JAIPUR ZILA DUGDH UTPADAK SAHKARI SANGH LIMITED & ORS. versus M/S AJAY SALES & SUPPLIERS on 9 September 2021

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SUPREME COURT REPORTS

[2021] 7 S.C.R.

AJAIPUR ZILA DUGDH UTPADAKSAHKARI SANGH LIMITED & ORS.

v.

M/S AJAY SALES & SUPPLIERS

B(Special Leave Petition (Civil) No.13520 of 2021)

SEPTEMBER 09, 2021

[M. R. SHAH AND ANIRUDDHA BOSE, JJ.]

Arbitration and Conciliation Act, 1996 – s.11 and sub-section(5) of s.12 r/w. Seventh Schedule – Appointment of an Arbitrator –COn 31.03.2015, the respondent and the petitioner-Sahkari Sanghentered into a distributorship agreement for distribution of milk andbutter – Dispute arose between the parties – Clause 13 of thedistribution agreement contained an arbitration clause, whichprovided that all disputes and differences arising out of or in anyDway touching or concerning the agreement, shall be referred to thesole Arbitrator, the Chairman of the petitioner Sangh – Therespondent approached the sole Arbitrator-Chairman as per clause13 of the agreement – During the pendency of the Arbitrationproceedings, the respondent approached the High Court forappointment of an Arbitrator u/s.11 of the Act – The High CourtEappointed the former District and Sessions Judge to act as anarbitrator – Before the Supreme Court, the petitioner submitted thatthe High Court erred in appointing the arbitrator other than thearbitrator mentioned in clause 13 of the agreement – Held: Sub-section (5) of s.12 read with Seventh Schedule made it clear that ifFthe arbitrator falls in any one of the categories specified in theSeventh Schedule, he becomes ‘ineligible’ to act as an arbitrator –Applying the law laid down by the Supreme Court in its variousdecisions and considering the object and purpose of insertion ofsub-section (5) of s.12 r/w. Seventh Schedule to the Act, the Chairmanof the petitioner Sangh can certainly be held ‘ineligible’ to continueGas an arbitrator – Though in the Seventh Schedule the word‘Chairman’ is specifically not mentioned but at the same time it wouldfall in the category of clause 1; clause 2; clause 5; clause 12 andhence would become ‘ineligible’ – Once the sole arbitrator-Chairmanis ‘ineligible’ to act as an arbitrator, he loses mandate to continueH

as a sole arbitrator – Therefore, the High Court has not committedany error in appointing the arbitrator other than the sole arbitrator.

Dismissing the Special Leave Petitions, the Court HELD: 1. In the case of Bharat Broadband NetworkLimited, it is observed that Sub-section (5) of Section 12 readwith Seventh Schedule made it clear that if the arbitrator falls inany one of the categories specified in the Seventh Schedule, hebecomes ‘ineligible’ to act as an arbitrator. It is further observedthat once he becomes ‘ineligible’, it is clear that he then becomedejure unable to perform his functions inasmuch as in law, he isregarded as ‘ineligible’. It further is observed in the said decisionthat where a person becomes ineligible to be appointed as anarbitrator there is no question of challenge to such arbitratorbefore such arbitrator in such a case i.e. a case which falls underSection 14(1)(a) of the Act gets attracted inasmuch as thearbitrator becomes, as a matter of law (i.e., de jure), unable toperform his functions under Section12(5), being ineligible to beappointed as an arbitrator and this being so, his mandateautomatically terminates, and he shall then be substituted byanother arbitrator. [Para 7][780-D-G]

2. Now so far as the submission on behalf of the petitionersthat in view of Section 58 of the Rajasthan Cooperative SocietiesAct, 2001, the dispute between the parties is to be resolved bythe Registrar only and as per Bye Laws 30 of RajasthanCooperative Societies Act, 2001 shall be applicable and thereforeno court shall have jurisdiction and therefore the dispute referredto the former District Judge is unsustainable has no substance.It cannot be disputed that Arbitration Act is a special Act. EvenSub-section (5) of Section 12 also states with non obstante clause.In the distributorship agreement dated 31.03.2015, there is aprovision to resolve dispute through arbitration. Despite Section58 of the Rajasthan Cooperative Societies Act, 2001, there is anagreement between the parties to resolve the dispute througharbitrator – Chairman. Parties are bound by the agreement andthe arbitration clause contained in the Agreement dated31.03.2015. Therefore, neither Section 58 of the RajasthanCooperative Societies Act, 2001 shall not be applicable at all nor ABC

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Athe same shall come in the way of appointing the arbitrator underthe Arbitration Act. [Para 7.1][780-G-H; 781-A-C]

