Supreme Court Declares Government Employee Arbitrators Ineligible Under Amended Arbitration Act: Ellora Paper Mills vs. State of Madhya Pradesh (2022)

Introduction

Date of the Judgment: 04 January 2022

Citation: 2022 INSC 11

Judges: M.R. Shah, J. and B.V. Nagarathna, J.

Can a committee of government officers serve as an impartial arbitration tribunal when the opposing party is in a dispute with the government itself? The Supreme Court of India recently tackled this issue, focusing on the impartiality of arbitrators under the Arbitration and Conciliation Act, 1996. This case, *Ellora Paper Mills Limited vs. The State of Madhya Pradesh*, examines whether amendments to the Act disqualify government employees from acting as arbitrators in disputes where the government is a party. The judgment was delivered by a two-judge bench comprising Justice M.R. Shah and Justice B.V. Nagarathna.

Case Background

The dispute originated from a 1993 tender where Ellora Paper Mills was contracted to supply paper to the State of Madhya Pradesh. Ellora Paper Mills claimed that the State failed to make full payments and unjustly rejected some consignments. This led to a series of legal actions. Initially, Ellora Paper Mills filed a civil suit in 1994 seeking an injunction against the State from awarding the contract to another party. This suit became irrelevant when the State awarded the contract to a third party.

Subsequently, in 1998, Ellora Paper Mills filed another suit to recover Rs. 95,32,103 from the State. The State then applied under Section 8 of the Arbitration and Conciliation Act, 1996, to stay the proceedings, citing an existing arbitration clause. The Civil Court rejected this application, but the High Court of Madhya Pradesh reversed this decision in 2000, referring the parties to arbitration by a “Stationery Purchase Committee” consisting of government officers.

Ellora Paper Mills initially challenged this decision in the Supreme Court, but later withdrew the petition. The arbitral tribunal, the Stationery Purchase Committee, was then formed. Ellora Paper Mills objected to this committee’s composition and jurisdiction, but these objections were rejected by the tribunal in 2001. A writ petition filed by Ellora Paper Mills in the High Court was dismissed in 2017, with liberty to raise objections before the appropriate forum. Finally, in 2019, Ellora Paper Mills filed an application in the High Court to terminate the mandate of the existing arbitral tribunal and appoint a new arbitrator.

Timeline

Course of Proceedings

The Civil Court initially rejected the State’s application to stay proceedings and refer the matter to arbitration. However, the High Court of Madhya Pradesh overturned this decision, directing the parties to resolve their dispute through arbitration by the Stationery Purchase Committee. This committee was composed of officers from the State government. Ellora Paper Mills challenged this decision by filing a special leave petition before the Supreme Court, which was later withdrawn. Subsequently, Ellora Paper Mills also challenged the jurisdiction of the Stationery Purchase Committee, which was rejected by the committee. This decision was challenged in the High Court, which was also dismissed. Finally, Ellora Paper Mills filed an application before the High Court to terminate the mandate of the Stationery Purchase Committee, which was dismissed, leading to the present appeal before the Supreme Court.

Legal Framework

The core of this case revolves around Section 12(5) of the Arbitration and Conciliation Act, 1996, along with its Seventh Schedule. Section 12(5), introduced by the 2015 Amendment Act, aims to ensure the neutrality of arbitrators. It states that, *“Notwithstanding any prior agreement to the contrary, any person whose relationship with the parties or counsel or the subject matter of the dispute falls under any of the categories specified in the Seventh Schedule, he shall be ineligible to be appointed as an arbitrator.”* This provision essentially disqualifies individuals with certain conflicts of interest from serving as arbitrators, regardless of any prior agreements.

The Seventh Schedule lists categories of relationships that create justifiable doubts about an arbitrator’s impartiality. These include situations where the arbitrator is an employee, consultant, or has a significant financial interest in one of the parties. The purpose of these provisions is to ensure that arbitration proceedings are conducted fairly and impartially.

