NEUTRAL CITATION
C/ARBI.P/36/2022 JUDGMENT DATED: 04/08/2023
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IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
R/PETN. UNDER ARBITRATION ACT NO. 36 of 2022
With
R/PETN. UNDER ARBITRATION ACT NO. 37 of 2022
With
R/PETN. UNDER ARBITRATION ACT NO. 38 of 2022
FOR APPROVAL AND SIGNATURE:
HONOURABLE THE CHIEF JUSTICE MRS. JUSTICE SUNITA AGARWAL
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1 Whether Reporters of Local Papers may be allowed Yes
to see the judgment ?
2 To be referred to the Reporter or not ? Yes
3 Whether their Lordships wish to see the fair copy No
of the judgment ?
4 Whether this case involves a substantial question No
of law as to the interpretation of the Constitution
of India or any order made thereunder ?
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SITSON INDIA PVT. LTD
Versus
KAVERI VIBHAG SAHAKARI KHAND UDHYOG MANDALI LIMITED
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Appearance:
MS M O NARSINGHANI(3849) for the Petitioner(s) No. 1
MR YATIN SONI(868) for the Respondent(s) No. 1
YASHASHVI Y SONI(9892) for the Respondent(s) No. 1
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CORAM:HONOURABLE THE CHIEF JUSTICE MRS. JUSTICE
SUNITA AGARWAL
Date : 04/08/2023
COMMON ORAL JUDGMENT
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1. Learned advocate appearing for the petitioner press the draft amendments dated 15.06.2023 in all the petitions. There is no objection to the same by the learned counsel for the respondent. Hence, Draft Amendment is allowed. The amended paragraphs and the prayers made therein are treated as part of the main petitions.
2. As three petitions connected herewith are between the same parties, though they are arising out of different agreements, but raise a common question of law and, as such, they have been heard together and are being decided together by this common judgment.
3. Heard Ms. M.O. Narsinghani, learned counsel appearing for the petitioner and Mr. Yatin Soni, learned counsel for the respondent in all the petitions.
4. By means of these petitions filed under section 11 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as 'the Act, 1996' for short), the petitioner herein seeks appointment of sole Arbitrator to adjudicate the Page 2 of 22 Downloaded on : Sun Sep 17 00:17:14 IST 2023 NEUTRAL CITATION C/ARBI.P/36/2022 JUDGMENT DATED: 04/08/2023 undefined dispute and differences that have arisen between the parties as per Clause 13 of the Agreements entered into between the petitioner and respondent herein. In reply to the original petition, in the affidavit filed on behalf of respondent, they have agreed for appointment of Arbitrator under Section 11 of the Act, 1996 as per the terms and conditions of the contracts / agreements as prayed therein, however, by draft amendment dated 15.06.2023, under the order passed by this Court, the prayer made in the original petition has been amended as under : -
"18(aa). Your Lordship may be pleased to appoint any retired High Court Judge as an arbitrator in order to complete the constitution of the arbitral tribunal to adjudicate the disputes and differences between the parties arising out of the Agreement dated 28 th February, 2017."
5. Pressing the stand taken by the petitioner in the amended writ petitions, it is submitted by the learned counsel appearing for the petitioner that Clause 13 of the agreements-in-question is hit by Section 12(5) of the Act, 1996 as the Director (Sugar), Government of Gujarat is ineligible to be appointed as an Arbitrator being an officer falling in the category of Clause 12 of the Seventh Schedule Page 3 of 22 Downloaded on : Sun Sep 17 00:17:14 IST 2023 NEUTRAL CITATION C/ARBI.P/36/2022 JUDGMENT DATED: 04/08/2023 undefined of the Act, 1996. For ready reference, Clause 13, which is common to all the three agreements in question herein, is reproduced as under : -
"Clause 13: Arbitration If at any time any question dispute or difference whatsoever shall arise between the mills and E.C or any person claiming under them upon or in relation to or in connection with this agreement accept as to matters the decision for which has been specifically provided, either party may forthwith give to the other notice in writing of the existence of such question, dispute or difference and the same shall be referred to the arbitration of Sole arbitrator namely Director (Sugar), Govt. of Gujarat.
