Supreme Court Upholds Arbitrator Appointment Under Section 11 of the Arbitration Act Despite Prior Agreement: Jaipur Zila Dugdh Utpadak Sangh Ltd. vs. M/s Ajay Sales & Suppliers (2021)

Date of the Judgment: 09 September 2021

Citation: [Not Available in Source]

Judges: M.R. Shah, J. and Aniruddha Bose, J.

Can a previously agreed-upon arbitrator be replaced by a court-appointed arbitrator if the original arbitrator is deemed ineligible under the amended Arbitration and Conciliation Act, 1996? The Supreme Court of India addressed this question in a case involving a dispute between a milk cooperative and its distributor. The core issue revolved around whether the High Court was correct in appointing a new arbitrator, overriding the arbitration clause in the original agreement, due to the ineligibility of the originally appointed arbitrator. The Supreme Court bench, comprising Justices M.R. Shah and Aniruddha Bose, delivered the judgment.

Case Background

On March 31, 2015, Jaipur Zila Dugdh Utpadak Sahkari Sangh Ltd. (referred to as ‘Sahkari Sangh’) and M/s Ajay Sales & Suppliers (the respondent) entered into a distributorship agreement for distributing milk and buttermilk in Jaipur for two years. Disputes arose between the parties. Clause 13 of the agreement contained an arbitration clause, stipulating that the Chairman of Sahkari Sangh would be the sole arbitrator. On August 18, 2018, the respondent raised a grievance. On August 22, 2018, the respondent was advised to raise the dispute before the Chairman, who was the sole arbitrator. The respondent approached the Chairman on October 19, 2019, for dispute resolution. While arbitration proceedings were ongoing before the Chairman, the respondent applied to the High Court for the appointment of an arbitrator under Section 11 of the Arbitration and Conciliation Act, 1996. The petitioners opposed this, arguing that since the respondent had already approached the Chairman and participated in the arbitration, it could not seek a new arbitrator. They also contended that the 2015 amendment to Section 12 of the Act, which disqualifies certain individuals from being arbitrators, did not apply to their agreement, which was made before the amendment.

Timeline

Course of Proceedings

The High Court of Judicature for Rajasthan at Jaipur allowed the application under Section 11 of the Arbitration and Conciliation Act, 1996, and appointed a former District and Sessions Judge as the arbitrator. The High Court considered Section 12(5) of the Act, read with the Seventh Schedule, which disqualifies certain individuals from acting as arbitrators. The High Court concluded that the Chairman of the Sahkari Sangh, being an elected member, was ineligible to act as an arbitrator. The Sahkari Sangh then filed the present Special Leave Petitions before the Supreme Court, challenging the High Court’s decision to appoint a new arbitrator.

Legal Framework

The case primarily revolves around the interpretation and application of the following legal provisions:

• Section 11 of the Arbitration and Conciliation Act, 1996: This section deals with the appointment of arbitrators by the court when parties fail to agree on an arbitrator or the agreed-upon mechanism fails.
• Section 12(5) of the Arbitration and Conciliation Act, 1996: This provision, inserted by the 2015 amendment, states that notwithstanding any prior agreement, a person whose relationship with the parties or the subject matter of the dispute falls under any of the categories specified in the Seventh Schedule is ineligible to be appointed as an arbitrator. The section reads as:
  “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.”
• Seventh Schedule of the Arbitration and Conciliation Act, 1996: This schedule lists categories of relationships that disqualify a person from being appointed as an arbitrator to ensure impartiality and independence. The relevant clauses of the Schedule are:
  • “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.”
• Section 58 of the Rajasthan Cooperative Societies Act, 2001: This section provides for the resolution of disputes by the Registrar of Cooperative Societies.

The Supreme Court also considered the principle of ‘neutrality of arbitrators’, which is fundamental to the arbitration process, and the rule against bias, which is a principle of natural justice.

Arguments

Arguments by the Petitioners (Jaipur Zila Dugdh Utpadak Sahkari Sangh Ltd.):

• The High Court erred in appointing an arbitrator other than the Chairman, who was designated as the sole arbitrator in Clause 13 of the agreement.
• Section 12(5) read with the Seventh Schedule of the Arbitration and Conciliation Act, 1996, should not apply because the agreement was made before the insertion of this provision.
• Even if Section 12(5) applies, the Chairman, being an elected member, does not fall within the categories of disqualification listed in the Seventh Schedule. The Chairman is not a manager, director, or part of the management as specified in the Seventh Schedule.
• The dispute should be resolved by the Registrar under Section 58 of the Rajasthan Cooperative Societies Act, 2001, as the non-obstante clause in this section supersedes Section 12(5) of the Arbitration Act. Clause 30 of the Bye-Laws of Sahkari Sangh also stipulates that all disputes of the society shall be dealt with as per the Rajasthan Cooperative Societies Act, 2001.
• The High Court should not have interfered once the arbitration proceedings had commenced before the Chairman, relying on the judgment in S.B.P. & Co vs Patel Engineering Ltd. & Anr., (2005) 8 SCC 618.

