Right To Seek Arbitration Not Lost Just Because Arbitration Clause Became Inoperable Due To Statutory Amendment: Supreme Court

The Supreme Court held that the invalidity or inoperability of an arbitration clause, such as one naming an ineligible arbitrator under Section 12(5) of the Arbitration and Conciliation Act, 1996, does not nullify the underlying arbitration agreement between the parties. The Court clarified that in such cases, the Court is empowered to step in and appoint a neutral arbitrator under Section 11(6) of the Act to preserve the efficacy of the arbitration mechanism.

The Court emphasised that the statutory disqualification of a named arbitrator under Section 12(5), read with the Seventh Schedule, does not render the arbitration clause itself void or non-existent. Rather, the clause remains enforceable, and the power to appoint an independent arbitrator shifts to the Court.

 In this case, the arbitration clause specified that the Managing Director of the respondent-company will act as the arbitrator. However, as per Section 12(5) of the Act, post the 2015 amendment, the Managing Director was disqualified from being an arbitrator.

The appellant approached the Supreme Court after the Madhya Pradesh High Court rejected the plea to appoint an arbitrator. 

Setting aside the High Court's judgment, the bench comprising Justice Dipankar Datta and Justice AG Masih observed :

“By virtue of its non-obstante clause [Section 12(5) of the Act], any person whose relationship with the parties falls within the disqualifications provided in Seventh Schedule is rendered ineligible to act as an arbitrator, this is notwithstanding any stipulation provided in the arbitration clause. If any arbitration clause runs contrary to the mandate provided in Section 12(5) of the 1996 Act, the power to appoint an independent arbitrator is vested with the court under section 11 of the 1996 Act, a principle consistent with pre-amendment jurisprudence under Section 11(8) of 1996 Act where courts had, even earlier, overridden restrictive arbitration clauses to ensure the appointment of impartial arbitrators.”, the court held.

The Judgment authored by Justice Masih rejected the Respondent's contention that the arbitration clause containing the procedure of arbitrator appointment became inoperative after the 2015 Amendment. The Court said that “merely because the procedure to appoint an arbitrator provided in the clause has become inoperative due to subsequent changes in statutory provisions, would not mean that the core of the contract referring the dispute for adjudication to arbitrator would be rendered nugatory.”

“The amendment in the statute has been enacted with the legislative intent to enforce neutrality of the arbitrator and bring impartiality in arbitration proceedings by virtue of Section 12(5) of the 1996 Act. It cannot be justified to literally interpret the clause in the contract in a manner or at the cost of the entire arbitration mechanism itself being abandoned. The arbitration agreement must be interpreted in a purposive manner, but not literally so as to enable the parties to pursue the intended dispute redressal mechanism of contract. Therefore, it cannot be said that non-operation of arbitration clause in GCC will result into forgoing of entire arbitration mechanism and rendering the Appellant disentitled for seeking appointment of arbitrator. The Appellant is, therefore, entitled to file application under section 11(6) of the 1996 Act for appointment of arbitrator and thereby the power is vested with the court to appoint an arbitrator upon filing of such application.”, the court added.

In support, the Court relied on the case of TRF Limited v. Energo Engineering Projects Limited where the Chairman and Managing Director of the respondent also became ineligible by the virtue of Section 12(5) read with the Seventh Schedule of the 1996 Act (as amended by Act 3 of 2016 w.e.f. 23.10.2015), the ineligibility also extends to power of nomination, thereby rendering any appointment made by him legally unsustainable. Consequently, the Court appointed an independent sole arbitrator holding that jurisdiction under Section 11(6) of the 1996 Act is not ousted merely because an appointment has already been made by the respondent if such appointment is ex facie invalid or contrary to the agreed procedure.

The Court further clarified the law of limitation in arbitration petitions under Section 11(6). Relying on Geo Miller & Co. Pvt. Ltd. v. Rajasthan Vidyut Utpadan Nigam Ltd., it reiterated that the right to apply under Section 11(6) accrues from the date when the final bill became due. Importantly, the Court also held that the limitation period must be computed after excluding the period covered by the Supreme Court's suo motu COVID-19 orders, which had extended limitation between March 15, 2020, and February 28, 2022.

Accordingly, the matter was referred to the Delhi International Arbitration Centre, which shall proceed to appoint an arbitrator, who shall decide the matter in accordance with law and rules, as applicable.

The appeal was allowed.

Cause Title: OFFSHORE INFRASTRUCTURES LIMITED VERSUS M/S BHARAT PETROLEUM CORPORATION LIMITED

Citation : 2025 LiveLaw (SC) 982
Click here to read/download the judgment

Appearance:

For Petitioner(s) :Mr. Gaurav Dudeja, Adv. Mr. Akarsh Garg, Adv. Mr. Kaushik Choudhury, AOR Mr. Dhruval Singh, Adv. Mr. Subhan Shankar Gogoi, Adv. Mr. Abhijit Debnath, Adv.

For Respondent(s) :Mr. Balbir Singh, Sr. Adv. Mr. Parijat Sinha, AOR Mr. Divyam Dhyani, Adv. Ms. Reshmi Rea Sinha, Adv. Mr. Deepak Joshi, Adv. Dr. Sanjay Sharma, Adv. Mr. Naman Tandon, Adv.