JAIPUR ZILA DUGDH UTPADAK SAHKARI SANGH LTD. & ORS. Vs. M/S. AJAY SALES & SUPPLIERS

[SPECIAL LEAVE PETITION (CIVIL) NO. 13520 OF 2021]

J. (M.R. SHAH) J. (ANIRUDDHA BOSE)

Date : 09.09.2021

LAW POINT- High Court can exercise the  powers  under  Section  11  of  the  Arbitration and Conciliation Act, 1996 to appoint another arbitrator, in the event a person becomes ineligible, to act as an arbitrator appointed under the arbitration agreement.

FACTS

The respondent and petitioner organisation entered into an agreement for distribution of dairy products in Jaipur. A dispute arose, within the parties and it was referred to an arbitration as the contract, provided for the same. It was also provided that the arbitration shall be a referred to a sole Arbitrator who was the Chairman of the petitioner’s organisation. During the pendency of the arbitral proceeding, the respondent approached the High Court to appoint a new Arbitrator. The High Court allowed the petition and appointed a former District Judge to act as the Arbitrator. Appealing against the High Court’s order, the Counsel for petitioner contended that Section 12(5) was brought into effect after the amendment in 2015, but the agreement was made prior to this. Hence, same will not apply. It was also submitted that the Seventh Schedule to be read with Section 12(5) does not mention Chairman as ineligible person as an Arbitrator. The Counsel also referred to a clause in the agreement which stated that all disputes will be dealt as per the Rajasthan Cooperative Societies Act, 2001. It was contended that this non obstante clauses superseded Section 12(5) of the Arbitration and Conciliation Act. It was also put forth that the High Court cannot interfere in an ongoing arbitral procedure and the aggrieved can only appeal, after the award of the Arbitral Tribunal. This Court believed that the contention of the petitioner had no substance. The Court held that Section 12(5) applies even to prior agreements and keeping in mind the object of this insertion, the contention of the petitioner was not accepted. With regard to the Rajasthan Cooperative Societies Act under Section 58, the court observed that even though it was accepted that disputes shall be resolved as per this  Act, the  parties went out and made an agreement to appoint a Chairman as an Arbitrator, hence the argument of the petitioner holds no merit. In view of the stated reasons, the court dismissed the petition, Hence, the appeal is before the Apex Court.

ISSUE- Whether Chairman of a company, which is involved in an arbitration proceeding, is an ineligible Arbitrator under Section 12(5) of the Arbitration and Conciliation Act, 1996, to be read with Seventh Schedule?

LEGAL PROVISIONS- Section 11 of the Arbitration and Conciliation Act, 1996 – Appointment of arbitrators.

Section 12(5) of the Arbitration and Conciliation Act, 1996 – Notwithstanding any prior agreement to the contrary, any person whose relationship with the parties or counsel or the subject-matter of the dispute, falls under any of the categories specified in the Seventh Schedule, shall be ineligible to be appointed as an arbitrator.

OBSERVATIONS OF HON’BLE SUPREME COURT

OBJECT OF AMENDMENT ACT 2015

The Amendment of 2015 to Section 12, regarding the disqualification, tries to bring neutrality of Arbitrator to promote impartial and independent arbitral proceedings. To achieve that, this Section must be read as whole keeping in mind the objects of the Section and not to confine this to the exact words mentioned in the Section

This court while referring to Voestalpine Schienen GMBH V. Delhi Metro Rail Corporation Ltd (2017), reiterated the observation of the Supreme Court, wherein the Courts examined and laid down the object and purpose of this insertion. It held that the main aim was to promote unbiased and neutral Arbitrators. An independent and impartial Arbitrator would only further the core objective of approaching an arbitration tribunal.

