Arbitration Clause and Judicial Intervention: Supreme Court's Ruling on Appointment of Arbitrators

The case of Jaipur Zila Dugdh Utpadak Sahkari Sangh Limited & Ors. vs. M/s Ajay Sales & Suppliers & Ors. revolves around the interpretation of arbitration agreements, the application of Section 12(5) of the Arbitration and Conciliation Act, 1996, and whether a party can seek judicial intervention under Section 11 when an arbitration clause already appoints a specific arbitrator. The Supreme Court ruled on whether the High Court was justified in appointing a fresh arbitrator despite the contractual agreement.

Background of the Case

The dispute arose when Jaipur Zila Dugdh Utpadak Sahkari Sangh Limited (Petitioner) entered into distributorship agreements with various firms for the distribution of milk and buttermilk in Jaipur. Clause 13 of the agreements provided for arbitration, designating the Chairman of Jaipur Zila Dugdh Utpadak Sahkari Sangh Ltd. as the sole arbitrator. However, after disputes emerged, the respondent firms moved the Rajasthan High Court under Section 11 of the Arbitration Act, seeking the appointment of a neutral arbitrator, contending that the Chairman was ineligible under the amended provisions of the Act.

The High Court, relying on Section 12(5) read with the Seventh Schedule of the Arbitration Act, appointed an independent arbitrator instead of the Chairman. The petitioner challenged this appointment before the Supreme Court.

Legal Issues Raised

Whether the arbitration clause designating the Chairman as the sole arbitrator was valid under Section 12(5) of the Arbitration Act.
Whether the High Court was justified in appointing an independent arbitrator under Section 11.
Whether participation in arbitration proceedings before the designated arbitrator barred the respondents from seeking judicial intervention.

Petitioner’s Arguments (Jaipur Zila Dugdh Utpadak Sahkari Sangh Limited)

The petitioner contended:

The arbitration agreements were executed before the 2015 amendment introducing Section 12(5) and the Seventh Schedule.
The Chairman, being an elected representative, did not fall under the categories of ineligible arbitrators listed in the Seventh Schedule.
Once arbitration proceedings were initiated before the designated arbitrator, the respondents were barred from seeking fresh appointment under Section 11.
The Rajasthan Cooperative Societies Act, 2001, governed disputes involving cooperative societies, making arbitration proceedings under the Arbitration Act unnecessary.

Respondent’s Arguments (M/s Ajay Sales & Suppliers & Others)

The respondents countered:

The Chairman, being part of the management, was ineligible under Section 12(5) and the Seventh Schedule.
Section 12(5) nullifies prior agreements that appoint a person ineligible under the Seventh Schedule.
They had the right to seek judicial intervention under Section 11 despite the existence of an arbitration agreement.
The Rajasthan Cooperative Societies Act did not override the Arbitration Act, and disputes were subject to the arbitration mechanism agreed upon by the parties.

Supreme Court’s Judgment

The Supreme Court dismissed the petitions, affirming the High Court’s decision to appoint an independent arbitrator. The Court held:

“The main purpose for amending Section 12(5) read with the Seventh Schedule was to ensure the neutrality of arbitrators. Independence and impartiality are the hallmarks of arbitration proceedings.”

“Sub-section (5) of Section 12 overrides prior agreements that appoint ineligible arbitrators. An arbitration clause that designates an ineligible arbitrator is rendered void.”

Key Observations:

Even though the agreements predated the 2015 amendment, the amendment applies retrospectively to ensure fair and impartial arbitration.
The Rajasthan Cooperative Societies Act does not override the Arbitration Act, and parties must adhere to contractual arbitration clauses unless they violate statutory provisions.
Participation in arbitration before an ineligible arbitrator does not prevent a party from later seeking judicial intervention under Section 11.

Impact of the Judgment

Reaffirms the importance of neutrality and independence in arbitration proceedings.
Clarifies that agreements designating ineligible arbitrators under Section 12(5) are unenforceable.
Strengthens judicial oversight in arbitration appointments, preventing conflicts of interest.
Ensures that cooperative societies and public sector entities cannot bypass arbitration neutrality requirements.

Conclusion

The Supreme Court’s ruling in Jaipur Zila Dugdh Utpadak Sahkari Sangh Limited & Ors. vs. M/s Ajay Sales & Suppliers & Ors. strengthens arbitration law in India by reinforcing the principles of neutrality and fairness. The decision affirms that contractual arbitration clauses must comply with statutory provisions, ensuring impartial dispute resolution. The ruling provides clarity on the ineligibility of arbitrators under Section 12(5) and safeguards the arbitration process from potential biases.

Petitioner Name: Jaipur Zila Dugdh Utpadak Sahkari Sangh Limited & Ors..
Respondent Name: M/s Ajay Sales & Suppliers & Ors..
Judgment By: Justice M.R. Shah, Justice Aniruddha Bose.
Place Of Incident: Jaipur, Rajasthan.
Judgment Date: 09-09-2021.

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