Chairman of party who entered into arbitration, can he be categorised as eligible under Arbitration and Conciliation Act? SC highlights impartiality of arbitrators as a key element while pronouncing this ruling

Supreme Court: Expressing on the aspect of independence and impartiality of the arbitrators, Division Bench of M.R. Shah and Aniruddha Bose, JJ., held that,

Though the word ‘Chairman’ is not mentioned explicitly in Seventh Schedule, at the same time, it would fall under clause 1, clause 2, clause 5, and clause 12 of the Seventh Schedule, hence will be ineligible for the purpose of the arbitration.

The above schedule is to be read with Section 12(5) of the Arbitration and Conciliation Act.

Aggrieved and dissatisfied with the impugned order of Rajasthan High Court allowing applications under Section 11 of the Arbitration and Conciliation Act, 1996 and appointing an Arbitrator, Jaipur Zila Dugdh Utpadak Sahkari Sangh Ltd., preferred the present Special Leave Petitions.

Facts leading to the present matter

Respondent and the Sahkari Sangh entered into a Distributorship Agreement for the distribution of milk and butter milk in certain zones in Jaipur for a period of two years.

Disputes arose between the two and as per Clause 13 of the said agreement, all disputes and differences arising out of or in any way touching or concerning the agreement, whatsoever shall be referred to the sole Arbitrator, the Chairman, Jaipur Zila Dugh Utpadak Sahkari Sangh Ltd. and his decision shall be final and binding for the parties.

Respondent approached the Sole Arbitrator for settlement of a commercial dispute between the parties.

But during the pendency of the arbitration proceedings, the respondent approached the High Court for appointment of an arbitrator in exercise of powers under Section 11 of the Act and invoking the arbitration contained in clause 13 of the Agreement.

Opposing the above, petitioner submitted that once the respondent has approached the Sole Arbitrator invoking clause 13 and participated in the arbitration proceedings, it is not open for it to approach the High Court to appoint an arbitrator under Section 11 of the Act.

High Court considering Section 12(5) read with 7th Schedule to the Act, allowed the said application and had appointed the former District and Sessions Judge to act as an arbitrator.

Analysis, Law and Decision

Supreme Court noted that the High Court while allowing the application under Section 11 of the Act had appointed the arbitrator other than the Chairman.

Petitioners Contention:

Agreement was prior to the insertion of Sub­section (5) of Section 12 read with Seventh Schedule to the Act and therefore the disqualification under Sub­section (5) of Section 12 read with Seventh Schedule to the Act shall not be applicable and that once an arbitrator – Chairman started the arbitration proceedings thereafter the High Court is not justified in appointing an arbitrator.

Court’s view:

Petitioner’s contention stated above had no substance.

Supreme Court’s decisions in Trf Ltd. v. Energo Engineering Projects Ltd., (2017) 8 SCC 377, Voestalpine Schienen GMBH v. Delhi Metro Rail Corporation Ltd., (2017) 4 SCC 665, considered in detail the object and purpose of insertion of Section 12(5) read with Seventh Schedule to the Act.

In the decision of Voestalpine Schienen GMBH v. Delhi Metro Rail Corporation Ltd., (2017) 4 SCC 665, it was observed and held by the Court that the main purpose of amending the provision was to provide for ‘neutrality of arbitrators.’

Further, it was observed in the case that,

Sub­section (5) of Section 12 lays down that notwithstanding any prior agreement to the contrary, any person whose relationship with the parties or counsel or the subject­matter of the dispute falls under any of the categories specified in the Seventh Schedule, he shall be ineligible to be appointed as an arbitrator. It is further observed that in such an eventuality i.e. when the arbitration clause finds foul with the amended provisions (Sub­section (5) of Section 12 read with Seventh Schedule) the appointment of an arbitrator would be beyond pale of the arbitration agreement, empowering the court to appoint such arbitrator as may be permissible. It is further observed that, that would be the effect of non obstante clause contained in sub­section (5) of Section 12 and the other party cannot insist on appointment of the arbitrator in terms of the arbitration agreement.

Adding to the above list of decisions, Court added another one, Bharat Broadband Network Ltd.v. Telecoms Limited, (2019) 5 SCC 755, wherein it was observed that Section 12(5) read with Seventh Schedule made it clear that if the arbitrator falls in any one of the categories specified in the Seventh Schedule, he becomes ‘ineligible’ to act as an arbitrator. Once he becomes ineligible he then becomes dejure unable to perform his functions.