Arguments

Arguments by Ellora Paper Mills:

• 
  ✓ The Stationery Purchase Committee, consisting of officers of the respondent, was ineligible to continue as arbitrators due to Section 12(5) read with the Seventh Schedule of the Arbitration Act, 1996. They relied on the Supreme Court’s decision in *Jaipur Zila Dugdh Utpadak Sahkari Sangh Limited v. Ajay Sales & Suppliers, 2021 SCC OnLine SC 730*.
• 
  ✓ The 2015 Amendment Act, introducing Section 12(5), should apply because the arbitration proceedings had not effectively commenced. The High Court had stayed the proceedings from 2001 to 2017, and the original members of the committee had retired.
• 
  ✓ There was no express agreement in writing to continue with the arbitration proceedings by the earlier Arbitral Tribunal. Unless such an agreement exists, the mandate of the earlier Arbitral Tribunal should be terminated, and a fresh arbitrator should be appointed.

Arguments by the State of Madhya Pradesh:

• 
  ✓ The 2015 Amendment Act should not apply retrospectively, as the arbitral tribunal was constituted in 2000, and the arbitration proceedings had commenced. They cited several Supreme Court decisions to support this view, including *Aravali Power Co. Power Ltd. v. Era Infra Engineering, (2017) 15 SCC 32* and *Indian Oil Corporation Ltd. v. Raja Transport Pvt. Ltd., (2009) 8 SCC 520*.
• 
  ✓ Ellora Paper Mills had participated in the arbitration proceedings before the Stationery Purchase Committee and should not be allowed to seek a fresh arbitrator.
• 
  ✓ The decision in *Jaipur Zila Dugdh Utpadak Sahkari Sangh Limited* was not applicable, as the arbitrator in that case was appointed after the 2015 amendment, unlike the present case, where the arbitrator was appointed much earlier.

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for consideration:

1. 
   Whether the Stationery Purchase Committee – Arbitral Tribunal consisting of the officers of the respondent has lost the mandate, considering Section 12(5) read with Seventh Schedule of the Arbitration Act, 1996.
2. 
   If the answer is in the affirmative, in that case, whether a fresh arbitrator has to be appointed as per the Arbitration Act, 1996?

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered several cases and legal provisions to reach its decision. These are categorized below:

Cases on the Impartiality of Arbitrators:

• 
  TRF Limited v. Energo Engineering Projects Limited, (2017) 8 SCC 377 – Supreme Court: This case established that individuals ineligible to be arbitrators cannot appoint another arbitrator.
• 
  Jaipur Zila Dugdh Utpadak Sahkari Sangh Limited v. Ajay Sales & Suppliers, 2021 SCC OnLine SC 730 – Supreme Court: This case clarified that the disqualification under Section 12(5) cannot be waived without an express written agreement.
• 
  Bharat Broadband Network Limited v. United Telecoms Limited, (2019) 5 SCC 755 – Supreme Court: This case held that an arbitrator’s ineligibility under Section 12(5) cannot be waived without an express written agreement.
• 
  Voestalpine Schienen GMBH v. Delhi Metro Rail Corporation Limited, (2017) 4 SCC 665– Supreme Court: This case emphasized that the main purpose for amending the provision was to provide for ‘neutrality of arbitrators’.

Cases on Retrospective Application of Law:

