Jaipur Zila Dugdh Utpadak Sahkari Sangh Limited & Ors. v. M/S Ajay Sales & Suppliers
1. Feeling aggrieved and dissatisfied with the impugned orde rs
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 (her einafter
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 pe riod of two
years. The dispute arose between the parties. Claus e 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 concer ning the
agreement, whatsoever shall be referred to the sole Arb itrator, the
Chairman, Jaipur Zila Dugdh Utpadak Sahkari Sangh Ltd. and his
decision shall be final and binding for the parties. On 18.08.2 018, 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/Chair man. 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 A ct 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
773
also submitted on behalf of the petitioners that the Agree ment 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 int o between
the parties before insertion of Sub-section (5) of S ection 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 A ct
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 arbitra tor. 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 Hig h 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 S ection 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
with Seventh Schedule to the Act. It is further submitted that even
otherwise the ‘Chairman’ being an elected member shal l not come
within Seventh Schedule to the Act. It is submitted that ‘Chairman’ is
not included within disqualified/ineligible person to be appointed in Seventh
Schedule of the Act.
4.2 It is further submitted that the High Court has erred in relying
upon Seventh Schedule to the Act of 2015 for the reason as the Learned
Sole Arbitrator/Chairman who is an elected member and is a part of
management by virtue of election as a director or has no similar influence,
can be said to be disqualified as per the Clause (5) of Seventh Schedule
of the Amendment Act, 2015.
4.3 It is further submitted that even otherwise considering Section
58 of the Rajasthan Cooperative Societies Act, 2001, the dispute between
the parties was required to be resolved by the Registrar and the decision
of the Registrar shall be final. It is submitted that non-obs tante clause
JAIPUR ZILA DUGDH UTPADAK SAHKARI SANGH
LIMITED & ORS. v. M/S AJAY SALES & SUPPLIERS
as contained in Section 58 of the Rajasthan Cooperative Societies Act,
2001 supersedes Sub-section (5) of Section 12 of the Amendment Act,
2015 and therefore no court of law shall have jurisdiction to ent ertain
any suit or proceeding in respect of such dispute. It is submitted that as
per Clause 30 of the Bye Laws of Sahkari Sangh all disputes of the
society shall be dealt with as per Rajasthan Co- operative Societies Act,
2001. It is submitted that therefore also the impugned order pass ed by
the High Court deserves to be quashed and set aside.
4.4 It is further submitted that the Learned Counsel appearing on
behalf of the petitioner that as held by this Court in the S.B.P. & Co vs
Patel Engineering Ltd. & Anr ., (2005) 8 SCC 618, once the matter
reaches the arbitration tribunal or the sole arbitrator, the High Court
would not interfere with the orders passed by the Arbitrator or the arbitral
tribunal during the course of arbitral proceedings and the party aggrieved
by any order of the arbitral tribunal, unless has a right of appeal under
Section 37 of the Act, has to wait until the award is passed by the
Tribunal. It is submitted therefore once the arbitral tribunal has initiated
the proceedings, the High Court ought not to have interfered i n such
matters. It is submitted that therefore, also the impugned or der passed
by the High Court appointing an arbitrator is unsustainable.
5. We have heard Learned Counsel appearing on behalf of the
petitioners at length.
6. It is not in dispute that distributorship agreement between the
parties was dated 31.03.2015 i.e. prior to the insertion of Sub-sec tion
(5) of Section 12 and Seventh Schedule to the Act w.e.f. 23.10.2015.
It also cannot be disputed that Clause 13 of the Agree ment dated
31.03.2015 contained the arbitration clause and as per Clause 1 3, any
dispute and differences arising out of or in any way touching or concerning
distributorship agreement shall be resolved through arbitration. As per
Clause 13 such a dispute shall be referred to the sole Arbitra tor – the
Chairman, Sahkari Sangh.
6.1 By the impugned order the High Court has allowed the
application under Section 11 of the Act and has appointed the arbitrator
other than the Chairman.
6.2 The submissions of the petitioners are observed and narrated
hereinabove.
