Today, I will talk about the case of Ellora Paper Mills Ltd. v. State of Madhya Pradesh, 2022 SCC OnLine SC 8, wherein the Hon’ble Supreme Court discussed Section 12 (5) of the Arbitration & Conciliation Act, 1996, that is a non-obstante clause providing for the ineligibility criteria for appointment of an arbitrator.
Today, I will talk about the case of Ellora Paper Mills Ltd. v. State of Madhya Pradesh, 2022 SCC OnLine SC 8, wherein the Hon’ble Supreme Court discussed Section 12 (5) of the Arbitration & Conciliation Act, 1996, that is a non-obstante clause providing for the ineligibility criteria for appointment of an arbitrator.
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Hi everyone.
I am Suyash and today, I will talk about the case of Ellora Paper Mills Ltd. v. State of Madhya Pradesh, 2022 SCC OnLine SC 8, wherein the Hon’ble Supreme Court discussed Section 12 (5) of the Arbitration & Conciliation Act, 1996, that is a non-obstante clause providing for the ineligibility criteria for appointment of an arbitrator.
Section 12 (5) 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 shall be ineligible to be appointed as an arbitrator:
Provided that parties may, subsequent to disputes having arisen between them, waive the applicability of this sub-section by an express agreement in writing.”
Basically, S. 12 talks about Seventh Schedule of the Arbitration Act that provides for the relationships that makes a person ineligible to be appointed as an arbitrator. Some of the key relationships are: -
a. Employer-Employee Relationship.
b. Client-Attorney Relationship.
c. Close Family Relationship.
d. Advisory relationship.
e. Part of same management.
f. Significant financial interest involved of the Arbitrator in the case.
g. Previous involvement of the Arbitrator in the case.
h. Any direct or indirect interest in the dispute.
Hence, if there exists any of the above-stated relationships, then such person shall be ineligible to be appointed as an arbitrator. Further, S. 12 (5) also has a proviso that stipulates that the parties, after arising of the dispute, by way of an express written agreement may waive off such ineligibility criteria and appoint any person of their choice to arbitrate over a dispute.
In the present case, the Court explained that S. 12 (5) was amended to provide for legal provisions governing the neutrality of arbitrators. According to the Court, if S. 12 (5) is attracted in a particular case, then in such a situation, “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.”
Essentially, “independence and impartiality of the arbitrator are the hallmarks of any arbitration proceedings. Rule against bias is one of the fundamental principles of natural justice which apply to all judicial and quasi-judicial proceedings.” It is to be understood that “even when an arbitrator is appointed in terms of contract and by the parties to the contract, he is independent of the parties.”
What is to be noted is that S. 12 (5) is a non-obstante clause and has an overriding effect on the prior intention and agreement of the parties. Though party autonomy is an important principle followed in the field of arbitration, yet equally important are the principles of impartiality and independence of the arbitrators. “The concept of party autonomy cannot be stretched to a point where it negates the very basis of having impartial and independent adjudicators for resolution of disputes. In fact, when the party appointing an adjudicator is the State, the duty to appoint an impartial and independent adjudicator is that much more onerous - and the right to natural justice cannot be said to have been waived only on the basis of a “prior” agreement between the parties at the time of the contract and before arising of the disputes.”
If parties to an arbitrable dispute wish to waive off the applicability of S. 12 (5), then “there must be an ‘express agreement’ in writing to satisfy the requirements of Section 12(5) proviso.”
Thus, in conclusion, following important points emerge: -
a. S. 12 (5) is a non-obstante clause having an overriding effect on the prior intention and agreement of the parties.
b. As per S. 12 (5), an arbitrator is ineligible to be appointed if he has certain types of relationships with the parties or interest in the subject-matter of the dispute.
c. After arising of the dispute, the parties may waive off the condition stipulated in S. 12 (5) by way of an express written agreement.
d. The purpose of S. 12 (5) is to ensure neutrality, impartiality and independence of arbitrators.
Thus, I hope that the mandate and the scope of S. 12 (5) of the Arbitration Act is clear by now.
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