Retrospective Applicability Of Section 12(5), Introduced By Arbitration Amendment Act, 2015: The Supreme Court Examines

In the recent landmark judgement passed in the case of Ellora Paper Mills Limited vs. The State of Madhya Pradesh¹ by a bench consisting of Hon'ble Justices Mr.M.R. Shah and Mrs. Nagarathna, dated January 4, 2022, the Hon'ble Supreme Court of India, held that the arbitrator's mandate attracts the incapacity to act under Section 12(5) read with Schedule VII of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as “the Act”), immediately on its introduction by the Amendment Act of 20152, even though the Arbitral Tribunal may have been appointed much before the Amendment Act of 2015², and the challenge to the appointment of Arbitral Tribunal may have already settled much prior to the Amendment Act of 2015. The Hon'ble Supreme Court of India overruled the view of the Hon'ble High Court of Madhya Pradesh, which had held that the Amendment Act, 2015 did not apply retroactively to arbitration proceedings already in progress unless the parties agreed otherwise. This article endeavours to highlight the judicial prescription on the retrospective applicability of the Amendment Act of 2015 qua the mandatory provisions of Section 14 of the Act.

FACTUAL MATRIX IN BRIEF:

The Respondent, State of Madhya Pradesh, awarded a tender to Respondent vide supply order dated 22.09.1993, for supply of the cream wove paper and duplicating paper for the year 1993-1994. In the course of transaction, certain disputes arose between the Appellant and Respondent. In that regard the litigation initiated by Appellant before the Civil Court, came to be referred to the Arbitral Tribunal on 03.05.2000 by the Hon'ble High Court of Madhya Pradesh, pursuant to application of Respondent under Section 8 of the Act, directing the Arbitral Tribunal to be constituted with officers of Respondent, the Arbitral Tribunal being named as “Stationary Purchase Committee”. The challenge by Appellant to the reference of dispute to Arbitral Tribunal was rejected by Supreme Court on 28.09.2000. 

Thereafter, the Appellant filed objections before the Arbitral Tribunal 12.09.2000 challenging its constitution as well as challenging jurisdiction by filing application under Section 13 of the Act. The objection/challenge of Appellant was rejected by the Arbitral Tribunal on 02.02.2001, which was assailed by Appellant before the Hon'ble High Court under Section 14 read with Section 11 and 15 of the Act, seeking termination of mandate of originally constituted Arbitral Tribunal and for appointment of new Arbitral Tribunal. The Hon'ble High Court rejected the same on 24.01.2017 and thereafter the matter once again came up before the Hon'ble Supreme Court, on the issue of appointment of a fresh Arbitral Tribunal.

ISSUE BEFORE THE SUPREME COURT:

The Hon'ble Supreme Court noted from the impugned order that the Hon'ble High Court had rejected the petition of Appellant on the view that the Amendment Act of 2015 shall be made applicable w.e.f. 23.10.2015 and cannot have retrospective operation in the arbitration proceedings already commenced unless the parties otherwise agree. In the facts and circumstances of the case, the Hon'ble Supreme Court noted the issue arising from the case as:

“Whether the Stationery Purchase Committee/ Arbitral Tribunal consisting of the officers of the respondent has lost their mandate, considering Section 12(5) read with Schedule VII of the Arbitration and Conciliation Act, 1996.”

DECISION OF THE SUPREME COURT:

The Hon'ble Supreme Court discussed in detail the legislative intent behind the introduction of amendment in Section 12 of the Act, including the focussed objective of the legislature with respect to the 'neutrality of arbitrators' in the matter of arbitration proceedings. It was observed that the independence and impartiality of the Arbitrator are the hallmark of any arbitration proceedings. The rule against bias is one of the fundamental principles of natural justice which also applies in arbitration proceedings. In the circumstances of the case, the Hon'ble Supreme Court observed that the Arbitral Tribunal constituted in the present case in 03.05.2000 lost its mandate by operation of law in view of Section 12(5), read with Seventh Schedule of the Act, and the Arbitral Tribunal originally constituted was found to be ineligible to act/continue as arbitrator.

While drawing the above views, the Hon'ble Supreme Court drew references from its previous judgments in Jaipur Zila Dugdh Utpadak Sahkari Sang Limited³ , and TRF Limited⁴ . In addition to the above, it was observed that unless and until there is an express agreement in writing to continue the arbitration with earlier tribunal, such application to terminate the earlier tribunal and to appoint a new arbitrator would be maintainable. The Hon'ble Supreme Court favourably considered the fact that after the constitution of the Arbitral Tribunal in the year 2001, no further steps whatsoever had been taken in the arbitration proceedings and therefore technically it cannot be said that the arbitration proceedings by the Arbitral Tribunal i.e., the Stationery Purchase Committee have commenced. In the above backdrop, the Hon'ble Supreme Court held that the impugned judgment of the Hon'ble High Court was contrary to the law laid down by the Hon'ble Supreme Court in the case of TRF limited⁵ .

CONCLUDING REMARKS:

As per Section 26 of the Arbitration and Conciliation (Amendment) Act, 2015, the provisions of the Amendment Act have not to be applied on pending arbitral proceedings. However, keeping in mind the recommendation of the Law Commission, with which spirit, section 12 of the Act has been amended by the Amendment Act of 2015, it is manifested that the main purpose for amending the provision was to provide for neutrality of arbitrator. Not applying section 12(5) of the Arbitration Act, 1996 will be unjust and against the principle of natural justice. Hence, the law settled by the Apex Court stipulates that an ineligible arbitrator cannot act/continue as arbitrator pursuant to attracting ineligibility under Section 12(5) of the Arbitration and Conciliation Act, 1996, even if the Arbitral Tribunal was constituted much prior to the 2015 Amendment of the Act. The Judgment of the Hon'ble Supreme Court is in furtherance of the legislative intent of ensuring independence and impartiality of the Arbitrator, and strengthening of fundamental principles of rule against bias.

Footnotes

1. Ellora Paper Mills Limited vs. The State of Madhya Pradesh (04.01.2022 - SC): 2022 SCC OnLine SC 8.

2. Arbitration and Conciliation (Amendment) Act, 2015.

3. Jaipur Zila Dugdh Utpadak Sahkari Sangh Limited v. Ajay Sales & Suppliers. 2021 SCC OnLine SC 730

4. TRF Ltd. v. Energo Engineering Projects Ltd. 2017 SCC Online SC 692

5. Supra

Originally published February 2022

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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