3. Now the next question which is required to consider iswhether the Chairman who is an elected member of the petitionerSahkari Sangh can be said to be ‘ineligible’ under Sub-section (5)Bof Section 12 read with Seventh Schedule to the Act or not. It isthe case on behalf of the petitioner that in the Seventh Scheduleto the Act ‘Chairman’ is not mentioned and only Manager,Director or part of the Management can be said to be ineligible.The aforesaid has no substance at all. Disqualification/ineligibleunder Sub-section (5) of Section 12 read with Seventh ScheduleCto the Act is to be read as a whole and considering the object andpurpose for which Sub-section (5) of Section 12 read with SeventhSchedule to the Act came to be inserted. Sub-section (5) of Section12 read with Seventh Schedule has been inserted bearing in mindthe ‘impartiality and independence’ of the arbitrators. It has beenDinserted with the purpose of ‘neutrality of arbitrators’.Independence and impartiality of the arbitrators are thehallmarks of any arbitration proceedings as observed in the caseof Voestalpine Schienen. Rule against bias is one of the fundamentalprinciples of natural justice which apply to all judicial proceedingsand quasi-judicial proceedings and it is for this reason that despiteEthe contractually agreed upon, the persons mentioned inSub-section (5) of Section 12 read with Seventh Schedule to theAct would render himself ineligible to conduct the arbitration.[Para 8][781-C-G]

4. Applying the law laid down by this Court in the aforesaidFdecisions and considering the object and purpose of insertion ofSub-section (5) of Section 12 read with Seventh Schedule to theAct, the Chairman of the petitioner Sangh can certainly be heldto be ‘ineligible’ to continue as an arbitrator. Though in theSeventh Schedule the word ‘Chairman’ is specifically notGmentioned but at the same time it would fall in the category ofClause 1; Clause 2; Clause 5; Clause 12. In that view of thematter, the Chairman who is elected member/Director of theSangh, can certainly be said to be ‘ineligible’ to become anarbitrator as per Sub-section (5) of Section 12 read with SeventhSchedule to the Act. [Para 9 and 9.1][783-A-B; 783-D-E]H

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5. Once the sole arbitrator – Chairman is ‘ineligible’ toact as an arbitrator to resolve the dispute between the parties inview of Sub-section (5) of Section 12 read with Seventh Scheduleto the Act he loses mandate to continue as a sole arbitrator.Therefore, it cannot be said that the High Court has committedany error in appointing the arbitrator other than the sole arbitrator– Chairman as per Clause 13 of the Agreement in exercise ofpowers, under Section 11 read with Section 14 of the Act. [Para10][786-A-B]

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Bharat Broadband Network Limited v. United TelecomsLimited, (2019) 5 SCC 755 : [2019] 6 SCR 97;Voestalpine Schienen GMBH v. Delhi Metro RailCorporation Limited, (2017) 4 SCC 665 : [2017] 1 SCR798 – relied on.

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S.B.P. & Co. v. Patel Engineering Ltd. & Anr., (2005) 8SCC : [2005] 4 Suppl. SCR 688; Trf Ltd v. EnergoEngineering Projects Ltd., (2017) 8 SCC 377 : [2017]7 SCR 409 – referred to.

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Case Law Reference

CIVIL APPELLATE JURISDICTION: Special Leave Petition(Civil) No. 13520 of 2021.

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From the Judgment and Order dated 03.03.2021 of the High Courtof Judicature for Rajasthan at Jaipur Bench in S.B. Arbitration ApplicationNos.07, 08, 09, 11 and 12 of 2020.

With

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Special Leave Petition (Civil) Nos. 13543, 13663, 13632 and 13870of 2021.

Gunjan Pathak, Ms. Archana Pathak Dave, Ms. Ishita Rawat,Ms. Vanya Gupta, Parmod Kumar Vishnoi, Advs. for the Appellants.

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AThe following Judgment of the Court was delivered:

1. Feeling aggrieved and dissatisfied with the impugned orderspassed by the High Court of Judicature for Rajasthan at Jaipur allowingthe applications under Section 11 of the Arbitration & Conciliation Act,1996 (hereinafter referred to as ‘the Act’) and appointing an Arbitrator,BJaipur Zila Dugdh Utpadak Sahkari Sangh Ltd, Jaipur (hereinafterreferred to as Sahkari Sangh) and others have preferred the presentSpecial Leave Petitions.

2. For the sake of convenience, the facts in SLP (C) No.13520 of2021 are narrated and SLP (C) No.13520 of 2021 be treated as a leadCmatter.

