Arbitral Tribunal Constituted Before 2015 Amendment Cannot Operate If It Violates Neutrality Mandate Under Section 12(5) : Supreme Court

The Supreme Court held that an arbitral tribunal constituted as per an arbitration clause before the 2015 amendment to the Arbitration and Conciliation Act 1996 will lose its mandate if it violates the neutrality clause under Section 12(5) read with the Seventh Schedule, which were incorporated through the 2015 amendment.The Court held that an arbitration clause that prescribes appointment of arbitrators contrary to the amended provision of Section 12(5) of the Arbitration and Conciliation Act cannot be given effect."...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", the Supreme Court observed in the case Ellora Paper Mills Limited v. State of Madhya Pradesh. The Court said that an arbitrary tribunal appointed as per such an arbitration clause will lose its mandate with the coming into force of Section 12(5)."...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....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". A bench comprising Justices M.R. Shah and B.V. Nagarathna allowed an appeal filed by Ellora Paper Mills Limited, assailing the order of the Madhya Pradesh High Court, which rejected its application filed under Section 14 read with Sections 11 and 15 of the Arbitration and Conciliation Act, 1996 ("Act") to appoint a new arbitrator, stating that Amendment Act, 2015 shall be made effective from 23.10.2015 and cannot have retrospective operation in the arbitration proceedings already commenced unless the parties otherwise agree. Factual Background The State of Madhya Pradesh issued a tender for supply of cream wove paper and duplicating paper for the year 1993-94. Ellora Paper Mills Limited ("Ellora") participated in the tender process and was eventually awarded the contract on 22.09.1993. Subsequently, a dispute arose when the State of Madhya Pradesh did not make 90% of the payments for the paper supplied by Ellora as per the terms of the contract and rejected some consignments without providing any justifications. By a letter dated 15.11.1993, the State of Madhya Pradesh informed Ellora that the paper so supplied did not conform to the specifications. In 1994, Ellora filed a civil suit for permanent injunction against the State in Civil Court, Bhopal restraining it from awarding the contract to a third party. However, the suit became infructuous as the State had already awarded the supply order to a third party. Thereafter, Ellora filed another suit to recover Rs. 95,32,103. The State preferred an application under Section 8 of the Arbitration and Conciliation Act, 1996 ("Act") and sought stay of proceedings before the Civil Court, which was rejected. On revision the Madhya Pradesh High Court allowed the application and referred the parties to arbitration by the Stationery Purchase Committee comprising officers of the State of Madhya Pradesh [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]. Against the order of the High Court a Special Leave Petition was preferred, but was eventually withdrawn. As the Arbitral Tribunal was constituted, Ellora filed an objection to its constitution and challenged its jurisdiction by filing an application under Section 13 of the Act, which was rejected. Thereafter, the High Court dismissed its Writ Petition. Ellora filed an application under Section 14 read with Section 11 and 15 of the Act before the High Court seeking termination of the mandate of originally constituted Tribunal and for appointment of a new arbitrator. The High Court rejected the said application. Contentions raised by the Appellant Advocate, Mr. Sandeep Bajaj appearing on behalf of Ellora argued that the impugned order of the Madhya Pradesh High Court was in derogation to the law laid down by the Supreme Court in Jaipur Zila Dugdh Utpadak Sahkari Sangh Limited v. Ajay Sales & Suppliers, 2021 SCC OnLine SC 730. It was contended that the continuation of a Tribunal consisting of officers of the State would frustrate the object of the Amendment Act, 2015, by which sub-section (5) to Section 12 read with Seventh Schedule was...

Arbitral Tribunal Constituted Before 2015 Amendment Cannot Operate If It Violates Neutrality Mandate Under Section 12(5) : Supreme Court

Sohini Chowdhury

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