775
6.3 So far as the submission on behalf of the petitioners tha t the
agreement was prior to the insertion of Sub-section (5) of Se ction 12
read with Seventh Schedule to the Act and therefore the disqualification
under Sub-section (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 are concerned the aforesaid has no substance
and can to be accepted in view of the decision of this Court in Trf Ltd
vs Energo Engineering Projects Ltd, (2017) 8 SCC 377 ; Bharat
Broadband Network Limited vs United Telecoms Limited , (2019) 5
SCC 755; Voestalpine Schienen GMBH vs. Delhi Metro Rail
Corporation Limited, (2017) 4 SCC 665. In the aforesaid decisions
this Court had an occasion to consider in detail the object and purpose
of insertion of Sub-section (5) of Section 12 read with Seventh Schedule
to the Act. In the case of Voestalpine Schienen GMBH (Supra) it is
observed and held by this Court that the main purpose for amending the
provision was to provide for ‘neutrality of arbitrators’. It is further
observed that in order to achieve this, Sub-section (5) of Section 12
lays down that notwithstanding any prior agreement to the contrary, any
person whose relationship with the parties or couns el or the
subject-matter of the dispute falls under any of the categories specified
in the Seventh Schedule, he shall be ineligible to be appoi nted as an
arbitrator. It is further observed that in such an eventuality i.e. when the
arbitration clause finds foul with the amended provisions (Sub-section
(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. I t is further
observed that, that would be the effect of non obstante clause contained
in sub-section (5) of Section 12 and the other party cannot insist on
appointment of the arbitrator in terms of the arbitration agreement.
6.4 It is further observed and held by this Court in the aforesaid
decision that independence and impartiality of the arbitra tor are the
hallmarks of any arbitration proceedings. Rule against bi as is one of
the fundamental principles of natural justice which apply to all judicial
and quasi-judicial proceedings. It is further observed tha t 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
JAIPUR ZILA DUGDH UTPADAK SAHKARI SANGH
LIMITED & ORS. v. M/S AJAY SALES & SUPPLIERS
agreement entered into between the parties, notwithstanding th e same
non-independence and non- impartiality of such arbitrator would render
him ineligible to conduct the arbitration. It is further obse rved that 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. In paragraphs 16 to 18 it is observed and held as under:
“16. Apart from other amendments, Section 12 was also
amended and the amended provision has already been reproduced
above. This amendment is also based on the recommendation of
the Law Commission which specifically dealt with the is sue of
‘neutrality of arbitrators’ and a discussion in this behalf is contained
in paras 53 to 60 and we would like to reproduce the entire
discussion hereinbelow:
“NEUTRALITY OF ARBITRATORS
53. It is universally accepted that any quasi- judicial process,
including the arbitration process, must be in accordance wit h
principles of natural justice. In the context of arbitration, neutrality
of arbitrators, viz. their independence and impartiality, is critical to
the entire process.
54. In the Act, the test for neutrality is set out in S ection
12(3) which provides –
‘12. (3) “An arbitrator may be challenged only if –
(a) circumstances exist that give rise to justifiable doubts as
to his independence or impartiality...”
55. The Act does not lay down any other conditions to identify
the “circumstances” which give rise to “justifiable doubts”, and it
is clear that there can be many such circumstances and situations.
The test is not whether, given the circumstances, there is any
actual bias for that is setting the bar too high; but, whether the
circumstances in question give rise to any justifiable apprehensions
of bias.
56. The limits of this provision has been tested in the Indian
Supreme Court in the context of contracts with State ent ities
naming particular persons/designations (associated with that entity)
as a potential arbitrator. It appears to be settled by a series of
decisions of the Supreme Court (See Executive Engineer, Irrigation
777
Division, Puri v. Gangaram Chhapolia, 1984 (3) SCC 627;
Secretary to Government Transport Department, Madra s v.
Munusamy Mudaliar, 1988 (Supp) SCC 651; International Authority
of India v. K.D. Bali and Anr, 1988 (2) SCC 360; S. Rajan v. State
of Kerala, 1992 (3) SCC 608; M/s. Indian Drugs &
Pharmaceuticals v. M/s. Indo-Swiss Synthetics Germ
Manufacturing Co.Ltd., 1996 (1) SCC 54; Union of India v. M.P.