• 
  Aravali Power Co. Power Ltd. v. Era Infra Engineering, (2017) 15 SCC 32 – Supreme Court: The High Court referred to this case to support its decision that the 2015 amendment should not apply retrospectively.
• 
  Indian Oil Corporation Ltd. v. Raja Transport Pvt. Ltd., (2009) 8 SCC 520 – Supreme Court: The High Court referred to this case to support its decision that the 2015 amendment should not apply retrospectively.
• 
  ACE Pipeline Contracts (P) Ltd. v. Bharat Petroleum Corpn. Ltd., (2007) 5 SCC 304 – Supreme Court: The High Court referred to this case to support its decision that the 2015 amendment should not apply retrospectively.
• 
  Union of India v. M.P. Gupta, (2004) 10 SCC 504 – Supreme Court: The High Court referred to this case to support its decision that the 2015 amendment should not apply retrospectively.
• 
  Union of India v. Parmar Construction Company, (2019) 15 SCC 682 – Supreme Court: The High Court referred to this case to support its decision that the 2015 amendment should not apply retrospectively.
• 
  Union of India v. Pradeep Vinod Construction Company, (2020) 2 SCC 464– Supreme Court: The High Court referred to this case to support its decision that the 2015 amendment should not apply retrospectively.
• 
  S.P. Singla Constructions Pvt. Ltd. v. State of Himachal Pradesh, (2019) 2 SCC 488 – Supreme Court: The High Court referred to this case to support its decision that the 2015 amendment should not apply retrospectively.

Legal Provisions:

• 
  Section 8 of the Arbitration and Conciliation Act, 1996: This section deals with the power of a judicial authority to refer parties to arbitration.
• 
  Section 11 of the Arbitration and Conciliation Act, 1996: This section deals with the appointment of arbitrators.
• 
  Section 12 of the Arbitration and Conciliation Act, 1996: This section deals with the grounds for challenging the appointment of an arbitrator, particularly sub-section (5).
• 
  Section 13 of the Arbitration and Conciliation Act, 1996: This section deals with the procedure for challenging an arbitrator.
• 
  Section 14 of the Arbitration and Conciliation Act, 1996: This section deals with the termination of the mandate of an arbitrator.
• 
  Section 15 of the Arbitration and Conciliation Act, 1996: This section deals with the appointment of a substitute arbitrator.
• 
  Seventh Schedule of the Arbitration and Conciliation Act, 1996: This schedule lists the categories of relationships that make an arbitrator ineligible.

Judgment

The Supreme Court overturned the High Court’s decision, ruling that the Stationery Purchase Committee was indeed ineligible to act as arbitrators. The Court emphasized that Section 12(5) of the Arbitration Act, along with the Seventh Schedule, aims to ensure the neutrality of arbitrators. The Court held that the 2015 amendment applies in this case because the arbitration proceedings had not effectively commenced due to the stay order and the retirement of the original members of the committee.

How each authority was viewed by the Court?

• TRF Limited v. Energo Engineering Projects Limited, (2017) 8 SCC 377*: The Court followed this authority, reiterating that an ineligible arbitrator cannot appoint another arbitrator.
• Jaipur Zila Dugdh Utpadak Sahkari Sangh Limited v. Ajay Sales & Suppliers, 2021 SCC OnLine SC 730*: The Court followed this authority, emphasizing that an arbitrator’s ineligibility cannot be waived without an express written agreement.
• Bharat Broadband Network Limited v. United Telecoms Limited, (2019) 5 SCC 755*: The Court followed this authority, highlighting the need for an express written agreement to waive the ineligibility of anarbitrator under Section 12(5).
• Voestalpine Schienen GMBH v. Delhi Metro Rail Corporation Limited, (2017) 4 SCC 665*: The Court followed this authority, reiterating that the main purpose for amending the provision was to provide for ‘neutrality of arbitrators’.
• Aravali Power Co. Power Ltd. v. Era Infra Engineering, (2017) 15 SCC 32*: The Court distinguished this case, stating that it did not apply to the present situation, as the arbitration had not effectively commenced.
• Indian Oil Corporation Ltd. v. Raja Transport Pvt. Ltd., (2009) 8 SCC 520*: The Court distinguished this case, stating that it did not apply to the present situation, as the arbitration had not effectively commenced.
• ACE Pipeline Contracts (P) Ltd. v. Bharat Petroleum Corpn. Ltd., (2007) 5 SCC 304*: The Court distinguished this case, stating that it did not apply to the present situation, as the arbitration had not effectively commenced.
• Union of India v. M.P. Gupta, (2004) 10 SCC 504*: The Court distinguished this case, stating that it did not apply to the present situation, as the arbitration had not effectively commenced.
• Union of India v. Parmar Construction Company, (2019) 15 SCC 682*: The Court distinguished this case, stating that it did not apply to the present situation, as the arbitration had not effectively commenced.
• Union of India v. Pradeep Vinod Construction Company, (2020) 2 SCC 464*: The Court distinguished this case, stating that it did not apply to the present situation, as the arbitration had not effectively commenced.
• S.P. Singla Constructions Pvt. Ltd. v. State of Himachal Pradesh, (2019) 2 SCC 488*: The Court distinguished this case, stating that it did not apply to the present situation, as the arbitration had not effectively commenced.
• Section 8 of the Arbitration and Conciliation Act, 1996*: The Court acknowledged this provision but held that it did not apply to the present situation.
• Section 11 of the Arbitration and Conciliation Act, 1996*: The Court acknowledged this provision but held that it did not apply to the present situation.
• Section 12 of the Arbitration and Conciliation Act, 1996*: The Court relied heavily on this provision, particularly sub-section (5), to support its decision.
• Section 13 of the Arbitration and Conciliation Act, 1996*: The Court acknowledged this provision but held that it did not apply to the present situation.
• Section 14 of the Arbitration and Conciliation Act, 1996*: The Court relied on this provision to terminate the mandate of the existing arbitral tribunal.
• Section 15 of the Arbitration and Conciliation Act, 1996*: The Court relied on this provision to appoint a substitute arbitrator.
• Seventh Schedule of the Arbitration and Conciliation Act, 1996*: The Court relied heavily on this schedule to determine the ineligibility of the arbitrators.