3. On 31.03.2015, the respondent herein and the Sahkari Sanghentered into Distributorship Agreement for the distribution of milk andbutter milk in certain zones in Jaipur, which was for a period of twoyears. The dispute arose between the parties. Clause 13 of theDdistributorship agreement provided for resolution of disputes. Clause 13contains an arbitration clause and it provides that all disputes anddifferences arising out of or in any way touching or concerning theagreement, whatsoever shall be referred to the sole Arbitrator, theChairman, Jaipur Zila Dugdh Utpadak Sahkari Sangh Ltd. and hisdecision shall be final and binding for the parties. On 18.08.2018, theErespondent made representation pointing out his grievance/dispute. Videletter dated 22.08.2018, the respondent herein – original applicant wasadvised to raise dispute before the Sole Arbitrator/Chairman. That on19.10.2019, the respondent firm/original applicant approached the SoleArbitrator as per Clause 13 of the Agreement dated 31.03.2015 i.e. theFChairman, Jaipur Zila Dugdh Utpadak Sahkari Sangh Ltd. for settlementof a commercial dispute between the parties. That during the pendencyof the arbitration proceedings before the Chairman – Sole Arbitrator, therespondent herein – firm approached the High Court for appointment ofan arbitrator in exercise of powers under Section 11 of the Act andinvoking the arbitration contained in clause 13 of the Agreement datedG31.03.2015. 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 invokingClause 13 of the Agreement dated 31.03.2015 and having participated inthe arbitration proceedings thereafter it is not open for it to approach theHHigh Court to appoint an arbitrator under Section 11 of the Act. It was

also submitted on behalf of the petitioners that the Agreement dated31.03.2015 was prior to the amendment of Section 12/insertion ofSection 12 (5) of the Act and the contract was entered into betweenthe parties before insertion of Sub-section (5) of Section 12 byamendment of Act, 2015 read with Seventh Schedule to the Act,Sub-section (5) of Section 12 read with Seventh Schedule to the Actshall not be applicable and the Chairman continues to be the sole arbitratoras per Clause 13. That thereafter by the impugned order and consideringthe Sub-section (5) of Section 12 read with Seventh Schedule to the Act,the High Court has allowed the said application and has appointed theformer District and Sessions Judge to act as an arbitrator. Feelingaggrieved and dissatisfied with the impugned order passed by the HighCourt appointing a fresh Arbitrator in exercise of powers under Section11 of the Arbitration Act, Sahkari Sangh has preferred the present petitions.

4. Shri Gunjan Pathak, Learned Counsel appearing on behalf ofthe petitioners has vehemently submitted that the High Court hasmaterially erred in appointing the arbitrator other than the arbitratormentioned in Clause 13 of the Agreement dated 31.03.2015.

4.1 It is submitted that first of all Sub-section (5) of Section 12read with Seventh Schedule to the Act shall not be applicable to thefacts of the case on hand more particularly when the agreement betweenthe parties was prior to insertion of Sub- section (5) of Section 12 readwith Seventh Schedule to the Act. It is further submitted that evenotherwise the ‘Chairman’ being an elected member shall not comewithin Seventh Schedule to the Act. It is submitted that ‘Chairman’ isnot included within disqualified/ineligible person to be appointed in SeventhSchedule of the Act.

4.2 It is further submitted that the High Court has erred in relyingupon Seventh Schedule to the Act of 2015 for the reason as the LearnedSole Arbitrator/Chairman who is an elected member and is a part ofmanagement 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 Scheduleof the Amendment Act, 2015.

4.3 It is further submitted that even otherwise considering Section58 of the Rajasthan Cooperative Societies Act, 2001, the dispute betweenthe parties was required to be resolved by the Registrar and the decisionof the Registrar shall be final. It is submitted that non-obstante clause AB

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Aas 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 entertainany suit or proceeding in respect of such dispute. It is submitted that asper Clause 30 of the Bye Laws of Sahkari Sangh all disputes of thesociety shall be dealt with as per Rajasthan Co- operative Societies Act,B2001. It is submitted that therefore also the impugned order passed bythe High Court deserves to be quashed and set aside.

4.4 It is further submitted that the Learned Counsel appearing onbehalf of the petitioner that as held by this Court in the S.B.P. & Co vsPatel Engineering Ltd. & Anr., (2005) 8 SCC 618, once the matterCreaches the arbitration tribunal or the sole arbitrator, the High Courtwould not interfere with the orders passed by the Arbitrator or the arbitraltribunal during the course of arbitral proceedings and the party aggrievedby any order of the arbitral tribunal, unless has a right of appeal underSection 37 of the Act, has to wait until the award is passed by theDTribunal. It is submitted therefore once the arbitral tribunal has initiatedthe proceedings, the High Court ought not to have interfered in suchmatters. It is submitted that therefore, also the impugned order passedby the High Court appointing an arbitrator is unsustainable.

