INTRODUCTION
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)
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.”
SEVENTH SCHEDULE
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.
INDEPENDENCE AND IMPARTIALITY
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.”
SUMMARY AND CONCLUSION
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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