1. Distributorship agreement with arbitration clause naming Chairman as sole arbitrator — Dispute arising — Application under Section 11, Arbitration & Conciliation Act for appointment of neutral arbitrator. (Para 3 )
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2021 Supreme(SC) 988
SUPREME COURT OF INDIA
M.R. SHAH, ANIRUDDHA BOSE, JJ.
Jaipur Zila Dugdh Utpadak Sahkari Sangh Limited & Ors. - Petitioners
Versus
M/s Ajay Sales & Suppliers - Respondent
Special Leave Petition (Civil) No. 13520 of 2021
With
Jaipur Zila Dugdh Utpadak Sahkari Sangh Limited & Ors. - Petitioners
Versus
M/s Anuj Associates - Respondent
Special Leave Petition (Civil) No. 13543 of 2021
With
Jaipur Zila Dugdh Utpadak Sahkari Sangh Limited & Ors. - Petitioners
Versus
M/s Parth Tours & Logistics Solutions - Respondent
Special Leave Petition (Civil) No. 13663 of 2021
With
Jaipur Zila Dugdh Utpadak Sahkari Sangh Limited & Ors. - Petitioners
Versus
M/s Ajay Sales & Suppliers - Respondent
Special Leave Petition (Civil) No. 13632 of 2021
With
Jaipur Zila Dugdh Utpadak Sahkari Sangh Limited & Ors. - Petitioners
Versus
M/s Anuj Associates - Respondent
Special Leave Petition (Civil) No. 13870 of 2021
Decided On : 09-09-2021
Important Points
The Court held that a Chairman/Director of a party is ineligible to act as an arbitrator under Section 12(5) and the Seventh Schedule of the Arbitration Act to ensure neutrality. This ineligibility overrides prior agreements and cannot be waived by conduct, requiring an express written agreement after disputes arise.
Subject
Arbitration Law - APPOINTMENT OF ARBITRATOR
Act Referred
Headnote
Arbitration & Conciliation Act, 1996 – Section 11 –Amendment Act, 2015 – Section 12 –Rajasthan Cooperative Societies Act, 2001 – Section 58 – Rajasthan Co-operative Societies Act, 2001 – Section 37 –Indian Contract Act, 1872 – Section 9 – Promises, express and implied – Feeling aggrieved and dissatisfied with impugned orders passed by High Court of Judicature for Rajasthan at Jaipur allowing applications under Section 11 of Arbitration & Conciliation Act, 1996 appointing an Arbitrator, and others have preferred the present Special Leave Petitions – Held, Facts of present case, and goes on to state that the appellant cannot be allowed to raise the issue of eligibility of an arbitrator, having itself appointed the arbitrator – Judgment under appeal is also in correct in stating that there is an express waiver in writing from fact that an appointment letter has been issued by appellant, and a statement of claim has been filed by respondent before arbitrator – Moment appellant came to know that appointment itself would be invalid, it filed an application before sole arbitrator for termination of his mandate – In view of above and for reasons stated above once sole arbitrator – Chairman is ‘ineligible’ to act as an arbitrator to resolve dispute between parties in view of Sub-section (5) of Section 12 read with Seventh Schedule to Act he loses mandate to continue as a sole arbitrator – Therefore, it cannot be said that High Court has committed any error in appointing arbitrator other than sole arbitrator – Chairman as per Clause 13 of Agreement in exercise of powers, under Section 11 read with Section 14 of Act – Petitions dismissed.
Legal Category Hierarchy
Table of Contents
2. Applicability of Section 12(5) to pre-amendment agreements — Eligibility of elected Chairman — Primacy of Rajasthan Co-operative Societies Act — Bar on judicial interference during arbitral proceedings. (Para 4 )
3. Section 12(5) mandates arbitrator neutrality regardless of prior agreements — Elected Chairman constitutes management under Seventh Schedule — Participation in proceedings does not constitute express written waiver. (Para 6 , 7 , 8 , 9 , 10 )
4. Arbitrators falling under the Seventh Schedule are de jure ineligible notwithstanding prior agreements, unless waived by an express agreement in writing subsequent to the dispute. (Para 7 , 10 )