The Court emphasized that the purpose of the 2015 amendment was to ensure the neutrality of arbitrators and that this purpose could not be circumvented by prior agreements or the mere participation of a party in the proceedings. The Court directed the appointment of a new arbitrator under Section 11 of the Act.

Final Order

The Supreme Court allowed the appeal filed by Ellora Paper Mills and set aside the High Court’s judgment. The Court held that the Stationery Purchase Committee was ineligible to act as arbitrators. The Court terminated the mandate of the existing arbitral tribunal and directed the appointment of a new arbitrator under Section 11 of the Arbitration and Conciliation Act, 1996.

Legal Principles

The Supreme Court established the following legal principles in this case:

• 
  ✓ Government employees are ineligible to act as arbitrators in disputes involving the government, as per Section 12(5) read with the Seventh Schedule of the Arbitration Act, 1996.
• 
  ✓ The 2015 Amendment Act applies if arbitration proceedings have not effectively commenced, even if the arbitral tribunal was initially constituted before the amendment.
• 
  ✓ The ineligibility of an arbitrator under Section 12(5) cannot be waived without an express written agreement between the parties.
• 
  ✓ Mere participation in arbitration proceedings does not waive the right to challenge an arbitrator’s ineligibility under Section 12(5).
• 
  ✓ The primary purpose of the 2015 amendment to the Arbitration Act is to ensure the neutrality of arbitrators and to prevent conflicts of interest.

Implications

This judgment has significant implications for arbitration law and practice in India. It reinforces the principle of arbitrator neutrality and clarifies that government employees cannot serve as arbitrators in disputes involving the government. The judgment also clarifies that mere participation in arbitration proceedings does not waive the right to challenge an arbitrator’s ineligibility. This ruling is likely to lead to greater transparency and fairness in arbitration proceedings, particularly in cases where one of the parties is the government.

Flowchart of the Case

Summary

The Supreme Court’s decision in *Ellora Paper Mills Limited vs. The State of Madhya Pradesh* is a landmark judgment that clarifies the application of Section 12(5) of the Arbitration and Conciliation Act, 1996, particularly concerning the eligibility of government employees to act as arbitrators. The Court emphasized the need for arbitrator neutrality and held that the 2015 amendment applies to cases where arbitration has not effectively commenced. This ruling reinforces the importance of fair and impartial arbitration proceedings and is likely to have a significant impact on arbitration law and practice in India.