[This article has been authored by Ishita Agrawal & Paritoshika Singh, third-year law students at JGLS, Sonipat]

Keywords: Neutrality of Arbitrators, Retrospective application, Section 12(5), Arbitration.

Introduction

On the 4th of January, 2022, the Supreme Court, in the Ellora Paper Mills Ltd. v. State of Madhya Pradesh (“Ellora Mills”), decided that the Arbitration and Conciliation (Amendment) Act, 2015 (“2015 Amendment Act”) that inserted Clause 5 to Section 12 of the Arbitration and Conciliation Act, 1996 (“Act”) will apply retrospectively to proceedings that commenced before the 2015 Amendment Act came into force. The dispute arose between Ellora and the State of Madhya Pradesh when the State refused to pay for the paper supplied by Ellora, claiming it to be a duplicate rather than the original paper. The State refused to pay 90% of the due amount as the paper supplied allegedly did not adhere to proper specifications. Ellora filed a recovery suit in 1998, but the State filed an application to refer the dispute to arbitration. When the State constituted a tribunal for arbitration, Ellora challenged its jurisdiction under Section 13 of the Act. The Tribunal rejected Ellora’s challenge, after which Ellora contested the rejection in the High Court of Madhya Pradesh in 2001. The High Court, after a protracted delay, dismissed the challenge in 2017.

Ellora again filed a suit in the High Court for the termination of the Tribunal’s mandate and requested its substitution with a court-appointed arbitrator. They claimed that the Tribunal had lost its mandate post the 2015 Amendment Act after Clause 5 was inserted in Section 12 to protect the ‘neutrality of arbitrators’. The High Court rejected this argument; however, the Supreme Court allowed the appeal while accepting the argument. This article criticises the judgment in the Ellora Mills case. It argues that the Supreme Court failed to consider landmark precedents that developed the position of the law with respect to the retrospective application of the 2015 Amendment Act. Moreover, the article highlights the dissonance between the Judiciary and the Legislature in how each of them intended its application, with the former extending it retrospectively and the latter restricting it to a prospective application only.

Judicial Precedents and Interpretation

While dealing with the question of retrospective application of Section 12(5) of the Act, the Supreme Court did not consider the Ratnam Sudesh Iyer v. Jackie Kakubhai Shroff judgment, where the Court had already made the position of law clear with regards to the above question. The Court acknowledged in the Ratnam case in holding that since the promulgation of the 2015 Amendment Act, the scope of interference by the courts had become much more restricted under Section 34 of the Act.[1] The Court in the Ratnam case reiterated that the legislative intent could be derived from the Board of Control for Cricket in India v. Kochi Cricket Pvt. Ltd., according to which the 2015 Amendment Act must be applied prospectively. In the Ratnam Sudesh case, the Court held that a clause in the deed specified that the arbitration proceedings should be governed by the Act or “any amendment thereto”.[2] The counsel for petitioners argued that the phrase in the above clause included future amendments made to the Act and, therefore, the 2015 Amendment Act would be applicable. The Court struck down this reasoning again and concluded that a clause that sought to make the 2015 Amendment Act applicable to earlier proceedings could not be availed to expand the scope of the Court’s scrutiny in arbitration proceedings, as this would defeat the legislative intent behind Section 26 of the 2015 Amendment Act.[3] Therefore, the Court ruled that the pre-2015 legal position with regards to the question of law would prevail in the case. It must be pointed out that the Ratnam judgment dealt with an international commercial arbitration case, but the judges went an extra mile to clear the confusion surrounding the applicability of the 2015 Amendment Act. However, the Supreme Court failed to engage with the above case in the Ellora Mills judgment.

Further, in Ellora Mills, the Supreme Court laid emphasis on the principle of ‘neutrality of arbitrators’ that Section 12(5) seeks to preserve. The Court held that the arbitral Tribunal, although constituted in 2001, did not take steps to commence the arbitration proceedings. Therefore, ‘technically’ the arbitration proceedings had not commenced.[4] It is unclear what the Court implies by the technical commencement of the arbitration. Section 21 of the Act clearly lays down that unless otherwise agreed by the parties, the arbitral proceedings begin as soon as the request for referring a dispute to arbitration is received by the respondent. There is no mention of technical and non-technical commencement of proceedings under the Act. On a perusal of the facts of the case, one can easily see that the State filed an application to refer the dispute to arbitration, but the proceedings were stalled due to the incessant number of suits filed by Ellora.