5. Special leave petitions dismissed — High Court order appointing an independent arbitrator upheld. (Para 11 , 12 )
6. Is an elected Chairman of a society considered management or a controlling influence under the Seventh Schedule?
Yes. The court held that a Chairman, being an elected member or Director, falls within the categories of manager, director, or part of management having a similar controlling influence under Clauses 1, 2, 5, and 12 of the Seventh Schedule. (Para 8 , 9 )
7. Can the ineligibility of an arbitrator under Section 12(5) be waived by participating in the arbitration proceedings?
No. Waiver of Section 12(5) requires an express agreement in writing made subsequent to the disputes having arisen. Participation in proceedings or filing a statement of claim does not constitute an express agreement in writing. (Para 10 )
8. What is the legal effect of an arbitrator being found ineligible under the Seventh Schedule?
An ineligible arbitrator is de jure unable to perform their functions. Their mandate terminates automatically as a matter of law, empowering the court to appoint a permissible substitute arbitrator. (Para 7 )
JUDGMENT :
1. Feeling aggrieved and dissatisfied with the impugned orders passed by the High Court of Judicature for Rajasthan at Jaipur allowing the applications under Section 11 of the Arbitration & Conciliation Act, 1996 (hereinafter referred to as ‘the Act’) and appointing an Arbitrator, Jaipur Zila Dugdh Utpadak Sahkari Sangh Ltd, Jaipur (hereinafter referred to as Sahkari Sangh) and others have preferred the present Special Leave Petitions.
2. For the sake of convenience, the facts in SLP (C) No.13520 of 2021 are narrated and SLP (C) No.13520 of 2021 be treated as a lead matter.
3. On 31.03.2015, the respondent herein and the Sahkari Sangh entered into Distributorship Agreement for the distribution of milk and butter milk in certain zones in Jaipur, which was for a period of two years. The dispute arose between the parties. Clause 13 of the distributorship agreement provided for resolution of disputes. Clause 13 contains an arbitration clause and it provides that 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 Dugdh Utpadak Sahkari Sangh Ltd. and his decision shall be final and binding for the parties. On 18.08.2018, the respondent made representation pointing out his grievance/dispute. Vide letter dated 22.08.2018, the respondent herein – original applicant was advised to raise dispute before the Sole Arbitrator/Chairman. That on 19.10.2019, the respondent firm/original applicant approached the Sole Arbitrator as per Clause 13 of the Agreement dated 31.03.2015 i.e. the Chairman, Jaipur Zila Dugdh Utpadak Sahkari Sangh Ltd. for settlement of a commercial dispute between the parties. That during the pendency of the arbitration proceedings before the Chairman – Sole Arbitrator, the respondent herein – firm 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 dated 31.03.2015. The said application was opposed by the petitioners herein. It was submitted that once the respondent – firm approached the Chairman – Sole Arbitrator for resolving the dispute between the parties invoking Clause 13 of the Agreement dated 31.03.2015 and having participated in the arbitration proceedings thereafter it is not open for it to approach the High Court to appoint an arbitrator under Section 11 of the Act. It was also submitted on behalf of the petitioners that the Agreement dated 31.03.2015 was prior to the amendment of Section 12/insertion of Section 12 (5) of the Act and the contract was entered into between the parties before insertion of Sub-section (5) of Section 12 by amendment of Act, 2015 read with Seventh Schedule to the Act, Sub-section (5) of Section 12 read with Seventh Schedule to the Act shall not be applicable and the Chairman continues to be the sole arbitrator as per Clause 13. That thereafter by the impugned order and considering the Sub-section (5) of Section 12 read with Seventh Schedule to the Act, the High Court has allowed the said application and has appointed the former District and Sessions Judge to act as an arbitrator. Feeling aggrieved and dissatisfied with the impugned order passed by the High Court appointing a fresh Arbitrator in exercise of powers under Section 11 of the Arbitration Act, Sahkari Sangh has preferred the present petitions.
4. Shri Gunjan Pathak, Learned Counsel appearing on behalf of the petitioners has vehemently submitted that the High Court has materially erred in appointing the arbitrator other than the arbitrator mentioned in Clause 13 of the Agreement dated 31.03.2015.
4.1 It is submitted that first of all Sub-section (5) of Section 12 read with Seventh Schedule to the Act shall not be applicable to the facts of the case on hand more particularly when the agreement between the parties was prior to insertion of Sub-section (5) of Section 12 read w