Arguments by the Respondent (M/s Ajay Sales & Suppliers):

• The respondent argued that the Chairman of the Sahkari Sangh was ineligible to act as an arbitrator under Section 12(5) of the Arbitration and Conciliation Act, 1996, read with the Seventh Schedule, as he was an elected member and part of the management.
• The respondent contended that the amendment to Section 12 of the Act, which introduced the concept of ineligibility of arbitrators, was applicable to their case, regardless of when the agreement was entered into.
• The respondent further argued that the appointment of a new arbitrator by the High Court was justified to ensure impartiality and independence in the arbitration process.

Innovativeness of the Argument: The petitioner’s argument that the Chairman, being an elected member, does not fall under the disqualification criteria of the Seventh Schedule, was a novel interpretation of the provision. They also argued that the Rajasthan Cooperative Societies Act, 2001, should take precedence over the Arbitration Act.

Submissions Table

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section. However, the core issues that the Court addressed can be summarized as follows:

1. Whether the High Court was justified in appointing an arbitrator under Section 11 of the Arbitration and Conciliation Act, 1996, when the parties had already agreed to a specific arbitrator (the Chairman of Sahkari Sangh) in their agreement.
2. Whether Section 12(5) read with the Seventh Schedule of the Arbitration and Conciliation Act, 1996, applies to agreements entered into before the insertion of this provision.
3. Whether the Chairman of Sahkari Sangh, being an elected member, falls within the categories of disqualification under Section 12(5) read with the Seventh Schedule of the Act.
4. Whether Section 58 of the Rajasthan Cooperative Societies Act, 2001, supersedes the provisions of the Arbitration and Conciliation Act, 1996, in this case.
5. Whether the respondent’s participation in the arbitration proceedings before the Chairman prevents them from seeking the appointment of a new arbitrator under Section 11 of the Act.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues:

Authorities

The Supreme Court relied on the following authorities:

The Court also considered the following provisions of law:

• Section 12(5) of the Arbitration and Conciliation Act, 1996: The court examined the purpose and effect of this provision, which renders certain individuals ineligible to be arbitrators.
• Seventh Schedule of the Arbitration and Conciliation Act, 1996: The court analyzed the categories of relationships that disqualify a person from being an arbitrator.
• Section 58 of the Rajasthan Cooperative Societies Act, 2001: The court determined that this provision did not override the arbitration agreement between the parties.

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The Court followed TRF Ltd vs Energo Engineering Projects Ltd, (2017) 8 SCC 377* to emphasize that the main purpose of amending Section 12 was to ensure the neutrality of arbitrators.
• The Court followed Bharat Broadband Network Limited vs United Telecoms Limited, (2019) 5 SCC 755* to explain that an arbitrator becomes ineligible if they fall under any of the categories specified in the Seventh Schedule.
• The Court followed Voestalpine Schienen GMBH vs. Delhi Metro Rail Corporation Limited, (2017) 4 SCC 665* to reiterate that independence and impartiality are hallmarks of arbitration proceedings.
• The Court distinguished S.B.P. & Co vs Patel Engineering Ltd. & Anr., (2005) 8 SCC 618* stating that the High Court should not have interfered once the arbitral tribunal has initiated the proceedings, stating that this case does not apply to the facts of this case.

What weighed in the mind of the Court?

The Supreme Court emphasized several key points in its reasoning:

• Neutrality of Arbitrators: The primary concern was to ensure the neutrality and impartiality of arbitrators, which is essential for fair arbitration proceedings. The Court highlighted that the amendments to Section 12 were introduced to achieve this goal.
• Independence and Impartiality: The Court reiterated that independence and impartiality are fundamental principles of natural justice and must be upheld in all judicial and quasi-judicial proceedings, including arbitration.
• Interpretation of Section 12(5): The Court interpreted Section 12(5) of the Arbitration and Conciliation Act, 1996, to mean that any person falling under the categories specified in the Seventh Schedule is ineligible to be an arbitrator, regardless of any prior agreement.
• Applicability of the Amendment: The Court held that the amendment to Section 12 applies to all arbitration proceedings, irrespective of when the agreement was entered into, as the purpose of the amendment was to ensure the neutrality of arbitrators.
• Ineligibility of Chairman: The Court found that the Chairman of Sahkari Sangh, being an elected member and part of the management, fell within the disqualification categories specified in the Seventh Schedule, making him ineligible to act as an arbitrator.
• Non-Obstante Clause: The Court emphasized that the non-obstante clause in Section 12(5) overrides any prior agreement to the contrary, and the parties cannot insist on the appointment of an ineligible arbitrator.
• Express Waiver: The Court clarified that the ineligibility of an arbitrator can only be waived by an express written agreement between the parties after the dispute has arisen, which was not present in this case.