The Tussle between the Legislature and the Judiciary

The retrospective vs prospective application of the 2015 Amendment Act has also been a contentious point of debate between the Parliament and the Judiciary. While Section 26 of the 2015 Act clearly postulated a prospective application of the 2015 Amendment Act, the Supreme Court in BCCI v. Kochi Cricket interpreted it to include a retrospective application as well. Thus, in effect, it purported to remove the clog on the enforcement of arbitral awards under Section 34 by rendering an automatic stay on the Award to be inoperative. Per contra, the Parliament repealed Section 26 and introduced Section 87 in the 2019 Amendment Act, which explicitly restated the application only to arbitral proceedings and related court proceedings that commenced on or after the cut-off date. This restored the position of the automatic stay on arbitral awards, where a petition was filed challenging the same before the cut-off date. However, the Supreme Court in Hindustan Construction Company Limited v. Union of India struck down such insertion of Section 87 and deletion of Section 26 as constitutionally invalid. The Court upheld this move of the Legislature as ‘manifestly arbitrary’ and ’unreasonable’, violating the scheme of Article 14 of the Constitution. Moreover, it deciphered the language of Section 87, referring to court proceedings as merely “parasitical” upon arbitral proceedings, such that the commencement date of only arbitral proceedings was material to the application of the 2015 Amendment Act.

Thus, the interpretation of the 2015 Amendment Act has been accompanied by a clear dissonance between the Judiciary and the Legislature. While the Judiciary has attempted to undertake a purposive interpretation by underlining the objective of the Arbitration Act, the reasoning is likely to be unsustainable. Moreover, although the stance in BCCI seems advantageous for ensuring the fruits of the arbitral awards under Section 34, for a substantive amendment like Section 12(5), it is likely to engender an ambiguity in the application, depending on varying permutations and combinations such as the date of commencement of arbitral proceedings, that of court proceedings, the nature of the petition filed, the stage of proceedings, and so on. This would render the amendment antithetical to the speedy redressal of disputes that arbitration seeks to achieve. It is well recognised that the neutrality of arbitrators constitutes an integral component of the entire arbitration process, and the law seeks to safeguard the same actively. However, such a safety valve should not unsettle pre-amendment arbitrations and subject them to a straitjacket application of the arbitrator appointment standards under the 2015 Amendment Act – particularly when the parties are forced to face the rigours of a law that was non-existent at the time of appointing their arbitrator. Such application consequently begets the necessity to maintain a balance between the fairness of the proceedings and the convenience of the parties.

Additionally, in the case of Jay Mahakali Rolling Mills v. Union of India, the Supreme Court identified and emphasised the difference between ‘retrospective’ and ‘retroactive’. While the former is a mere application of law to contemplate facts and rights occurring in the past, the latter imposes ‘a new obligation on transactions’ or ‘impairs vested rights’. In Ellora Mills, the Apex Court upheld the non-obstante nature of Section 12(5), which has the effect of overriding a party’s right to appoint an arbitrator in terms of the arbitration agreement if a clause is in contravention with Section 12. Thus, the decision of the Court in the aforementioned case is essentially advocating for a ‘retroactive’ application of the amended section by imposing new obligations on the parties that interfere with their vested rights. The balance between procedural fairness and party autonomy seems to have been conveniently tipped in favour of the former, bearing no consideration of the parties’ agreement. However, a continued retroactive application of the Section is extremely precarious, as it is devoid of any basis for its application to certain arbitral agreements and not to certain others. This potentiates detrimental effects to parties, particularly in cases like Ellora, where the arbitrator was appointed 20 years ago. Thus, while the Legislature and the Judiciary are engaged in a tussle to manoeuvre the application of the 2015 Amendment Act, subject to their reasoning, the parties emerge as the scapegoats in an atmosphere of ambiguity.

Conclusion

Thus, through a prima facie reading, the Supreme Court’s decision in Ellora Mills emerges as a bearer of a pro-arbitration stance. However, at the same time, it is plagued with ambiguity and uncertainty surrounding the future application of the reasoning adopted by the Court. A deficient interpretation of the ‘commencement of proceedings’ solely to support the retrospective application of Section 12(5) is likely to be unsustainable in the long run. Moreover, it also brings to the foreground a clear discrepancy between the two recent cases of Ratnam and Ellora Mills, both of which were presided over by a two-judge bench. This evident conflict and disregard of judicial precedents only posits a bleak stance for the harmonious development of arbitration laws in India. Consequently, an unclarified retroactive application of the 2015 Amendment Act in India could inevitably meddle with the vested rights of the parties, proving repugnant to the main objective of arbitration, particularly when the Legislature itself is at odds with the Judiciary in this regard.

[1] Ratnam Sudesh Iyer v. Jackie Kakubhai Shroff (2022) 4 SCC 206 (SC) (12).

[2] Ratnam (n 1) (25).

[3] Ratnam (n1) (31).

[4] Ellora Paper Mills Ltd. v State of Madhya Pradesh (2022) AIR 280(SC)(6).