure inability of an arbitrator to act as such.Under this provision, any prior agreement to the contrary iswiped out by the non-obstante clause in Section 12(5) themoment any person whose relationship with the parties or thecounsel or the subject matter of the dispute falls under theSeventh Schedule. The sub-section then declares that suchperson shall be “ineligible” to be appointed as arbitrator. Theonly way in which this ineligibility can be removed is by theproviso, which again is a special provision which states thatparties may, subsequent to disputes having arisen betweenthem, waive the applicability of Section 12(5) by an expressagreement in writing. What is clear, therefore, is that where,under any agreement between the parties, a person falls withinany of the categories set out in the Seventh Schedule, he is, asa matter of law, ineligible to be appointed as an arbitrator. The F

G

H

only way in which this ineligibility can be removed, again, inlaw, is that parties may after disputes have arisen betweenthem, waive the applicability of this sub-section by an “expressagreement in writing”. Obviously, the “express agreement inwriting” has reference to a person who is interdicted by theSeventh Schedule, but who is stated by parties (after thedisputes have arisen between them) to be a person in whomthey have faith notwithstanding the fact that such person isinterdicted by the Seventh Schedule.

xxx xxx xxx

20. This then brings us to the applicability of the proviso to Section12(5) on the facts of this case. Unlike Section 4 of the Act whichdeals with deemed waiver of the right to object by conduct, theproviso to Section 12(5) will only apply if subsequent to disputeshaving arisen between the parties, the parties waive the applicabilityof sub-section (5) of Section 12 by an express agreement in writing.For this reason, the argument based on the analogy of Section 7of the Act must also be rejected. Section 7 deals with arbitrationagreements that must be in writing, and then explains that suchagreements may be contained in documents which provide arecord of such agreements. On the other hand, Section 12(5) refersto an “express agreement in writing”. The expression “expressagreement in writing” refers to an agreement made in words asopposed to an agreement which is to be inferred by conduct. Here,Section 9 of the Indian Contract Act, 1872 becomes important. Itstates:

“9. Promises, express and implied.—In so far as a proposal oracceptance of any promise is made in words, the promise issaid to be express. In so far as such proposal or acceptance ismade otherwise than in words, the promise is said to beimplied.” 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 beappointed as an arbitrator, still go ahead and say that they havefull faith and confidence in him to continue as such. The facts ofthe present case disclose no such express agreement. The AB

CD

E

F

G

H

Aappointment letter which is relied upon by the High Court asindicating an express agreement on the facts of the case is dated17.01.2017. On this date, the Managing Director of the appellantwas certainly not aware that Shri Khan could not be appointed byhim as Section 12(5) read with the Seventh Schedule only went tothe invalidity of the appointment of the Managing Director himselfBas an arbitrator. Shri Khan’s invalid appointment only becameclear after the declaration of the law by the Supreme Court in TRFLtd. (supra) which, as we have seen hereinabove, was only on03.07.2017. After this date, far from there being an expressagreement between the parties as to the validity of Shri Khan’sCappointment, the appellant filed an application on 07.10.2017 beforethe sole arbitrator, bringing the arbitrator’s attention to the judgmentin TRF Ltd. (supra) and asking him to declare that he has becomede jure incapable of acting as an arbitrator. Equally, the fact that astatement of claim may have been filed before the arbitrator, wouldnot mean that there is an express agreement in words which wouldDmake it clear that both parties wish Shri Khan to continue asarbitrator despite being ineligible to act as such. This being thecase, the impugned judgment is not correct when it applies Section4, Section 7, Section 12(4), Section 13(2), and Section 16(2) ofthe Act to the facts of the present case, and goes on to state thatEthe appellant cannot be allowed to raise the issue of eligibility ofan arbitrator, having itself appointed the arbitrator. The judgmentunder appeal is also in correct in stating that there is an expresswaiver in writing from the fact that an appointment letter hasbeen issued by the appellant, and a statement of claim has beenfiled by the respondent before the arbitrator. The moment theFappellant came to know that Shri Khan’s appointment itself wouldbe invalid, it filed an application before the sole arbitrator fortermination 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 contraryGto the law laid down by this Court in the cases of TRF (supra), BharatBroadband Network Limited (supra) and the recent decision of thisCourt in the case of Jaipur Zila Dugdh Utpadak Sahkari SanghLimited (supra). It is held that the earlier Arbitral Tribunal – StationeryPurchase Committee comprising of Additional Secretary, DepartmentHof 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/UnderSecretary, General Administration Department and (v) Senior DeputyController of Head Office, Printing as Members, has lost its mandate byoperation of law in view of Section 12(5) read with Seventh Scheduleand a fresh arbitrator has to be appointed under the provisions of theArbitration Act, 1996. The impugned judgment and order passed by theHigh Court is therefore unsustainable and deserves to be quashed andset aside.

10. In view of the above and for the reasons stated above, thepresent appeal succeeds. The impugned judgment and order passed bythe 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 ACNo. 100/2019 filed by the appellant herein before the High Court is herebyallowed. It is declared that the earlier Arbitral Tribunal – StationeryPurchase Committee comprising of Additional Secretary, Departmentof Revenue as President and (i) Deputy Secretary, Department ofRevenue, (ii) Deputy Secretary, General Administration Department, (iii)Deputy Secretary, Department of Finance, (iv) Deputy Secretary/UnderSecretary, General Administration Department and (v) Senior DeputyController of Head Office, Printing as Members are ineligible to act/continue as arbitrators in view of sub-section (5) of Section 12 read withSeventh Schedule of the Arbitration Act, 1996 and therefore a fresharbitrator under the provisions of the Arbitration Act, 1996 is to beappointed to adjudicate upon and resolve the dispute between the parties.

11. Instead of remanding the matter to the High Court to namethe arbitrator, we appoint Justice Abhay Manohar Sapre, a former Judgeof this Court to act as an arbitrator to adjudicate upon/resolve the disputebetween the parties. We hope and trust that the learned arbitrator shallconclude the arbitration proceedings and declare the award at the earliestconsidering the fact that the dispute between the parties is pending sincethe 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 ofthis judgment shall be forwarded to the newly appointed arbitrator.

12. The present appeal is accordingly allowed. However, in thefacts and circumstances of the case, there shall be no order as to costs.

Devika Gujral and Amarendra Kumar(Assisted by : Iram Jan, LCRA)

Appeal allowed.

A

B

C

D

E

F

G

H