Sentiment Analysis of Reasons Given by the Supreme Court:

Fact:Law Ratio:

The court’s decision was primarily influenced by legal considerations and the interpretation of the Arbitration and Conciliation Act, 1996.

Logical Reasoning

Key Takeaways

• The amendment to Section 12 of the Arbitration and Conciliation Act, 1996, which introduced Section 12(5) and the Seventh Schedule, applies to all arbitration proceedings, irrespective of when the agreement was entered into.
• Parties cannot insist on the appointment of an arbitrator who falls under the disqualification categories specified in the Seventh Schedule, even if they had agreed to such an appointment in their original contract.
• The ineligibility of an arbitrator under Section 12(5) can only be waived by an express written agreement between the parties after the dispute has arisen.
• The principle of neutrality and impartiality of arbitrators is paramount and overrides any prior contractual agreements.
• The Arbitration Act is a special act and takes precedence over other laws in matters of arbitration.

Directions

The Supreme Court dismissed the special leave petitions, upholding the High Court’s decision to appoint a new arbitrator. No specific directions were given other than that.

Development of Law

The ratio decidendi of this case is that the provisions of Section 12(5) read with the Seventh Schedule of the Arbitration and Conciliation Act, 1996, which were introduced by the 2015 amendment, apply to all arbitration proceedings irrespective of the date of the agreement. The Court clarified that the ineligibility of an arbitrator under Section 12(5) can only be waived by an express written agreement between the parties after the dispute has arisen. This judgment reinforces the importance of neutrality and impartiality in arbitration proceedings and clarifies that the Arbitration Act takes precedence over other laws in matters of arbitration. This is a change in the previous position of law where the parties had the autonomy to appoint an arbitrator of their choice.

Conclusion

The Supreme Court dismissed the special leave petitions, affirming the High Court’s decision to appoint a new arbitrator. The Court held that the Chairman of the Sahkari Sangh was ineligible to act as an arbitrator under Section 12(5) of the Arbitration and Conciliation Act, 1996, read with the Seventh Schedule. The Court emphasized the importance of neutrality and impartiality in arbitration proceedings and clarified that the ineligibility of an arbitrator can only be waived by an express written agreement between the parties after the dispute has arisen. This judgment reinforces the supremacy of the Arbitration Act in matters of arbitration and the need for independent and impartial arbitrators.

Category

Parent Category: Arbitration Law

Child Categories:

• Section 11, Arbitration and Conciliation Act, 1996
• Section 12, Arbitration and Conciliation Act, 1996
• Seventh Schedule, Arbitration and Conciliation Act, 1996
• Rajasthan Cooperative Societies Act, 2001

FAQ

Q: Can an arbitrator be replaced if they were agreed upon in a prior contract?

A: Yes, if the arbitrator becomes ineligible under Section 12(5) of the Arbitration and Conciliation Act, 1996, read with the Seventh Schedule, they can be replaced, even if they were agreed upon in a prior contract.

Q: What makes an arbitrator ineligible?

A: An arbitrator is ineligible if their relationship with the parties or the subject matter of the dispute falls under any of the categories specified in the Seventh Schedule of the Arbitration and Conciliation Act, 1996. This includes being an employee, consultant, advisor, or having a business relationship with a party, or being a manager or director of one of the parties.

Q: Can parties waive the ineligibility of an arbitrator?

A: Yes, but only by an express written agreement made after the dispute has arisen. The parties must be fully aware of the arbitrator’s ineligibility and still agree to their appointment.

Q: Does the amendment to Section 12 of the Arbitration Act apply to old agreements?

A: Yes, the amendment applies to all arbitration proceedings, irrespective of when the agreement was entered into. The purpose of the amendment is to ensure the neutrality of arbitrators.

Q: What is the significance of ‘neutrality’ in arbitration?

A: Neutrality in arbitration means that the arbitrator must be independent and impartial, without any bias towards any of the parties. This is essential for fair and just resolution of disputes.