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Ellora Paper Mills Limited vs The State of Madhya Pradesh

Civil Appeal · 2022 INSC 11Decided 4 Jan 2022
Civil Appeal No. 7697 of 2021
M.R. Shah · B.V. Nagarathna

Background

A commercial dispute arose from a 1993-94 government paper-supply tender after the State allegedly withheld payment and rejected consignments without justification. Years of litigation followed, and the dispute was eventually referred to arbitration before a "Stationery Purchase Committee" made up entirely of the State's own departmental officers. After the Supreme Court's 2017 ruling in TRF Limited v. Energo Engineering Projects Limited established that a person ineligible to act as arbitrator under Section 12(5) of the Arbitration and Conciliation Act, 1996 also cannot nominate another arbitrator, the appellant sought termination of this Committee's mandate and appointment of a neutral arbitrator; the Madhya Pradesh High Court refused, holding the 2015 amendment (which introduced Section 12(5)) did not apply retrospectively to arbitration proceedings that began before it took effect.

Decision Breakdown

The Supreme Court held the High Court's reasoning was contrary to its settled precedents (TRF, Bharat Broadband Network Ltd., and Jaipur Zila Dugdh Utpadak Sahkari Sangh Ltd.), which establish that ineligibility under Section 12(5) read with the Seventh Schedule operates by force of law the moment it applies, regardless of when the arbitration commenced, and cannot be cured by the ineligible members' own earlier participation or an appointment letter issued before the ineligibility became legally clear. Since all five members of the Stationery Purchase Committee were serving officers of the State, a party to the dispute, they were declared ineligible to continue as arbitrators, and the High Court's order upholding their mandate was quashed. Rather than remanding the matter for a fresh appointment process, the Court itself appointed a retired Supreme Court judge, Justice Abhay Manohar Sapre, as the new arbitrator, directing the parties to appear before him within four weeks given the dispute had already been pending since 2000.

Lesson Learnt

An arbitrator (or arbitral panel) made up of employees of a party to the dispute is legally ineligible to act once Section 12(5) of the Arbitration Act applies, and such ineligible arbitrators cannot cure the defect by appointing a substitute themselves: a party's continued participation in the arbitration does not amount to a valid waiver of this objection unless made through an express written agreement after the ineligibility is known.

Official source (sci.gov.in)View Judgment (PDF)

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