Clause 25 Declared Inoperative: Reinforcing Section 12(5) Ineligibility in Public Contracts

I. Introduction

In M/s R.S. Construction v. Building Construction Department, the Patna High Court addressed the enforceability of an arbitration clause (Clause 25) within a public works contract. The petitioner, M/s R.S. Construction, entered into an agreement with the Building Construction Department, Government of Bihar, which contained Clause 25 for dispute resolution by arbitration. After disagreements arose, the petitioner submitted a request for the appointment of an arbitrator as per the Arbitration and Conciliation Act, 1996.

The respondents, however, opposed this request by relying on the High Court’s own precedent in The State of Bihar v. Kashish Developers Limited (C.Rev No. 181 and 182 of 2023), where the Court had concluded that Clause 25 rendered the role of the Engineer-in-Chief or the administrative head to serve as arbitrator, or appoint one, inoperative due to the disqualification introduced by the 2016 amendment to the Arbitration and Conciliation Act.

The controversy primarily revolved around the effect of Section 12(5) of the Arbitration and Conciliation Act, 1996, which rendered certain potential arbitrators ineligible. This Judgment explores whether, in the absence of a valid mechanism to appoint arbitrators, parties are left with no recourse to arbitration and must instead resort to litigation in the civil courts.

II. Summary of the Judgment

The Court dismissed the petitioner’s request for the appointment of an arbitrator. It arrived at this conclusion by applying and reaffirming its earlier decision in The State of Bihar v. Kashish Developers Limited, where Clause 25 of public contract agreements was declared unenforceable once the designated arbitrator (the Engineer-in-Chief or the administrative head) became ineligible under Section 12(5) of the Arbitration and Conciliation Act, 1996. Since no other recourse for arbitration was stipulated in Clause 25, the Court held that the arbitration clause effectively became “otiose.” Consequently, the parties have no option but to pursue litigation in the regular civil court for dispute resolution unless they mutually agree, subsequent to the dispute, on another arrangement in writing, as per the proviso to Section 12(5).

III. Analysis

A. Precedents Cited

The State of Bihar v. Kashish Developers Limited (C.Rev No. 181 and 182 of 2023)
The High Court in this earlier case interpreted Clause 25 and concluded that once the designated arbitrator was disqualified by operation of Section 12(5), the arbitration clause ceased to exist. This ruling was further solidified when Special Leave Petitions to challenge it were dismissed by the Supreme Court.
Voestalpine Schienen GmbH v. Delhi Metro Rail Corpn. Ltd.
This Supreme Court decision underscored the principles of independence and impartiality enshrined in Section 12(5). An arbitrator lacking these attributes becomes ineligible.
TRF Ltd. v. Energo Engineering Projects Ltd.
The Court reaffirmed that a person who is ineligible under Section 12(5) cannot act as an arbitrator and is also disqualified from appointing someone else to arbitrate.
Perkins Eastman Architects Dpc v. Hscc (India) Ltd.
Emerging from TRF Ltd., it was clarified that any unilateral appointment by a disqualified person is unsustainable, reflecting the fundamental principle of fairness and equality in arbitration proceedings.
Central Organisation for Railway Electrification v. ECI-SPIC-SMO-MCML(JV)
This judgment introduced the idea of a “counter balance” in appointments only when parties share meaningful participation. However, as the Patna High Court noted, no such balancing mechanism existed under Clause 25.
Municipal Corporation of Greater Mumbai Case
Cited for the proposition that, where a contract disallows arbitration upon the ineligibility of a named arbitrator, parties must resort to civil courts.

B. Legal Reasoning

The Court’s reasoning turned primarily on the language of Clause 25, which explicitly indicated that no individual other than the one appointed by the Engineer-in-Chief or administrative head could serve as arbitrator, and should that appointment be impossible, the matter would not be referred to arbitration at all. After the 2016 amendment to the Arbitration and Conciliation Act, Section 12(5) effectively rendered the Engineer-in-Chief and the administrative head statutorily ineligible to act as arbitrators or even appoint others to this role.

Since the parties had not executed any subsequent agreement to waive Section 12(5)’s prohibitions, the Court held that the invocation of Clause 25 could not survive this ineligibility. In other words, the entire arbitration clause was extinguished because the only mechanism for appointing an arbitrator was unavailable under the law.

C. Impact

The Judgment significantly impacts public contracts containing similar “sole arbitrator” clauses or unrestricted power of appointment by a government official. As a result of this ruling:

Contracts featuring the same Clause 25 will be rendered unenforceable insofar as arbitration is concerned, forcing parties to pursue civil litigation unless they mutually consent to a new arrangement.
Government bodies and contracting parties will have to revise their standard clauses to ensure compliance with Section 12(5) of the Arbitration and Conciliation Act, 1996, to preserve the right to arbitrate.
Unilateral appointment clauses, especially in public-private contracts, face heightened scrutiny under constitutional principles of fairness and equality.

IV. Complex Concepts Simplified

Section 12(5) of the Arbitration and Conciliation Act, 1996:
This provision states that if the arbitrator’s relationship to the dispute or the parties falls within certain prohibited categories (detailed in the Seventh Schedule), that arbitrator becomes ineligible. The law further clarifies that the disqualified individual cannot even nominate a third person as an arbitrator. Only if both parties, after the dispute has arisen, choose to waive this ineligibility in writing, can that specific individual’s appointment proceed legally.

Unilateral Appointment By Ineligible Person:
If a clause confers exclusive power on one party (or its officer) to appoint the arbitrator and that individual is disqualified under Section 12(5), not only is that person barred from acting as the arbitrator, they cannot appoint anyone else either. This is crucial in ensuring a fair and impartial arbitral proceeding.

“Otiose” Clause:
When the court refers to Clause 25 as “otiose,” it signifies that the clause is effectively rendered useless or without legal effect. Since the designated person or office is disqualified by statute from appointing arbitrators, the contractual right to arbitrate simply disappears.

V. Conclusion

The Patna High Court reaffirmed that if a public contract vests the power of appointing an arbitrator in a person or office that is ineligible under Section 12(5) of the Arbitration and Conciliation Act, any resulting arbitration clause becomes inoperative. This decision underscores the importance of updating standard arbitration clauses in government contracts to comply with modern arbitration norms, ensuring the independence and impartiality of arbitrators.

In turn, the Judgment highlights that the parties, notwithstanding earlier contractual commitments, must adhere to statutory requirements. Where no viable alternative appointment mechanism exists, litigation remains the only remedy unless both parties explicitly and subsequently agree to waive the Section 12(5) disqualification. This case sets a crucial precedent that demands careful drafting of dispute resolution clauses and emphasizes legislative policy favoring fair and unbiased arbitration processes.