Gupta, (2004) 10 SCC 504; Ace Pipeline Contract Pvt. Ltd. v.
Bharat Petroleum Corporation Ltd., 2007 (5) SCC 304) that
arbitration agreements in government contracts which provide for
arbitration by a serving employee of the department, are valid and
enforceable. While the Supreme Court, in Indian Oil Corp. Ltd. v.
Raja Transport (P) Ltd., 2009 8 SCC 520 carved out a minor
exception in situations when the arbitrator
“was the controlling or dealing authority in regard to the subject
contract or if he is a direct subordinate (as contrasted fr om an
officer of an inferior rank in some other department) to the officer
whose decision is the subject matter of the dispute” (SCC p. 533,
para 34) and this exception was used by the Supreme Court i n
Denel (Proprietary) Ltd. v. Govt. of India, Ministry of Defe nce,
AIR 2012 SC 817 and Bipromasz Bipron Trading SA v. Bharat
Electronics Ltd., (2012) 6 SCC 384, to appoint an independent
arbitrator under section 11, this is not enough.
57. The balance between procedural fairness and binding
nature of these contracts, appears to have been tilted in favour of
the latter by the Supreme Court, and the Commission believes
the present position of law is far from 18 satisfactory. Si nce the
principles of impartiality and independence cannot be discarded
at any stage of the proceedings, specifically at the stage of
constitution of the arbitral tribunal, it would be incongruous to say
that party autonomy can be exercised in complete disregard of
these principles – even if the same has been agreed prior t o the
disputes having arisen between the parties. There are ce rtain
minimum levels of independence and impartiality that should be
required of the arbitral process regardless of the parties’ apparent
agreement. A sensible law cannot, for instance, permit appointment
of an arbitrator who is himself a party to the dispute, or who is
employed by (or similarly dependent on) one party, even if this is
JAIPUR ZILA DUGDH UTPADAK SAHKARI SANGH
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what the parties agreed. The Commission hastens to add that Mr.
PK Malhotra, the ex officio member of the Law Commission
suggested having an exception for the State, and allow State parties
to appoint employee arbitrators. The Commission is of the opinion
that, on this issue, there cannot be any distinction between State
and non-State parties. The concept of party autonomy cannot be
stretched to a point where it negates the very basis of having
impartial and independent adjudicators for resolution of disputes.
In fact, when the party appointing an adjudicator is the State, the
duty to appoint an impartial and independent adjudicator is that
much more onerous – and the right to natural justice cannot be
said to have been waived only on the basis of a “prior” agreement
between the parties at the time of the contract and before arising
of the disputes.
58. Large-scale amendments have been suggested to
address this fundamental issue of neutrality of arbitrators, which
the Commission believes is critical to the functioning of the
arbitration process in India. In particular, amendments have been
proposed to sections 11, 12 and 14 of the Act.
59. The Commission has proposed the requirement of having
specific disclosures by the arbitrator, at the stage of his *possible*
appointment, regarding existence of any relationship or inter est
of any kind which is likely to give rise to justifiable doubts. The
Commission has proposed the incorporation of the Fourth Schedule,
which has drawn from the red and orange lists of th e IBA
Guidelines on Conflicts of Interest in International Arbitration, and
which would be treated as a “guide” to determine whe ther
circumstances exist which give rise to such justifiable doubts. On
the other hand, in terms of the proposed section 12 (5) of t he
Act and the Fifth Schedule which incorporates the categori es
from the red list of the IBA Guidelines (as above), the p erson
proposed to be appointed as an arbitrator shall be *ineligible* to
be so appointed, notwithstanding any prior agreement to the
contrary. In the event such an ineligible person is purported to be
appointed as an arbitrator, he shall be de jure deemed to be unable
to perform his functions, in terms of the proposed explanation to
section 14. Therefore, while the *disclosure* is required with respect
to a broader list of categories (as set out in the Fourth Schedule,
779
and as based on the Red and Orange lists of the IBA Guidelines),
the *ineligibility* to be appointed as an arbitrato r (and the
consequent de jure inability to so act) follows from a smaller and
more serious sub-set of situations (as set out in the Fifth Schedule,
and as based on the Red list of the IBA Guidelines).