Petitioners Contention:

In view of Section 58 of the Rajasthan Cooperative Societies Act, 2001, the dispute between the parties is to be resolved by the Registrar only and as per Bye Laws 30 of Rajasthan Cooperative Societies Act, 2001 shall be applicable and therefore no court shall have jurisdiction and therefore the dispute referred to the former District Judge is unsustainable has no substance.

Court’s view:

Bench opined that, despite Section 58 of the Rajasthan Cooperative Societies Act, 2001, there is an agreement between the parties to resolve the dispute through arbitrator – Chairman. Parties are bound by the agreement and the arbitration clause contained in the Agreement.

Hence, neither Section 58 of the Rajasthan Cooperative Societies Act, 2001 shall not be applicable at all nor the same shall come in the way of appointing the arbitrator under the Arbitration Act.

Significant Question:

Whether the Chairman who is an elected member of the petitioner Sahkari Sangh can be said to be ineligible under Section 12(5) read with Seventh Schedule to the Act or not?

As per the petitioner, Seventh Schedule to the Act ‘Chairman’ is not mentioned and only Manager, Director or part of the Management can be said to be ineligible.

Court’s view:

Bench expressed that Section 12 (5) read with Seventh Schedule was inserted bearing in mind the ‘impartiality and independence’ of the arbitrators. It had been inserted with the purpose of ‘neutrality of arbitrators.’

Independence and impartiality of the arbitrators are the hallmarks of any arbitration proceedings, as observed in Voestalpine Schienen GMBH v. Delhi Metro Rail Corporation Ltd., (2017) 4 SCC 665.

Rule against bias is one of the fundamental principles of natural justice which apply to all judicial proceedings and quasi­judicial proceedings and it is for this reason that despite the contractually agreed upon, the persons mentioned in Sub­section (5) of Section 12 read with Seventh Schedule to the Act would render himself ineligible to conduct the arbitration.

In view of the above-cited decision, Supreme Court held that Chairman of the petitioner Sangh can certainly be held to be ‘ineligible’ to continue as an arbitrator. Court added that though the word ‘Chairman’ is not specifically mentioned, but it would fall in the category of Clause 1; Clause 2; Clause 5; Clause 12 which read as under:

“1. The arbitrator is an employee, consultant, advisor or has any other past or present business relationship with a party.

  1. The arbitrator currently represents or advises one of the parties or an affiliate of one of the parties
  2. The arbitrator is a manager, director or part of the management, or has a similar controlling influence, in an affiliate of one of the parties if the affiliate is directly involved in the matters in dispute in the arbitration.
  1. The arbitrator is a manager, director or part of the management, or has a similar controlling influence in one of the parties.”

Therefore, Chairman who was elected member/Director of the Sangh could certainly be said to be ‘ineligible’ to become an arbitrator as per Section 12(5) read with Seventh Schedule to the Act.

Petitioner’s Contention:

Respondents participated in the arbitration proceedings before the sole arbitrator – Chairman and therefore he ought not to have approached the High Court for appointment of arbitrator under Section 11

Court’s view:

While citing the decision of this Court in Bharat Broadband Network Ltd. v. Telecoms Limited, (2019) 5 SCC 755, wherein it was stated that there must be an ‘express agreement’ in writing to satisfy the requirements of Section 12(5) proviso, Bench found the above substance also unsustainable.

Conclusion

On considering the above discussion, Supreme Court held that once the sole arbitrator – Chairman is ‘ineligible’ to act as an arbitrator to resolve the dispute between the parties in view of Section 12(5) read with Seventh Schedule to the Act he loses mandate to continue as a sole arbitrator.

Hence, High Court did not commit any error in appointing the arbitrator other than the sole arbitrator – Chairman.

Taking into consideration the above reasons, Supreme Court dismissed the applications. [Jaipur Zila Dugdh Utpadak Sahkari Sangh Ltd. v. Ajay Sales & Suppliers, 2021 SCC OnLine SC 730, decided on 9-09-2021]


Advocates before the Court

Gunjan Pathak, Counsel for the Petitioners

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