5. We have heard Learned Counsel appearing on behalf of theEpetitioners at length.

6. It is not in dispute that distributorship agreement between theparties was dated 31.03.2015 i.e. prior to the insertion of Sub-section(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 Agreement datedF31.03.2015 contained the arbitration clause and as per Clause 13, anydispute and differences arising out of or in any way touching or concerningdistributorship agreement shall be resolved through arbitration. As perClause 13 such a dispute shall be referred to the sole Arbitrator – theChairman, Sahkari Sangh.

G6.1 By the impugned order the High Court has allowed theapplication under Section 11 of the Act and has appointed the arbitratorother than the Chairman.

6.2 The submissions of the petitioners are observed and narratedhereinabove.

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6.3 So far as the submission on behalf of the petitioners that theagreement was prior to the insertion of Sub-section (5) of Section 12read with Seventh Schedule to the Act and therefore the disqualificationunder Sub-section (5) of Section 12 read with Seventh Schedule to theAct shall not be applicable and that once an arbitrator – Chairman startedthe arbitration proceedings thereafter the High Court is not justified inappointing an arbitrator are concerned the aforesaid has no substanceand can to be accepted in view of the decision of this Court in Trf Ltdvs Energo Engineering Projects Ltd, (2017) 8 SCC 377; BharatBroadband Network Limited vs United Telecoms Limited, (2019) 5SCC 755; Voestalpine Schienen GMBH vs. Delhi Metro RailCorporation Limited, (2017) 4 SCC 665. In the aforesaid decisionsthis Court had an occasion to consider in detail the object and purposeof insertion of Sub-section (5) of Section 12 read with Seventh Scheduleto the Act. In the case of Voestalpine Schienen GMBH (Supra) it isobserved and held by this Court that the main purpose for amending theprovision was to provide for ‘neutrality of arbitrators’. It is furtherobserved that in order to achieve this, Sub-section (5) of Section 12lays down that notwithstanding any prior agreement to the contrary, anyperson whose relationship with the parties or counsel or thesubject-matter of the dispute falls under any of the categories specifiedin the Seventh Schedule, he shall be ineligible to be appointed as anarbitrator. It is further observed that in such an eventuality i.e. when thearbitration clause finds foul with the amended provisions (Sub-section(5) of Section 12 read with Seventh Schedule) the appointment of anarbitrator would be beyond pale of the arbitration agreement, empoweringthe court to appoint such arbitrator as may be permissible. It is furtherobserved that, that would be the effect of non obstante clause containedin sub-section (5) of Section 12 and the other party cannot insist onappointment of the arbitrator in terms of the arbitration agreement.

6.4 It is further observed and held by this Court in the aforesaiddecision that independence and impartiality of the arbitrator are thehallmarks of any arbitration proceedings. Rule against bias is one ofthe fundamental principles of natural justice which apply to all judicialand quasi-judicial proceedings. It is further observed that it is for thisreason that notwithstanding the fact that relationship between the parties,to the arbitration and the arbitrators themselves are contractual in natureand the source of an arbitrator’s appointment is deduced from the ABC

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Aagreement entered into between the parties, notwithstanding the samenon-independence and non- impartiality of such arbitrator would renderhim ineligible to conduct the arbitration. It is further observed that thegenesis behind this rational is that even when an arbitrator is appointed interms of contract and by the parties to the contract, he is independent ofthe parties. In paragraphs 16 to 18 it is observed and held as under:B

“16. Apart from other amendments, Section 12 was alsoamended and the amended provision has already been reproducedabove. This amendment is also based on the recommendation ofthe Law Commission which specifically dealt with the issue of‘neutrality of arbitrators’ and a discussion in this behalf is containedCin paras 53 to 60 and we would like to reproduce the entirediscussion hereinbelow:

“NEUTRALITY OF ARBITRATORS

53. It is universally accepted that any quasi- judicial process,including the arbitration process, must be in accordance withprinciples of natural justice. In the context of arbitration, neutralityof arbitrators, viz. their independence and impartiality, is critical tothe entire process.

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54. In the Act, the test for neutrality is set out in Section12(3) which provides –

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‘12. (3) “An arbitrator may be challenged only if –

(a) circumstances exist that give rise to justifiable doubts asto his independence or impartiality...”