60. The Commission, however, feels that *real* and
*genuine* party autonomy must be respected, and, in certain
situations, parties should be allowed to waive even the categories
of ineligibility as set in the proposed Fifth Schedule. This could be
in situations of family arbitrations or other arbitrations where a
person commands the blind faith and trust of the parties to the
dispute, despite the existence of objective “justifiable doubts”
regarding his independence and impartiality. To deal with such
situations, the Commission has proposed the proviso to section
12 (5), where parties may, subsequent to disputes having arisen
between them, waive the applicability of the proposed section
12 (5) by an express agreement in writing. In all other cases, the
general rule in the proposed section 12 (5) must be followed. In
the event the High Court is approached in connection with
appointment of an arbitrator, the Commission has propose d
seeking the disclosure in terms of section 12 (1) and in whi ch
context the High Court or the designate is to have “due regard”
to the contents of such disclosure in appointing the arbit rator.”
(emphasis supplied)
17. We may put a note of clarification here. Though, the
Law Commission discussed the aforesaid aspect under the heading
“Neutrality of Arbitrators”, the focus of discussio n was on
impartiality and independence of the arbitrators which has relation
to or bias towards one of the parties. In the field of international
arbitration, neutrality is generally related to the nationality of the
arbitrator. In international sphere, the “appearance of neutrality”
is considered equally important, which means that an arbitrator is
neutral if his nationality is different from that of the parties.
However, that is not the aspect which is being considered and the
term “neutrality” used is relatable to impartiality and independence
of the arbitrators, without any bias towards any of the parties. In
fact, the term “neutrality of arbitrators” is commonly used in this
context as well.
JAIPUR ZILA DUGDH UTPADAK SAHKARI SANGH
LIMITED & ORS. v. M/S AJAY SALES & SUPPLIERS
18. Keeping in mind the aforequoted recommendation of
the Law Commission, with which spirit, Section 12 has been
amended by the Amendment Act, 2015, it is manifest that the
main purpose for amending the provision was to provide for
neutrality of arbitrators. In order to achieve this, sub-secti on (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 subject matter of the dispute falls under any of the
categories specified in the Seventh Schedule, he shall be ineligible
to be appointed as an arbitrator. In such an eventuality i.e. when
the arbitration clause finds foul with the amended provisions
extracted above, the appointment of an arbitrator would be beyond
pale of the arbitration agreement, empowering the court to appoint
such arbitrator(s) as may be permissible. That would be the effect
of non obstante clause contained in sub-section (5) of Section 12
and the other party cannot insist on appointment of the arbitrator
in terms of arbitration agreement.”
7. In the case of Bharat Broadband Network Limited (Supra),
it is observed that Sub-section (5) of Section 12 read w ith 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. It is further observed that once he becomes ‘ineligible’,
it is clear that he then become dejure unable to perform his f unctions
inasmuch as in law, he is regarded as ‘ineligible’. It further is observed
in the said decision that where a person becomes ineligible to be appointed
as an arbitrator there is no question of challenge to such arbitrator before
such arbitrator in such a case i.e. a case which falls under Section 14(1)(a)
of the Act gets attracted inasmuch as the arbitrator becomes, as a matter
of law (i.e., de jure), unable to perform his functions under Section12(5),
being ineligible to be appointed as an arbitrator and this being so, his
mandate automatically terminates, and he shall then be subs tituted by
another arbitrator.
7.1 Now so far as the submission on behalf of the petitioners that
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 jurisdi ction and
therefore the dispute referred to the former District Judge is unsustainable
781
has no substance. It cannot be disputed that Arbitration Act is a special
Act. Even Sub-section (5) of Section 12 also states with non o bstante
clause. In the distributorship agreement dated 31.03.2015, there is a
provision to resolve dispute through arbitration. 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 dated 31.03.2015. Therefore, 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 ar bitrator under
the Arbitration Act.
8. Now the next question which is required to consider is whether
the Chairman who is an elected member of the petitioner Sahkari Sangh
can be said to be ‘ineligible’ under Sub-section (5) of Secti on 12 read
with Seventh Schedule to the Act or not. It is the case on be half of the
petitioner that in the Seventh Schedule to the Act ‘Chairm an’ is not
mentioned and only Manager, Director or part of the Management can
be said to be ineligible. The aforesaid has no subs tance at all.