The award of the Sole Arbitrator shall be final and binding on the parties. This submission shall deemed to be submission to arbitration within the meaning of the Arbitration and Conciliation Act 1996 and the rules made thereunder or any statutory modifications or re-enactment thereof for the time being inforce.
The Arbitrator may from time to time with the consent of the parties enlarge the time for making and publishing the award work under the agreement shall, unless the arbitrator otherwise directs, continue during the Arbitration proceedings."
6. The Court may also note sub-section (5) of Section 12 and Clause 12 of the Seventh Schedule to the Act, 1996 as under : -
"12. Grounds for challenge -
1 to 4 - xxxxx (5) Notwithstanding any prior agreement to the Page 4 of 22 Downloaded on : Sun Sep 17 00:17:14 IST 2023 NEUTRAL CITATION C/ARBI.P/36/2022 JUDGMENT DATED: 04/08/2023 undefined 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:
Provided that parties may, subsequent to disputes having arisen between them, waive the applicability of this sub-section by an express agreement in writing."
"The Seventh Schedule :
Arbitrator's relationship with the parties or counsel 1 to 11 - xxxxx
12. The arbitrator is a manager, director of part of the management, or has a similar controlling influence in one of the parties."
7. It is contended by the learned counsel for the petitioner is that Director (Sugar) Government of Gujarat, is one of the Director of the Gujarat State Federation of Cooperative Sugar Factories Ltd (hereinafter referred to as 'the Federation' for short), and the respondent herein is a member and part of the management of the Federation. It is contended that the decisions qua private and Government Sugar Factories, from allocation of the areas for issuance of Industrial Entrepreneur Memorandum (hereinafter referred to as 'IEM' for short) are taken by the Director of Sugar. The Page 5 of 22 Downloaded on : Sun Sep 17 00:17:14 IST 2023 NEUTRAL CITATION C/ARBI.P/36/2022 JUDGMENT DATED: 04/08/2023 undefined Sugar (Control) Order, 1996 is applicable to all the Cooperative Societies, whereunder the Director of Sugar is responsible for implementation of policies regarding or relating to sugar societies particularly in exercising control over granting / issuing / acknowledging IEM to a Cooperative Society, so that it becomes easy for the society to do business among new and existing societies.
8. With the above submission, it was contended that independence and impartiality of the Director (Sugar), Government of Gujarat is doubtful. The respondent cannot insists for appointment of Director (Sugar), Government of Gujarat as sole Arbitrator by invoking Arbitration Clause 13 of the agreements-in-question. Reliance is placed on the decision of the Hon'ble Apex Court in the cases of Bharat Broadband Network Ltd.1, Perkins Eastman Architects DPC and Another2, Haryana Space Application Centre (HARSAC)3, Ellora Paper Mills Limited4, to assert that 1 Bharat Broadband Network Ltd. versus United Telecoms Ltd. (2019) 5 SCC 755, 2 Perkins Eastman Architects DPC and Another versus HSCC (India) Ltd., (2020) 20 SCC 760 3 Haryana Space Application Centre (HARSAC) and Another versus Pan India Consultants Private Limited (2021) 3 SCC 103 4 Ellora Paper Mills Limited versus State of Madhya Pradesh, (2022) 3 SCC 1 Page 6 of 22 Downloaded on : Sun Sep 17 00:17:14 IST 2023 NEUTRAL CITATION C/ARBI.P/36/2022 JUDGMENT DATED: 04/08/2023 undefined with the coming into force of sub-section (5) of Section 12, 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, he shall be ineligible to be appointed as an Arbitrator. It is submitted that the main purpose for incorporation of sub-section (5) of Section 12 is to ensure neutrality of the arbitrators. As sub-section (5) commences with the non obstante clause, it will override any agreement to the contrary. Any person falling in any of the categories specified in Seventh Schedule, thus, shall be ineligible to be appointed as an Arbitrator. A party or an Official or an Authority having interest in the dispute is held disentitled to be appointed as an Arbitrator by the Apex Court in the above noted decisions. The fact that parties herein (petitioner and respondent) have entered into agreements containing arbitration clause will have no relevance, inasmuch as, Director (Sugar), Government of Gujarat is incapacitated / ineligible by operation of law.