ARBITRATOR TO BE INDEPENDENT & IMPARTIAL

Independence and impartiality of the arbitrator are the hallmarks of any arbitration proceedings. Rule against bias is one of the fundamental principles of natural justice which applied to all judicial and quasi-judicial proceedings. It is for this reason, that notwithstanding the fact that relationship between the parties to the arbitration and the arbitrators themselves are contractual in nature and the source of an arbitrator’s appointment is deduced from the agreement entered into between the parties, notwithstanding the same, nonindependence and non-impartiality of such arbitrator (though contractually agreed upon) would render him ineligible to conduct the arbitration.

The genesis behind this rational is that even when an arbitrator is appointed in terms of contract and by the parties to the contract, he is independent of the parties. Functions and duties require him to rise above the partisan interest of the parties and not to act in, or so as to further, the particular interest of either parties. After all, the arbitrator has adjudicatory role to perform and, therefore, he must be independent of parties as well as impartial.

SCOPE & EFFECT OF INELIGIBILITY UNDER SEVENTH  SCHEDULE  R/W  SECTION 12(5)

Section 12(5) states as ‘notwithstanding any prior agreements’- This in itself acts a non obstante clause, hence there cannot be any contravention to this section. The Court, while considering the ineligibility of the Chairman and the contention that there was no explicit mentioning of Chairman in the Seventh Schedule, held that the scope of the Schedule was much wider and it should be read keeping in mind the object of the amendment and it should not be constrained to the wordings in the Schedule. The Arbitrator has an adjudicatory function to perform hence, it is important that he is independent and not influenced by external factors. Therefore, the meaning and scope of the Schedule cannot be limited and if the Arbitrator is found to be ineligible, the court can appoint another Arbitrator. The proviso  to Section 12(5) provides for parties to waive this section, by a written agreement. In absence of the same, the respondent can approach the Court for appointing an independent and unbiased arbitrator.

As held by the Apex Court, in the case of Bharat Broadband Network Limited v. United Telecoms Limited 2019 SC,  there must be an ‘express agreement’ in writing to satisfy the requirements of Section 12(5) proviso. It was held as under:

“Section 12(5), is a new provision which relates to the de jure inability of an arbitrator to act as such. Under this provision, any prior agreement to the contrary is wiped out by the non-obstante clause in Section 12(5). The moment any person whose relationship with the parties or the counsel or the subject matter of the dispute falls under the Seventh Schedule, the subsection then declares that such person shall be “ineligible” to be appointed as arbitrator. The only way in which this ineligibility can be removed is by the proviso, which again is a special provision which states that parties may, subsequent to disputes having arisen between them, waive the applicability of Section 12(5) by an express agreement in writing.”

It is therefore clear that where, under any agreement between the parties, a person falls within any of the categories set out in the Seventh Schedule, he is, as a matter of law, ineligible to be appointed as an arbitrator. The only way in which this ineligibility can be removed, again, in law, is that parties may after disputes have arisen between them, waive the applicability of this subsection by an “express agreement in writing”. Obviously, the “express agreement in writing” has reference to a person who is interdicted by the Seventh Schedule, but who is stated by parties (after the disputes have arisen between them) to be a person in whom they have faith, notwithstanding the fact that such person is interdicted by the Seventh Schedule.

Independent and unbiased arbitrator is a significant characteristic of an arbitration proceeding. It is also important that the same should not be compromised. To achieve the same, the relevant law must be interpreted, keeping in mind the purpose of the law and to provide for wider scope to weed out ineligible people, who might be influenced due to the prevailing facts and circumstance for an effective delivery of an award.

Once the sole arbitrator – Chairman is ‘ineligible’ to act as an arbitrator to resolve the dispute between the parties in view of Subsection (5) of Section 12 read with Seventh Schedule to the Act, he loses mandate to continue as a sole arbitrator.  Therefore,  it cannot be said that the High Court has committed  any  error  in  appointing  the arbitrator, other than the sole arbitrator  –  Chairman  as  per  Clause  13  of  the Agreement in exercise of powers, under Section 11 read with Section 14 of the Act.

DECISION– In view of the above and for the reasons stated above, all these applications deserve to be dismissed.