India: Interested Party Not Eligible To Be An Arbitrator: Supreme Court Of India

Interested Party Not Eligible To Be An Arbitrator: Supreme Court Of India

The Hon'ble Supreme Court in its recent judgment in Jaipur Zila Dugdh Utpadak Sahkari Sangh Limited and Ors. v. M/s Ajay Sales and Suppliers¹ emphasised upon the impartiality of an arbitrator and held that chairman of one of the disputants would be ineligible to be an arbitrator under the Arbitration and Conciliation Act, 1996 (Arbitration Act). In this article, we briefly discuss the facts and circumstances which led to the aforementioned judgment of the Hon'ble Supreme Court.

Brief facts

The present matter deals with special leave petitions (SLPs) filed by the petitioners, including the Jaipur Zila Dugdh Utpadak Sahkari Sangh Ltd. (Sakhari Sangh). The SLPs have been filed against the impugned orders of the High Court of Judicature for Rajasthan (High Court), allowing applications under Section 11 of the Arbitration Act. In May 2015, the respondent entered into a distributorship agreement (Agreement) to distribute milk and buttermilk in certain zones of Jaipur. Disputes arose amongst the parties in pursuance of the Agreement. The arbitration clause under the Agreement provided that all disputes and differences arising out of or in any way touching or concerning the Agreement would be referred to the sole arbitrator, i.e., the Chairman of Sahkari Sangh (Chairman). In August 2018, the respondent made representation to the Sahkari Sangh, pointing out his grievance and the dispute. Thereafter, in October 2019, the respondent approached the sole arbitrator as per the Agreement's arbitration clause. During the pendency of the arbitration proceedings, the respondent approached the High Court to appoint an arbitrator in the exercise of powers under Section 11 of the Arbitration Act. The petitioners opposed the said application. The High Court eventually allowed the application filed under Section 11 of the Arbitration Act and appointed an arbitrator. Feeling aggrieved and dissatisfied with the impugned order allowing the appointment of a fresh arbitrator, the petitioners preferred the present petitions.

Contentions of the petitioners

The petitioner argued that once the respondent approached the Chairman – sole arbitrator for resolving the dispute, it was not open to the High Court to appoint an arbitrator under Section 11 of the Arbitration Act. The petitioner also pointed out that the Agreement in the instant matter was signed before the insertion of sub-section (5) in Section 12 by amendment of the Arbitration Act. Thus, the petitioner argued that sub-section (5) of Section 12, read with the Seventh Schedule of the Arbitration Act would not be applicable to the present case. Further, the petitioner pointed out that a 'chairman' was not included in within the disqualified/ ineligible person to be appointed in Seventh Schedule of the Arbitration Act.

In an alternative argument, the petitioner stated that Clause 30 of bye-laws of Sahkari Sangh state that all disputes of the society shall be dealt with as per the Rajasthan Cooperative Societies Act, 2001. As per Section 58 of the Rajasthan Cooperative Societies Act, 2001, the dispute between the parties was required to be resolved by the registrar of co-operative societies (Registrar), and the decision of the Registrar would be final. The petitions submitted that the non-obstante clause contained under Section 58 of the Rajasthan Cooperative Societies Act, 2001 superseded Section 12(5) of the Arbitration Act. Therefore, as per the petitioner, no court of law shall have jurisdiction to entertain any suit or proceeding regarding the dispute.

The petitioner then referred to the case in S.B.P. & Co. v. Patel Engineering Ltd. & Anr.² to contend that once the matter reached the arbitration tribunal or the sole arbitrator, the High Court would not interfere with the arbitral process. In such circumstances, unless a party aggrieved by any order of the arbitral tribunal has a right of appeal under Section 37 of the Arbitration Act, it has to wait until the tribunal passes the award.

Held

The Hon'ble Supreme Court at the outset observed that there was no dispute that the Agreement was dated prior to the insertion of sub-section (5) to Section 12 and Seventh Schedule of the Arbitration Act. The Apex Court rejected the petitioner's submission that the Agreement was prior to the introduction of Section 12(5), and therefore the said provision would not apply to the instant matter. Reliance was placed on a catena of decisions³ wherein the Hon'ble Supreme Court had considered the object and purpose of insertion of sub-section (5) of Section 12 read with Seventh Schedule of the Arbitration Act in detail. The Apex Court noted that the primary purpose of introducing the provisions mentioned above was to provide for the neutrality of arbitrators.

The Apex Court observed that the independence and impartiality of an arbitrator was the hallmark of any arbitration proceeding. The rule against bias was one of the natural justice's fundamental principles, which applied to all judicial and quasi-judicial proceedings. Thus, even when an arbitrator is appointed in terms of contract and by parties to the contract, he must be independent of the parties. If an arbitrator falls within any one of the categories specified in the Seventh Schedule, he becomes ineligible to act as an arbitrator.

The Hon'ble Supreme Court also rejected the argument of the petitioners that Section 58 of the Rajasthan Cooperative Societies Act, 2001, applied to the instant matter. It was observed that the Arbitration Act was a special enactment. Moreover, sub-section (5) of Section 12 begins with a non-obstante clause. The Agreement called for the resolution of disputes through arbitration. Therefore, parties were bound by the Agreement and the arbitration clause contained therein. Accordingly, the Apex Court held that neither Section 58 of the Rajasthan Cooperative Societies Act, 2001 should be applicable at all nor the same shall come in the way of appointing the arbitrator under the Arbitration Act.

It was observed that even 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. Accordingly, applying the decisions discussed and considering the object and purpose of insertion of Section 12(5) read with Seventh Schedule to the Arbitration Act, the Apex Court held the Chairman to be 'ineligible' to continue as an arbitrator. Thus, the special leave petitions were dismissed.

Comments

It is a fundamental principle of arbitration jurisprudence across the world that arbitrators must act neutral and be independent of the disputants. Independence and neutrality of arbitrators is indispensable to hold fair proceedings and a basic tenet of principles of natural justice. The aspect of neutrality of arbitrator goes to the very root of the arbitral proceedings. Thus, in the words of the Apex Court as held in TRF Limited v. Energo Engineering Projects Limited⁴, once the infrastructure collapses, the superstructure is bound to collapse. Thus, parties must take utmost care in ensuring that the arbitrators appointed in their matter have no interest in the dispute.

Footnotes

1 Jaipur Zila Dugdh Utpadak Sahkari Sangh Limited and Ors. v. M/s Ajay Sales and Suppliers, Special Leave Petition (Civil) No. 13250 of 2021.

2 S.B.P. & Co. v. Patel Engineering Ltd. & Anr., (2005) 8 SCC 618.

3 Trf Ltd. v. Energo Engineering Projects Ltd., (2017) 8 SCC 377; Bharat Broadband Network Limited v. United Telecoms Limited, (2019) 5 SCC 755; Voestalpine Schienen GMBH v. Delhi Metro Rail Corporation Limited, (2017) 4 SCC 665.

4 TRF Limited v. Energo Engineering Projects Limited, (2017) 8 SCC 377.

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