Chairman Of Company In Arbitration Ineligible To Be Arbitrator; Disqualification Conditions Have To Be Read As A Whole : Supreme Court

The Supreme Court observed that non­-independence and non-impartiality of an arbitrator would make him ineligible to conduct arbitration.

The bench of Justices MR Shah and Aniruddha Bose observed that the ineligibility of an arbitrator can be removed only by an 'express agreement'.

In this case , the distributorship agreement between various firms and Jaipur Zila Dugdh Utpadak Sahkari Sangh Limited contained an arbitrator clause, as per which all disputes and differences arising out of or in any way touching or concerning the agreement, had to be referred to the sole Arbitrator, the Chairman of the said Sahkari Sangh. Following a dispute between the firm and sangh, the arbitration proceedings were initated by the Chairman. During the pendency of the said arbitration proceedings, the firms approached the High Court for appointment of an arbitrator in exercise of powers under Section 11 of the Act. The High Court  allowed the said application and appointed a former District and Sessions Judge to act as an arbitrator.

In appeal filed by the Sangh before the Apex Court, the issue to be considered was whether the Chairman who is an elected member of the petitioner Sahkari Sangh can be said to be 'ineligible' under Sub­-section (5) of Section 12 read with Seventh Schedule to the Act or not?  The Sangh's contention was that, in the Seventh Schedule to the Act 'Chairman' is not mentioned and only Manager, Director or part of the Management can be said to be ineligible.

Rejecting the said contention, the bench observed that the Chairman of the Sangh can certainly be held to be 'ineligible' to continue as an arbitrator. Referring to Voestalpine Schienen GMBH vs. Delhi Metro Rail Corporation Limited, (2017) 4 SCC 665, the court said:

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 Sub­section (5) of Section 12 read with Seventh Schedule to the Act would render himself ineligible to conduct (Para 8)

The court said that, though the word 'Chairman' is specifically not mentioned, he would fall in the category of the following clauses: 

(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. (Para 9)

The Court said that disqualification conditions under Sub­section (5) of Section 12 read with Seventh Schedule to the Act is to be read as a whole and considering the object and purpose for which Sub­section (5) of Section 12 read with Seventh Schedule to the Act came to be inserted.

The court also rejected the contention that since the party participated in the arbitration proceedings before the sole arbitrator – Chairman, it ought not to have approached the High Court for appointment of arbitrator under Section 11. The court, referring to Section 12(5) proviso, observed that there must be an 'express agreement' in writing to remove the ineligibility of the arbitrator. It referred to the following observations made in Bharat Broadband Network Limited vs United Telecoms Limited (2019) 5 SCC 755;,

5. 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 Section 12(5) the moment any person whose relationship with the parties or the counsel or the subject matter of the dispute falls under the Seventh Schedule. The subsection then declares that such person shall be "ineligible" to 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 falls 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 subsection by an "express agreement in writing". Obviously, the "express agreement in writing" 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. (Para 10)

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