[Rida is a student at School of Law, Christ (Deemed to be University).]
The Arbitration and Conciliation (Amendment) Act 2015 (2015 Amendment) introduced several landmark changes to the arbitration framework in India, making arbitrations time-bound and cost-effective. However, the advantages of the 2015 Amendment were diluted owing to the confusion surrounding the application of the amendment. Although the debate was later settled in BCCI v. Kochi Cricket (BCCI), the judgment of the Supreme Court (SC) in Ellora Paper Mills v. State of Madhya Pradesh (Ellora Paper Mills) passed in January 2022, has reignited the debate regarding the retrospective application of the 2015 Amendment.
Although the court did not specifically discuss the applicability of the 2015 Amendment, it applied Section 12(5) of the Arbitration and Conciliation Act 1996 (Act) to an arbitration that was pending when the amendment came into force. This runs contrary to Section 26 of the 2015 Amendment. This may be used as precedent to challenge the appointment of arbitrators in pending arbitrations which commenced before the 2015 Amendment was enforced. If pursued, it will lead to prolonged litigation between parties. This article seeks to analyse the ambit of Section 26 and the implications of the judgment of Ellora Paper Mills in this regard.
Statutory Provisions
Section 12(5) of the Act provides that a person cannot act as an arbitrator if such person’s relationship with the parties, counsel or the subject matter of the dispute falls within the ambit of Schedule Seven of the Act. The Fifth and Seventh Schedules spell out the circumstances under which the neutrality of an arbitrator may be affected.
Since Section 12(5) was introduced through the 2015 Amendment, its application is subject to Section 26 which provides that the Act shall not apply to arbitral proceedings which commenced before the 2015 Amendment came into force, i.e., 23 October 2015, unless the parties have agreed otherwise. The Act does, however, apply to all other proceedings ‘in relation to arbitral proceedings’. Commencement under Section 26 must be interpreted as per Section 21 which provides that arbitral proceedings commence when the respondent receives a request for the dispute to be referred to arbitration.
Retrospective Application under Section 26 of the 2015 Amendment
The interpretation of Section 26, in the context of the application of the 2015 Amendment to pending court proceedings varied across High Courts. Finally, in BCCI, the SC clarified that the 2015 Amendment applied prospectively to court proceedings as well as arbitral proceedings which began after the amendment came into force. Although Section 12(5) was not a point of discussion in BCCI, it was made explicitly clear that the 2015 Amendment would not apply to any arbitral proceedings which commenced prior to 23 October 2015.
Position Prior to Ellora Paper Mills
As per the 246th Report of the Law Commission, Section 12(5) and the Seventh Schedule were introduced to ensure the independence and impartiality of arbitrators, which is the hallmark of any arbitration. If an arbitrator falls within any of the categories under Schedule Seven, it will strike at the very jurisdiction of the arbitrator to continue with the proceedings.
Although it may seem that the provision must be applied to pending arbitrations, , the decision of the court in BCCI has been diligently followed in cases pertaining to Section 12(5). In Aravali Power Company Private Limited v. Era Infra Engineering Limited and Rajasthan Small Industries Corporation Limited v. Ganesh Containers and Movers Syndicate, the issue of application of Section 12(5) arose. In both cases, arbitral proceedings began much before the 2015 Amendment was enforced. Moreover, the party objecting to the constitution of the tribunal had already participated in the arbitral proceedings. In these circumstances, apart from holding that the 2015 Amendment cannot operate retrospectively, the SC also observed that the parties invoking Section 12(5) had already acquiesced to the appointment of the arbitrator and had raised an objection much later in the proceedings.
However, in S.P. Singla Constructions v. State of Himachal Pradesh, the respondent continuously avoided the arbitration proceedings by either remaining absent or requesting an adjournment stating that they would challenge the appointment of the arbitrator. Although no proceedings were held before the arbitrator, the SC held that the appointment of the arbitrator is valid as the 2015 Amendment cannot apply to proceedings which began in 2013. This clarified that even if objections were raised at an early stage, the 2015 Amendment could not apply. While the facts are similar to that of the S. P. Singla decision, the decision rendered in Ellora Paper Mills is starkly contrasting.