55. The Act does not lay down any other conditions to identifythe “circumstances” which give rise to “justifiable doubts”, and itis clear that there can be many such circumstances and situations.The test is not whether, given the circumstances, there is anyactual bias for that is setting the bar too high; but, whether thecircumstances in question give rise to any justifiable apprehensionsof bias.

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56. The limits of this provision has been tested in the IndianSupreme Court in the context of contracts with State entitiesnaming particular persons/designations (associated with that entity)as a potential arbitrator. It appears to be settled by a series ofdecisions of the Supreme Court (See Executive Engineer, Irrigation H

Division, Puri v. Gangaram Chhapolia, 1984 (3) SCC 627;Secretary to Government Transport Department, Madras v.Munusamy Mudaliar, 1988 (Supp) SCC 651; International Authorityof India v. K.D. Bali and Anr, 1988 (2) SCC 360; S. Rajan v. Stateof Kerala, 1992 (3) SCC 608; M/s. Indian Drugs &Pharmaceuticals v. M/s. Indo-Swiss Synthetics GermManufacturing 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) thatarbitration agreements in government contracts which provide forarbitration by a serving employee of the department, are valid andenforceable. While the Supreme Court, in Indian Oil Corp. Ltd. v.Raja Transport (P) Ltd., 2009 8 SCC 520 carved out a minorexception in situations when the arbitrator “was the controlling or dealing authority in regard to the subjectcontract or if he is a direct subordinate (as contrasted from anofficer of an inferior rank in some other department) to the officerwhose decision is the subject matter of the dispute” (SCC p. 533,para 34) and this exception was used by the Supreme Court inDenel (Proprietary) Ltd. v. Govt. of India, Ministry of Defence,AIR 2012 SC 817 and Bipromasz Bipron Trading SA v. BharatElectronics Ltd., (2012) 6 SCC 384, to appoint an independentarbitrator under section 11, this is not enough.

57. The balance between procedural fairness and bindingnature of these contracts, appears to have been tilted in favour ofthe latter by the Supreme Court, and the Commission believesthe present position of law is far from 18 satisfactory. Since theprinciples of impartiality and independence cannot be discardedat any stage of the proceedings, specifically at the stage ofconstitution of the arbitral tribunal, it would be incongruous to saythat party autonomy can be exercised in complete disregard ofthese principles – even if the same has been agreed prior to thedisputes having arisen between the parties. There are certainminimum levels of independence and impartiality that should berequired of the arbitral process regardless of the parties’ apparentagreement. A sensible law cannot, for instance, permit appointmentof an arbitrator who is himself a party to the dispute, or who isemployed by (or similarly dependent on) one party, even if this is ABC

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what the parties agreed. The Commission hastens to add that Mr.PK Malhotra, the ex officio member of the Law Commissionsuggested having an exception for the State, and allow State partiesto appoint employee arbitrators. The Commission is of the opinionthat, on this issue, there cannot be any distinction between Stateand non-State parties. The concept of party autonomy cannot bestretched to a point where it negates the very basis of havingimpartial and independent adjudicators for resolution of disputes.In fact, when the party appointing an adjudicator is the State, theduty to appoint an impartial and independent adjudicator is thatmuch more onerous – and the right to natural justice cannot besaid to have been waived only on the basis of a “prior” agreementbetween the parties at the time of the contract and before arisingof the disputes.

58. Large-scale amendments have been suggested toaddress this fundamental issue of neutrality of arbitrators, whichthe Commission believes is critical to the functioning of thearbitration process in India. In particular, amendments have beenproposed to sections 11, 12 and 14 of the Act.

59. The Commission has proposed the requirement of havingspecific disclosures by the arbitrator, at the stage of his *possible*appointment, regarding existence of any relationship or interestof any kind which is likely to give rise to justifiable doubts. TheCommission has proposed the incorporation of the Fourth Schedule,which has drawn from the red and orange lists of the IBAGuidelines on Conflicts of Interest in International Arbitration, andwhich would be treated as a “guide” to determine whethercircumstances exist which give rise to such justifiable doubts. Onthe other hand, in terms of the proposed section 12 (5) of theAct and the Fifth Schedule which incorporates the categoriesfrom the red list of the IBA Guidelines (as above), the personproposed to be appointed as an arbitrator shall be *ineligible* tobe so appointed, notwithstanding any prior agreement to thecontrary. In the event such an ineligible person is purported to beappointed as an arbitrator, he shall be de jure deemed to be unableto perform his functions, in terms of the proposed explanation tosection 14. Therefore, while the *disclosure* is required with respectto a broader list of categories (as set out in the Fourth Schedule, and as based on the Red and Orange lists of the IBA Guidelines),the *ineligibility* to be appointed as an arbitrator (and theconsequent de jure inability to so act) follows from a smaller andmore 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 certainsituations, parties should be allowed to waive even the categoriesof ineligibility as set in the proposed Fifth Schedule. This could bein situations of family arbitrations or other arbitrations where aperson commands the blind faith and trust of the parties to thedispute, despite the existence of objective “justifiable doubts”regarding his independence and impartiality. To deal with suchsituations, the Commission has proposed the proviso to section12 (5), where parties may, subsequent to disputes having arisenbetween them, waive the applicability of the proposed section12 (5) by an express agreement in writing. In all other cases, thegeneral rule in the proposed section 12 (5) must be followed. Inthe event the High Court is approached in connection withappointment of an arbitrator, the Commission has proposedseeking the disclosure in terms of section 12 (1) and in whichcontext the High Court or the designate is to have “due regard”to the contents of such disclosure in appointing the arbitrator.”(emphasis supplied)

