A 1993 contract, a state's own officers as judges — then a 2015 law changed everything

The state's own officers were judging a dispute with the state. The company objected for 20 years. Then a 2015 law silently wiped out the panel — no one had to ask.

In January 2022, the Supreme Court of India did something that sounds simple but took two decades to happen: it told the Madhya Pradesh government that its own employees could no longer sit in judgment over a company the state had refused to pay. The panel was gone. Not because anyone asked for it to be removed, but because the law itself had made it impossible for them to stay.

The question the court had to answer was this: when Parliament amends the Arbitration Act in 2015 to say that certain people cannot be arbitrators, does that rule apply to an arbitration panel that was set up in 2001 — or does the old panel get to finish its work?

1993 — the contract that started it

Ellora Paper Mills Limited won a contract to supply paper to the State of Madhya Pradesh. The company delivered the consignments. The state rejected some of them, claiming the paper did not meet the required specifications. Then the state refused to pay.

The company sued for recovery of its money in a civil court in Bhopal. The state responded by invoking an arbitration clause in the contract — a clause that said disputes would be decided by the Stationery Purchase Committee, a body made up entirely of the state's own officers.

The company objected immediately. It told the court and the committee that having the state's own employees decide a dispute with the state was fundamentally unfair. The committee rejected that objection in 2001. The company then spent the next 16 years fighting through various legal proceedings — a revision petition before the High Court, a special leave petition before the Supreme Court that was withdrawn, and a writ petition that was dismissed with liberty to approach again.

2015 — the amendment that changed everything mid-game

While the case was frozen in procedural limbo, Parliament passed the Arbitration and Conciliation (Amendment) Act, 2015. Among other changes, it inserted a new Section 12(5) into the Arbitration Act — a provision that made certain categories of people ineligible to serve as arbitrators. The Seventh Schedule to the Act listed those categories. At the top of the list: an employee or officer of one of the parties to the dispute.

The amendment also said that this ineligibility could only be waived if the parties expressly agreed in writing after the dispute had arisen. A clause buried in an old contract would not count.

In 2017, the company filed an application before the Madhya Pradesh High Court under Section 14 of the Arbitration Act (the provision that deals with an arbitrator's failure or impossibility to act), read with Sections 11 and 15 (which govern appointment and substitution of arbitrators). The company argued that the Stationery Purchase Committee had lost its mandate by operation of law — the 2015 amendment had made them ineligible, and no one had to file a separate challenge to remove them.

The High Court disagreed. It held that the 2015 amendment applied only to arbitration agreements entered into after the amendment came into force. Since the contract was from 1993 and the arbitration had started in 2001, the old rules applied. The committee could continue.

Why the Supreme Court said the High Court was wrong

The Supreme Court reversed the High Court in a judgment delivered on January 4, 2022, by a bench comprising Justice M.R. Shah and Justice B.V. Nagarathna. The court held that the 2015 amendment did not need to be retrospective in the traditional sense to apply to this case. The key was not when the arbitration started, but whether the committee could legally continue to act after the amendment came into force.

The court relied on a series of its own precedents. In TRF Limited v. Energo Engineering Projects Limited (2017), the Supreme Court had held that if a person is ineligible to be appointed as an arbitrator, they are also ineligible to nominate someone else. In Bharat Broadband Network Limited v. United Telecoms Limited (2019), the court had clarified that Section 12(5) read with the Seventh Schedule operates automatically — it does not require a party to file a challenge. The mandate of an ineligible arbitrator terminates by operation of law.

The court also cited Jaipur Zila Dugdh Utpadak Sahkari Sangh Limited v. Ajay Sales & Suppliers (2021), where it had held that mere participation in arbitration proceedings does not amount to an express agreement in writing to waive the applicability of Section 12(5). Such a waiver requires a separate, written agreement after the dispute has arisen.

Applying these principles, the Supreme Court held that the Stationery Purchase Committee — composed entirely of officers of the State of Madhya Pradesh — fell squarely within the prohibited categories under the Seventh Schedule. Their mandate had terminated by operation of law the moment the 2015 amendment came into force. The company did not need to file a fresh challenge. The committee was simply no longer capable of acting as arbitrators.

The verdict lands

The court appointed Justice Abhay Manohar Sapre, a former Supreme Court judge, as the sole arbitrator to decide the dispute between Ellora Paper Mills and the State of Madhya Pradesh. The parties were directed to appear before him within four weeks.

For practitioners and companies dealing with state governments, this judgment settles a question that had been litigated for years. An arbitration clause that appoints government officers as arbitrators is not merely undesirable — it is legally unenforceable after the 2015 amendment. The old practice of having departmental committees decide disputes with the state is no longer valid, even if the arbitration clause was signed decades ago.

THE PLAY: If your arbitration agreement appoints an employee or officer of one party as arbitrator, that clause is dead — the mandate terminates automatically under Section 12(5) read with the Seventh Schedule, and you can go directly to court to appoint a neutral arbitrator without filing a separate challenge.

The state's own officers were judging a dispute with the state. The law finally said they could not.