Disqualification/ineligible under Sub-section (5) of Section 12 read with
Seventh Schedule to the Act is to be read as a whole and cons idering
the object and purpose for which Sub-section (5) of Sect ion 12 read
with Seventh Schedule to the Act came to be inserted. Sub-section (5)
of Section 12 read with Seventh Schedule has been inserted bearing in
mind the ‘impartiality and independence’ of the arbitrators. It has 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 the case of Voestalpine Schienen (Supra).
Rule against bias is one of the fundamental principles of natural justice
which apply to all judicial proceedings and quasi-judicial proceedings
and it is for this reason that despite the contractually agreed upon, the
persons mentioned in Sub-section (5) of Section 12 read with Seventh
Schedule to the Act would render himself ineligible to conduc t the
arbitration. In paragraphs 20 to 22 in the case of Voestalpine Schienen
(Supra) it is observed and held as under:
“20. 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 r eason that
JAIPUR ZILA DUGDH UTPADAK SAHKARI SANGH
LIMITED & ORS. v. M/S AJAY SALES & SUPPLIERS
notwithstanding the fact that relationship between the partie s to
the arbitration and the arbitrators themselves are cont ractual in
nature and the source of an arbitrator’s appointment is deduce d
from the agreement entered into between the parties ,
notwithstanding the same non-independence 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 ter ms of
contract and by the parties to the contract, he is indep endent of
the parties. Functions and duties require him to rise abov e 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. The United Kingdom Sup reme
Court has beautifully highlighted this aspect in Hashwani v. Jivraj
in the following words: (WLR p. 1889, para 45)
“45 .. ...the dominant purpose of appointing an arbitrator o r
arbitrators is the impartial resolution of the dispute between t he
parties in accordance with the terms of the agreemen t and,
although the contract between the parties and the arbitrators would
be a contract for the provision of personal services, they were not
personal services under the direction of the parties.”
21. Similarly, Cour de Cassation, France, in a judgment
delivered in 1972 in Consorts Ury, underlined that:
“an independent mind is indispensable in the exercise of
judicial power, whatever the source of that power may be, and it
is one of the essential qualities of an arbitrator.”
22. Independence and impartiality are two different concepts.
An arbitrator may be independent and yet, lack impartial ity, or
vice versa. Impartiality, as is well accepted, is a more subjective
concept as compared to independence. Independence, which is
more an objective concept, may, thus, be more straightforwardly
ascertained by the parties at the outset of the arb itration
proceedings in light of the circumstances disclosed by the
arbitrator, while partiality will more likely surface during the
arbitration proceedings.”
783
9. Applying the law laid down by this Court in the aforesaid decisions
and considering the object and purpose of insertion of Sub-section (5) of
Section 12 read with Seventh Schedule to the Act, the Chairman of the
petitioner Sangh can certainly be held to be ‘ineligible’ to continue as
an arbitrator. Though in the Seventh Schedule the word ‘Chairman’ is
specifically not mentioned but at the same time it would fall in the category
of Clause 1; Clause 2; Clause 5; Clause 12 which read as unde r:
“1. The arbitrator is an employee, consultant, advisor or has any
other past or present business relationship with a party.
2. The arbitrator currently represents or advises one of the parties
or an affiliate of one of the parties.
5. 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.
12. The arbitrator is a manager, director or part of the management,
or has a similar controlling influence in one of the parties.”
9.1 In that view of the matter, the Chairman who is elected member/
Director of the Sangh, can certainly be said to be ‘ineligible’ to become
an arbitrator as per Sub-section (5) of Section 12 read wi th Seventh
Schedule to the Act.