17. We may put a note of clarification here. Though, theLaw Commission discussed the aforesaid aspect under the heading“Neutrality of Arbitrators”, the focus of discussion was onimpartiality and independence of the arbitrators which has relationto or bias towards one of the parties. In the field of internationalarbitration, neutrality is generally related to the nationality of thearbitrator. In international sphere, the “appearance of neutrality”is considered equally important, which means that an arbitrator isneutral if his nationality is different from that of the parties.However, that is not the aspect which is being considered and theterm “neutrality” used is relatable to impartiality and independenceof the arbitrators, without any bias towards any of the parties. Infact, the term “neutrality of arbitrators” is commonly used in thiscontext as well.

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A18. Keeping in mind the aforequoted recommendation ofthe Law Commission, with which spirit, Section 12 has beenamended by the Amendment Act, 2015, it is manifest that themain purpose for amending the provision was to provide forneutrality of arbitrators. In order to achieve this, sub-section (5)of Section 12 lays down that notwithstanding any prior agreementBto the contrary, any person whose relationship with the parties orcounsel or the subject matter of the dispute falls under any of thecategories specified in the Seventh Schedule, he shall be ineligibleto be appointed as an arbitrator. In such an eventuality i.e. whenthe arbitration clause finds foul with the amended provisionsCextracted above, the appointment of an arbitrator would be beyondpale of the arbitration agreement, empowering the court to appointsuch arbitrator(s) as may be permissible. That would be the effectof non obstante clause contained in sub-section (5) of Section 12and the other party cannot insist on appointment of the arbitratorin terms of arbitration agreement.”D

7. In the case of Bharat Broadband Network Limited (Supra),it is observed that Sub-section (5) of Section 12 read with SeventhSchedule made it clear that if the arbitrator falls in any one of thecategories specified in the Seventh Schedule, he becomes ‘ineligible’ toact as an arbitrator. It is further observed that once he becomes ‘ineligible’,Eit is clear that he then become dejure unable to perform his functionsinasmuch as in law, he is regarded as ‘ineligible’. It further is observedin the said decision that where a person becomes ineligible to be appointedas an arbitrator there is no question of challenge to such arbitrator beforesuch arbitrator in such a case i.e. a case which falls under Section 14(1)(a)

Fof the Act gets attracted inasmuch as the arbitrator becomes, as a matterof 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, hismandate automatically terminates, and he shall then be substituted byanother arbitrator.

G7.1 Now so far as the submission on behalf of the petitioners thatin view of Section 58 of the Rajasthan Cooperative Societies Act, 2001,the dispute between the parties is to be resolved by the Registrar onlyand as per Bye Laws 30 of Rajasthan Cooperative Societies Act, 2001shall be applicable and therefore no court shall have jurisdiction andtherefore the dispute referred to the former District Judge is unsustainableH

has no substance. It cannot be disputed that Arbitration Act is a specialAct. Even Sub-section (5) of Section 12 also states with non obstanteclause. In the distributorship agreement dated 31.03.2015, there is aprovision to resolve dispute through arbitration. Despite Section 58 ofthe Rajasthan Cooperative Societies Act, 2001, there is an agreementbetween the parties to resolve the dispute through arbitrator – Chairman.Parties are bound by the agreement and the arbitration clause containedin the Agreement dated 31.03.2015. Therefore, neither Section 58 of theRajasthan Cooperative Societies Act, 2001 shall not be applicable at allnor the same shall come in the way of appointing the arbitrator underthe Arbitration Act.

