If Arbitration Clause Falls Foul Of Section 12(5) of Arbitration Act, Appointment of Arbitrator Would Be Beyond The Scope of Arbitration Agreement: SC
A two-judge Bench of Justice M.R. Shah and Justice B.V. Nagarathna has held, "It 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."
Counsel Mr. Sandeep Bajaj appeared on behalf of the Appellant while Counsel Mr. Nachiketa Joshi advanced submissions on behalf of the Respondent before the Court.
The Appellant before the Apex Court, i.e., Ellora Paper Mills Ltd. had filed an application under Section 14 r/w Sections 11 and 15 of the Arbitration and Conciliation Act, 1996 before the Madhya Pradesh High Court seeking termination of the mandate of originally constituted Arbitral Tribunal and to appoint a new arbitrator.
The application was dismissed by the High Court and hence, the appeal before the Apex Court.
The Respondent had issued a tender in which the Appellant participated and was awarded the contract. A dispute arose on the non-conformity of the specification of the products in question. A civil suit was filed to restrain the Respondent from awarding a supply order to a third party. However, the Respondent awarded the contract to a third party in the meanwhile and the suit became infructuous.
Another suit was filed for recovery by the Appellant. Respondent filed a Section 8 application for stay of proceedings on grounds of the existence of an arbitration clause. The Civil Court dismissed the said application which was allowed in revision by the High Court. The High Court referred parties to the arbitration.
An SLP was filed by the Appellant which was dismissed as withdrawn. Hence, the Tribunal was constituted comprising officers of the Respondent. Appellant challenged the jurisdiction of the Tribunal and filed objections to its constitution which were rejected by the Tribunal. A writ was filed before the High Court which was dismissed with liberty to raise objections before the appropriate forum.
Hence, the instant application under Section 14 r/w 11 and 15 were filed. The Appellant relied upon TRF Limited v. Energo Engineering Projects Limited, reported in (2017) 8 SCC 377 to submit that all 5 officers constituting the Tribunal were employees of the Respondent and ineligible to continue as arbitrators.
The High Court, as noted above, did not agree and rejected the application.
On the point of the constitution of the Tribunal, the Supreme Court inter alia observed -
"As observed hereinabove, the Arbitral Tribunal – Stationery Purchase Committee consisted of officers of the respondent-State. Therefore, as per Amendment Act, 2015 – Sub-section (5) of Section 12 read with Seventh Schedule, all of them have become ineligible to become arbitrators and to continue as arbitrators. Section 12 has been amended by Amendment Act, 2015 based on the recommendations of the Law Commission, which specifically dealt with the issue of "neutrality of arbitrators"."
The Court held that the Arbitral Tribunal cannot be permitted to continue and hence, a fresh arbitration is to be appointed. The Court heavily relied upon Jaipur Zila Dugdh Utpadak Sahkari Sangh Limited v. Ajay Sales & Suppliers, 2021 SCC OnLine SC 730 to fortify its view.
Accordingly, the Court held that the judgment rendered by the High Court was contrary to the law laid down in TRF (supra) and Jaipur Zila (Supra). The Court held that the Arbitral Tribunal had lost its mandate in view of Section 12(5) r/w VII Schedule. The impugned judgment was quashed.
The Court appointed Justice AM Sapre, former Judge, Supreme Court as an arbitrator. The appeal was accordingly, allowed.