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9. Refuting the said submissions, learned counsel appearing for the respondent has relied upon the contents of the affidavit filed by it against the amendment submitted by the petitioner. The first submission is that three contracts were executed between the parties on 28.02.2017, 02.03.2017, 08.03.2017, which are the subject matter of the three petitions herein seeking appointment of Arbitrator under Section 11 of the Act, 1996. All three contracts / agreements were executed after insertion of sub-section (5) of Section 12 of the Act, 1996. Resultantly, as per the the proviso to sub-section (5), the petitioner by way of three express agreements in writing, had waived their rights to raise any dispute under sub-section (5) of Section 12. Even at the time of issuance of notice, after the dispute has arisen, the petitioner had waived their such right, inasmuch as, they requested to appoint sole Arbitrator for resolution of dispute as per the agreements only. Even the prayer in three original petitions was to appoint sole Arbitrator for resolution of dispute as per the agreements only. After waiving their right, the petitioner cannot be allowed to Page 8 of 22 Downloaded on : Sun Sep 17 00:17:14 IST 2023 NEUTRAL CITATION C/ARBI.P/36/2022 JUDGMENT DATED: 04/08/2023 undefined agitate the issue seeking appointment of another arbitrator in place of the Arbitrator mentioned in the express agreement in writing entered into between the parties.
10. It is further argued that the assertion in the draft amendment that the respondent is part of the Management of the Federation, is incorrect. The Federation has no control over the management of the respondent society. The Director (Sugar), Government of Gujarat also has no control over the management of the respondent society. The respondent - Society is an independent Cooperative Society and a separate legal entity. The proposed arbitrator, as per the agreements in question, is neither an employee nor a Director nor has any financial interest in his personal capacity in the respondent society namely Kaveri Vibhag Sahakari Khand Udhyog Mandali Ltd. There is no master - servant relationship between the proposed Arbitrator namely Director (Sugar), Government of Gujarat and respondent - Society. It is categorically stated in the affidavit that Director (Sugar), Government of Gujarat has no official control or any management control over the respondent Page 9 of 22 Downloaded on : Sun Sep 17 00:17:14 IST 2023 NEUTRAL CITATION C/ARBI.P/36/2022 JUDGMENT DATED: 04/08/2023 undefined society.
11. Moreover, the petitioner had entered into the agreements with open eyes and no dispute was raised at the time of execution of the contracts-in-question. Rather both the parties voluntarily after several negotiations and discussions, had agreed to appoint the Director (Sugar), Government of Gujarat as sole Arbitrator for resolution of disputes between them, if any. It was also discussed at the time of execution of the contracts that the Director (Sugar), Government of Gujarat, being an expert with regard to Sugar Industries and experts of Sugar Laws, will be the most suitable person for performing his duties as an Arbitrator, having full knowledge about the plant and machinery of sugar factories, being well versed with the Sugar Factories which may be the subject matter of the disputes between the parties, if any. It was also discussed that the Director (Sugar), Government of Gujarat being an independent authority, will be unbiased and will have concern for the welfare of sugar industries. Once between the parties, it had been decided voluntarily to appoint the Director (Sugar), Page 10 of 22 Downloaded on : Sun Sep 17 00:17:14 IST 2023 NEUTRAL CITATION C/ARBI.P/36/2022 JUDGMENT DATED: 04/08/2023 undefined Government of Gujarat as an Arbitrator in case of any dispute, the parties having expressed full faith in his authority, cannot raise a dispute in relation to express clause of the agreements. The prayer made in the instant petitions by way of amendment made by the petitioner, amounts to amendment in the clauses of the contracts which is impermissible.