8. Now the next question which is required to consider is whetherthe Chairman who is an elected member of the petitioner Sahkari Sanghcan be said to be ‘ineligible’ under Sub-section (5) of Section 12 readwith Seventh Schedule to the Act or not. It is the case on behalf of thepetitioner that in the Seventh Schedule to the Act ‘Chairman’ is notmentioned and only Manager, Director or part of the Management canbe said to be ineligible. The aforesaid has no substance at all.Disqualification/ineligible under Sub-section (5) of Section 12 read withSeventh Schedule to the Act is to be read as a whole and consideringthe object and purpose for which Sub-section (5) of Section 12 readwith Seventh Schedule to the Act came to be inserted. Sub-section (5)of Section 12 read with Seventh Schedule has been inserted bearing inmind the ‘impartiality and independence’ of the arbitrators. It has beeninserted with the purpose of ‘neutrality of arbitrators’. Independenceand impartiality of the arbitrators are the hallmarks of any arbitrationproceedings as observed in the case of Voestalpine Schienen (Supra).Rule against bias is one of the fundamental principles of natural justicewhich apply to all judicial proceedings and quasi-judicial proceedingsand it is for this reason that despite the contractually agreed upon, thepersons mentioned in Sub-section (5) of Section 12 read with SeventhSchedule to the Act would render himself ineligible to conduct thearbitration. 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 thehallmarks of any arbitration proceedings. Rule against bias is oneof the fundamental principles of natural justice which applied to alljudicial and quasi judicial proceedings. It is for this reason that AB

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SUPREME COURT REPORTS

notwithstanding the fact that relationship between the parties tothe arbitration and the arbitrators themselves are contractual innature and the source of an arbitrator’s appointment is deducedfrom the agreement entered into between the parties,notwithstanding the same non-independence and non-impartialityof such arbitrator (though contractually agreed upon) would renderhim ineligible to conduct the arbitration. The genesis behind thisrational is that even when an arbitrator is appointed in terms ofcontract and by the parties to the contract, he is independent ofthe parties. Functions and duties require him to rise above thepartisan interest of the parties and not to act in, or so as to further,the particular interest of either parties. After all, the arbitrator hasadjudicatory role to perform and, therefore, he must be independentof parties as well as impartial. The United Kingdom SupremeCourt has beautifully highlighted this aspect in Hashwani v. Jivrajin the following words: (WLR p. 1889, para 45)

“45 .. ...the dominant purpose of appointing an arbitrator orarbitrators is the impartial resolution of the dispute between theparties in accordance with the terms of the agreement and,although the contract between the parties and the arbitrators wouldbe a contract for the provision of personal services, they were notpersonal services under the direction of the parties.”

21. Similarly, Cour de Cassation, France, in a judgmentdelivered in 1972 in Consorts Ury, underlined that:

“an independent mind is indispensable in the exercise ofjudicial power, whatever the source of that power may be, and itis one of the essential qualities of an arbitrator.”

22. Independence and impartiality are two different concepts.An arbitrator may be independent and yet, lack impartiality, orvice versa. Impartiality, as is well accepted, is a more subjectiveconcept as compared to independence. Independence, which ismore an objective concept, may, thus, be more straightforwardlyascertained by the parties at the outset of the arbitrationproceedings in light of the circumstances disclosed by thearbitrator, while partiality will more likely surface during thearbitration proceedings.”

9. Applying the law laid down by this Court in the aforesaid decisionsand considering the object and purpose of insertion of Sub-section (5) ofSection 12 read with Seventh Schedule to the Act, the Chairman of thepetitioner Sangh can certainly be held to be ‘ineligible’ to continue asan arbitrator. Though in the Seventh Schedule the word ‘Chairman’ isspecifically not mentioned but at the same time it would fall in the categoryof Clause 1; Clause 2; Clause 5; Clause 12 which read as under:

“1. The arbitrator is an employee, consultant, advisor or has anyother past or present business relationship with a party.

2. The arbitrator currently represents or advises one of the partiesor 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 theparties if the affiliate is directly involved in the matters in disputein 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 becomean arbitrator as per Sub-section (5) of Section 12 read with SeventhSchedule to the Act.