10. Now so far as the submission on behalf of the petitioners that
the 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 Sect ion 11 is
concerned, the same has also no substance. As held by this Court in the
case of Bharat Broadband Network Limited (Supra) there must be
an ‘express agreement’ in writing to satisfy the requirements of Section
12(5) proviso. In paragraphs 15 & 20 it is observed and held as under:
“15. Section 12(5), on the other hand, 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 Section12(5) the moment any person
whose relationship with the parties or the counsel or the s ubject
matter of the dispute falls under the Seventh Schedu le. The
sub-section then declares that such person shall be “ineligible” to
JAIPUR ZILA DUGDH UTPADAK SAHKARI SANGH
LIMITED & ORS. v. M/S AJAY SALES & SUPPLIERS
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. What is clear, therefore, is that
where, under any agreement between the parties, a person f alls
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 sub-section by an “express agreement in
writing”. Obviously, the “express agreement in writi ng” 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.
xxx xxx xxx
20. This then brings us to the applicability of the proviso to Section
12(5) on the facts of this case. Unlike Section 4 of the Act
which deals with deemed waiver of the right to object by conduct,
the proviso to Section 12(5) will only apply if subsequent to disputes
having arisen between the parties, the parties waiv e the
applicability of sub-section (5) of Section 12 by an express
agreement in writing. For this reason, the argument based on the
analogy of Section 7 of the Act must also be rejected. Section 7
deals with arbitration agreements that must be in writing, and then
explains that such agreements may be contained in documents
which provide a record of such agreements. On the other hand,
Section 12(5) refers to an “express agreement in writing”. The
expression “express agreement in writing” refers to an agreement
made in words as opposed to an agreement which is to be inferred
by conduct. Here, Section 9 of the Indian Contract Act, 1872
becomes important. It states:
“9. Promises, express and implied.—In so far as a proposal
or acceptance of any promise is made in words, the promise i s
said to be express. In so far as such proposal or accepta nce is
made otherwise than in words, the promise is said to be implied.”
785
It is thus necessary that there be an “express” agree ment in
writing.
This agreement must be an agreement by which both parties,
with full knowledge of the fact that Shri Khan is ineligible to be
appointed as an arbitrator, still go ahead and say that they have
full faith and confidence in him to continue as such. The facts of
the present case disclose no such express agreement . The
appointment letter which is relied upon by the High Court as
indicating an express agreement on the facts of the case is dated
17.01.2017. On this date, the Managing Director of the appellant
was certainly not aware that Shri Khan could not be appointed by
him as Section 12(5) read with the Seventh Schedule only went to
the invalidity of the appointment of the Managing Director himself
as an arbitrator. Shri Khan’s invalid appointment only became clear
after the declaration of the law by the Supreme Court in TRF Ltd.
(supra) which, as we have seen hereinabove, was onl y on
03.07.2017. After this date, far from there being an exp ress
agreement between the parties as to the validity of Shri Khan’s
appointment, the appellant filed an application on 07.10.2017 before
the sole arbitrator, bringing the arbitrator’s attention to the judgment
in TRF Ltd. (supra) and asking him to declare that he has become
de jure incapable of acting as an arbitrator. Equally, the fact that a
statement of claim may have been filed before the arbitr ator,
would not mean that there is an express agreement in words which
would make it clear that both parties wish Shri Khan to continue
as arbitrator despite being ineligible to act as such. This being the
case, the impugned judgment is not correct when it applies Section
4, Section 7, Section 12(4), Section 13(2), and Section 16(2) of
the Act to the facts of the present case, and goes on to state th at
the appellant cannot be allowed to raise the issue of eligibility of
an arbitrator, having itself appointed the arbitrator. The judgment
under appeal is also in correct in stating that there is an express
waiver in writing from the fact that an appointment lette r has
been issued by the appellant, and a statement of claim has b een
filed by the respondent before the arbitrator. The momen t the
appellant came to know that Shri Khan’s appointment itself would
be invalid, it filed an application before the sole arbitra tor for
termination of his mandate.”
JAIPUR ZILA DUGDH UTPADAK SAHKARI SANGH
LIMITED & ORS. v. M/S AJAY SALES & SUPPLIERS
11. In view of the above and for the reasons stated above on ce
the sole arbitrator – Chairman is ‘ineligible’ to act as an arbitrator to
resolve the dispute between the parties in view of Sub-s ection (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 tha t 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.
12. In view of the above and for the reasons stated above all
these applications deserve to be dismissed.
The special leave petitions are dismissed accordingly.
Ankit Gyan SLPs dismissed.