Ineligibility Of Arbitrator As Per S.12(5) Arbitration Act Can't Make Arbitration Clause Itself Invalid: Allahabad High Court:

The Allahabad High Court has held that the entire arbitration agreement will not cease to exist merely because the procedure of appointment of the arbitrator, as stated in the agreement, is barred by Section 12(5) of the Arbitration and Conciliation Act, 1996.

“Section 12(5) of the Act read with 7th Schedule has been introduced so as to lend greater legitimacy to the process of arbitration by providing for an independent person to act as arbitrator and exclude the other party from becoming a judge in their own cause,” observed Justice Ashwani Kumar Mishra.

The Court held that Section 12(5) of the Arbitration and Conciliation Act, 1996 was introduced to incorporate principles of impartiality and independence in the process of appointment of arbitrators. Thus, an arbitration clause in an agreement cannot be interpreted in a literal sense so as to exclude the arbitration itself.

Applicant was awarded contract for construction of roads near village Usmanpur which was completed on 30.6.2017. Payments were released by the authority against running bills from time to time. However, in the fourth and final bill, various deductions were made which led to the dispute.

Applicant made several requests for appointment of arbitrator which were denied by YEIDA were on the ground that the arbitration clause ceased to exist by virtue of Section 12(5) of the Act of 1996. As per Clause 33 of the Contract, the Chief Executive Officer of YEIDA alone is competent to arbitrate in the matter.

Section 12(5) of the Act provides that notwithstanding anything in prior agreements to the contrary, a person would be ineligible to be appointed arbitrator if he/she has any relationship with either party to the dispute or their counsels in terms of the Seventh Schedule of the Act, except without written consent of the parties.

Counsel for Applicant divided the arbitration agreement in two parts comprising of agreement for reference of dispute to arbitrator and the procedure to be followed in the matter on such reference. He further argued that statutory provisions Section 12(5) will override party autonomy granted in the arbitration agreement.

Further, it was argued that reference to arbitration could not be denied merely because the appointment of an arbitrator provided in the agreement was overridden by a statutory provision.

Counsel for Respondent contended that since the CEO of YEIDA could not appoint an arbitrator due to Section 12(5), the dispute could not be referred to arbitration at all. Relying upon an earlier decision of this Court in Arbitration Application No. 54 of 2017, he argued that the mandate of Section 12(5) of the Act prohibited the arbitrator from arbitrating any dispute. Further, absence of a specific clause recording consent of both parties, no reference for arbitration could be made.

The Court observed that the arbitration clause “has to be interpreted so as to cull out the real intent of the parties” even though it is worded in a way to exclude arbitration by virtue of Section 12(5).

“The agreement between the parties to refer all disputes arising out of contract to arbitrator is the core part of the agreement. The manner to appoint the arbitrator would, at best, fall in the realm of procedure. Merely because the person, who could act as an arbitrator in terms of arbitration clause becomes ineligible to act as arbitrator by virtue of Section 12(5) of the Act read with 7th Schedule, it would not mean that the core part of the agreement for referring the dispute for adjudication to arbitrator would be rendered nugatory,” held the Court.

Further, the Court held that one party cannot retain the power of adjudication. A clause to that effect goes against the spirit of Section 12(5) of the Act which incorporates the principle of neutrality of arbitrator. Party autonomy in the appointment of the arbitrator has to be exercised while keeping in mind the principles of impartiality and independence.

While appointing an arbitrator in the present case, no party to an arbitration agreement can retain power at the cost of abandoning the arbitration itself. Clause 33 of the contract herein, would remain subservient to Section 12(5) of the Act.

Case Title: M/S Bansal Construction Office v. Yamuna Expressway Industrial Development Authority And 2 Others 2023 LiveLaw (AB) 250 [Arbitration And Conciliation APPL.U/S11(4) No. - 142 of 2019]

Case Citation: 2023 LiveLaw (AB) 250

Counsel for Applicant: J.P. PandeyCounsel for Opposite Party: Aditya Bhushan Singhal

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