10. Now so far as the submission on behalf of the petitioners thatthe respondents participated in the arbitration proceedings before thesole arbitrator – Chairman and therefore he ought not to have approachedthe High Court for appointment of arbitrator under Section 11 isconcerned, the same has also no substance. As held by this Court in thecase of Bharat Broadband Network Limited (Supra) there must bean ‘express agreement’ in writing to satisfy the requirements of Section12(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 whichrelates to the de jure inability of an arbitrator to act as such. Underthis provision, any prior agreement to the contrary is wiped outby the non- obstante clause in Section12(5)the moment any personwhose relationship with the parties or the counsel or the subjectmatter of the dispute falls under the Seventh Schedule. Thesub-section then declares that such person shall be “ineligible” to A

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be appointed as arbitrator. The only way in which this ineligibilitycan be removed is by the proviso, which again is a special provisionwhich states that parties may, subsequent to disputes having arisenbetween them, waive the applicability of Section 12(5) by anexpress agreement in writing. What is clear, therefore, is thatwhere, under any agreement between the parties, a person fallswithin any of the categories set out in the Seventh Schedule, he is,as a matter of law, ineligible to be appointed as an arbitrator. Theonly way in which this ineligibility can be removed, again, in law,is that parties may after disputes have arisen between them, waivethe applicability of this sub-section by an “express agreement inwriting”. Obviously, the “express agreement in writing” hasreference to a person who is interdicted by the Seventh Schedule,but who is stated by parties (after the disputes have arisen betweenthem) to be a person in whom they have faith notwithstanding thefact that such person is interdicted by the Seventh Schedule.

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20. This then brings us to the applicability of the proviso to Section12(5)on the facts of this case. Unlike Section 4of the Actwhich deals with deemed waiver of the right to object by conduct,the proviso to Section 12(5)will only apply if subsequent to disputeshaving arisen between the parties, the parties waive theapplicability of sub-section (5) of Section 12 by an expressagreement in writing. For this reason, the argument based on theanalogy of Section 7of the Act must also be rejected. Section 7deals with arbitration agreements that must be in writing, and thenexplains that such agreements may be contained in documentswhich provide a record of such agreements. On the other hand,Section12(5) refers to an “express agreement in writing”. Theexpression “express agreement in writing” refers to an agreementmade in words as opposed to an agreement which is to be inferredby conduct. Here, Section 9of the Indian Contract Act, 1872becomes important. It states:

“9. Promises, express and implied.—In so far as a proposalor acceptance of any promise is made in words, the promise issaid to be express. In so far as such proposal or acceptance ismade otherwise than in words, the promise is said to be implied.”

It is thus necessary that there be an “express” agreement inwriting.

This agreement must be an agreement by which both parties,with full knowledge of the fact that Shri Khan is ineligible to beappointed as an arbitrator, still go ahead and say that they havefull faith and confidence in him to continue as such. The facts ofthe present case disclose no such express agreement. Theappointment letter which is relied upon by the High Court asindicating an express agreement on the facts of the case is dated17.01.2017. On this date, the Managing Director of the appellantwas certainly not aware that Shri Khan could not be appointed byhim as Section 12(5)read with the Seventh Schedule only went tothe invalidity of the appointment of the Managing Director himselfas an arbitrator. Shri Khan’s invalid appointment only became clearafter the declaration of the law by the Supreme Court in TRF Ltd.(supra) which, as we have seen hereinabove, was only on03.07.2017. After this date, far from there being an expressagreement between the parties as to the validity of Shri Khan’sappointment, the appellant filed an application on 07.10.2017 beforethe sole arbitrator, bringing the arbitrator’s attention to the judgmentin TRF Ltd. (supra) and asking him to declare that he has becomede jure incapable of acting as an arbitrator. Equally, the fact that astatement of claim may have been filed before the arbitrator,would not mean that there is an express agreement in words whichwould make it clear that both parties wish Shri Khan to continueas arbitrator despite being ineligible to act as such. This being thecase, the impugned judgment is not correct when it applies Section4, Section7, Section12(4), Section13(2), and Section16(2) ofthe Act to the facts of the present case, and goes on to state thatthe appellant cannot be allowed to raise the issue of eligibility ofan arbitrator, having itself appointed the arbitrator. The judgmentunder appeal is also in correct in stating that there is an expresswaiver in writing from the fact that an appointment letter hasbeen issued by the appellant, and a statement of claim has beenfiled by the respondent before the arbitrator. The moment theappellant came to know that Shri Khan’s appointment itself wouldbe invalid, it filed an application before the sole arbitrator fortermination of his mandate.”

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A11. In view of the above and for the reasons stated above oncethe sole arbitrator – Chairman is ‘ineligible’ to act as an arbitrator toresolve the dispute between the parties in view of Sub-section (5) ofSection 12 read with Seventh Schedule to the Act he loses mandate tocontinue as a sole arbitrator. Therefore, it cannot be said that the HighCourt has committed any error in appointing the arbitrator other than theBsole arbitrator – Chairman as per Clause 13 of the Agreement in exerciseof powers, under Section 11 read with Section 14 of the Act.

12. In view of the above and for the reasons stated above allthese applications deserve to be dismissed.

CThe special leave petitions are dismissed accordingly.

Ankit Gyan

SLPs dismissed.

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