The Decision in Ellora Paper Mills
After a dispute arose between the parties, the appellant filed a suit before the civil court seeking recovery of money in 1998. However, due to the arbitration clause, a Section 8 application was filed by the respondents which was subsequently rejected. On appeal, the High Court referred the parties to arbitration, and an arbitral tribunal was constituted in the year 2000, consisting of five officers of the respondents. The appellants challenged the jurisdiction of the tribunal by filing a writ petition before the High Court, which was dismissed in 2017. Ultimately, in 2019, they filed an application under Section 14 before the High Court of Madhya Pradesh, contending that the arbitral tribunal had no jurisdiction based on Section 12(5). The High Court held that the 2015 Amendment cannot operate retrospectively to pending arbitrations.
On appeal, the SC categorically observed that no further steps were taken after the constitution of the tribunal in 2001 and therefore, the proceedings did not technically commence. Hence, the court applied Section 12(5) read with the Seventh Schedule. Relying on the decisions given in TRF Limited v. Energo Engineering Products (TRF) and Jaipur Zila Dugdh Utpadak Sahkari Sangh Limited v. M/s Ajay Sales and Suppliers (Jaipur Zila), the court held that once the arbitrator falls within any one of the categories under Schedule Seven, he will de-jure be unable to perform his functions. In other words, his mandate terminates and he cannot act as an arbitrator. In the instant case, all five arbitrators were related to the respondent as they were officers of the respondent, thereby terminating their mandate as per Section 12(5) read with the Seventh Schedule. Thus, a new independent arbitrator was appointed by the court.
Analysis of the Decision
It is clear in this case that the court ruled equitably in favour of the appellants since the arbitration proceedings have been pending since 2000. Although the decision upholds the principles of impartiality and neutrality of an arbitrator and ensures that the dispute is resolved in a fair manner, the judgment is incorrect regarding the concept of commencement of the arbitration proceedings under Section 21 and, more importantly, the application of the 2015 Amendment.
The court’s application of Section 12(5) was based on the rationale that the proceedings had not ‘technically’ commenced since no proceedings or hearings were held before the tribunal. However, the commencement of an arbitral proceeding for these purposes must be determined as per Section 21, which provides that the date of commencement will be the date on which the opposite party received the notice of arbitration or when the court referred the parties to arbitration. It is not mandatory that hearings must be held before the arbitrator since there is a difference between the expression commencement of an arbitration proceeding used in Section 21 and commencement of proceedings before an arbitrator. As observed in Milkfood Limited v. GMC Ice Cream Private Limited, the former means the formal commencement of proceedings after notice of arbitration is received by the opposite party or an order referring the parties to arbitration is passed, whereas the latter means the date on which the first hearing is held before an arbitrator. Under Section 26, formal commencement of proceedings is considered while applying the 2015 Amendment. The court failed to take this into account in Ellora Paper Mills since the proceedings had commenced in the year 2000 when an order referring the parties to arbitration was passed. The court also incorrectly relied on the decisions given in TRF and Jaipur Zila because in those cases, arbitration proceedings had commenced after the 2015 Amendment came into force and thus, Section 12(5) could be invoked.
Hence, although not explicitly stated, the decision has the effect of applying the 2015 Amendment retrospectively to proceedings that commenced before it came into effect.
Conclusion
Although the holding in Ellora Paper Mills is contrary to Section 26, courts are inclined to apply the 2015 Amendment to cases involving questions of biased arbitrators to ensure that the proceedings are fair and just. This may be in favour of the parties in the case, but it also sets a precedent allowing other parties to object to the appointment of arbitrators before whom proceedings have been continuing for an extended period of time. The parties are subject to a law they never knew existed at the time of the arbitrator's appointment. Hence, courts must deter from this practice to avoid inconvenience to the parties involved.