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Jaipur Zila Dugdh Utpadak Sahkari Sangh Limited & Ors. v. M/s Ajay Sales and Suppliers

Special Leave Petition (Civil) · 2021 INSC 465Decided 9 Sept 2021
Special Leave Petition (Civil) No. 13520 of 2021
Justice M.R. Shah · Justice Aniruddha Bose

Background

A dairy cooperative society (Sahkari Sangh) had a distributorship agreement with a supplier that named the Sangh's own Chairman as the sole arbitrator for any disputes. When a dispute arose and the supplier approached the Chairman for arbitration, it simultaneously also asked the Rajasthan High Court to appoint an independent arbitrator under Section 11 of the Arbitration Act. The High Court agreed and appointed a retired judge instead of the Chairman, reasoning that the Chairman, being part of the Sangh's own management, was legally disqualified from acting as an impartial arbitrator in a dispute involving the Sangh. The Sangh and its officials challenged this before the Supreme Court in five connected Special Leave Petitions.

Decision Breakdown

The Supreme Court upheld the High Court's decision and dismissed all the petitions. It held that under Section 12(5) read with the Seventh Schedule of the Arbitration Act (introduced by a 2015 amendment to ensure "neutrality of arbitrators"), anyone who is a manager, director, or part of the management of a party automatically becomes ineligible to serve as arbitrator in a dispute involving that party, regardless of what the original contract says. The Court found the Sangh's Chairman clearly fell into this disqualified category since he was an elected member and part of its management. It rejected arguments that the agreement predated the 2015 amendment, that "Chairman" wasn't literally listed in the Schedule, and that state cooperative society law ousted the arbitration clause altogether, holding that only an "express agreement in writing" made after the dispute arose could waive this ineligibility, which did not exist here.

Lesson Learnt

A contract clause naming an employee, director, or office-bearer of one of the contracting parties as "the" arbitrator is legally unenforceable once a dispute arises: courts will treat such a person as automatically disqualified and will appoint an independent arbitrator instead, to guarantee a fair hearing.

Official source (sci.gov.in)View Judgment (PDF)

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