12. It is further contended that the Director (Sugar), Government of Gujarat is a Government Authority and the respondent is a private body, the Government has no control over the cooperative societies. The Director (Sugar), Government of Gujarat in ex officio capacity being authority of Sugar (control) has supervisory jurisdiction to safeguard the interest of farmers. The Federation of Cooperative Sugar Factories is an advisory body in Gujarat which helps Sugar Industries to overcome their problems. From any angle, Director (Sugar), Government of Gujarat cannot be said to be interested or partisan in the disputes that have arisen between the petitioner and the respondent herein. The challenge to clause 13 of the agreements in question, by Page 11 of 22 Downloaded on : Sun Sep 17 00:17:14 IST 2023 NEUTRAL CITATION C/ARBI.P/36/2022 JUDGMENT DATED: 04/08/2023 undefined invoking the provisions of sub-section (5) of Section 12, by the petitioner, is only with ill intention to delay the process of law.
13. Having heard learned counsels for the parties and perused the record, dealing with the contentions of the learned counsel for the parties, this Court is first required to go through the legal pronouncements pertaining to the effect of insertion of sub-section (5) in Section 12 in the Act, 1996. In Ellora Paper Mills Limited4, the decision relied upon by the learned counsel for the petitioner, it is noted that Section 12 has been amended by the Amendment Act, 2005 based upon the recommendation of the Law Commission. It is to specifically deal with the issue of "neutrality of arbitrators". With the insertion of sub-section (5) of Section 12 which contains non-obstante clause, any prior agreement to the contrary, the arbitration clause wherein it is found to be foul with the amended provision, the appointment of the arbitrator would be beyond the pale of the arbitration agreement, empowering the Court to appoint such Arbitrator 4 Ellora Paper Mills Limited versus State of Madhya Pradesh, (2022) 3 SCC 1 Page 12 of 22 Downloaded on : Sun Sep 17 00:17:14 IST 2023 NEUTRAL CITATION C/ARBI.P/36/2022 JUDGMENT DATED: 04/08/2023 undefined as may be permissible. In view of the non-obstante clause contained in sub-section (5) of Section 12, other party cannot insist upon the appointment of the Arbitrator in terms of such arbitration clause.
14. In Voestalpine Schienen GmbH versus Delhi Metro Rail Corporation Ltd.5, it was observed and held by the Apex Court that independence and impartiality of arbitrator are the hallmarks of any arbitration proceedings. Rule against bias is one of the fundamental principles of natural justice which apply to all judicial and quasi-judicial proceedings. It is for this reason that notwithstanding the fact that the relationship between the parties to the arbitration and arbitrators themselves are contractual in nature and the source of arbitrator's appointment is deducted from the agreement entered into between the parties, notwithstanding the same, non-impartiality of such arbitrator would render him ineligible to conduct the arbitration. It is further observed that genesis behind this rationale is that even when an arbitrator is appointed in 5 Voestalpine Schienen GmbH versus Delhi Metro Rail Corporation Ltd., (2017) 4 SCC 665 Page 13 of 22 Downloaded on : Sun Sep 17 00:17:14 IST 2023 NEUTRAL CITATION C/ARBI.P/36/2022 JUDGMENT DATED: 04/08/2023 undefined terms of contract and by the parties to the contract, he is independent of the parties.
15. In Bharat Broadband Network Ltd.1, it was held by the Hon'ble Apex Court that there must be "express agreement" in writing to specify the requirements of proviso to Section 12(5). It was observed that the only way in which the ineligibility in sub-section (5) of Section 12 can be removed is by the proviso, which again is the special provision providing 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. However, the parties may after disputes have arisen between them, waive the applicability of this sub-section by "express agreement in writing". The term "express agreement in writing" has reference to a person who is interdicted by the 1 Bharat Broadband Network Ltd. versus United Telecoms Ltd. (2019) 5 SCC 755, Page 14 of 22 Downloaded on : Sun Sep 17 00:17:14 IST 2023 NEUTRAL CITATION C/ARBI.P/36/2022 JUDGMENT DATED: 04/08/2023 undefined 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.
16. In Haryana Space Application Centre (HARSAC)3, the Hon'ble Apex Court has observed that Section 12(5) read with Seventh Schedule is mandatory and non-derogable provision of the Act.
17. In Bharat Broadband Network Ltd.1, it was further noted that the amended provision is enacted to identify the "circumstances" which give rise to "justifiable doubts" about the independence or impartiality of the arbitrator. If any of those circumstances as mentioned in Seventh Schedule exists, it will give rise to justifiable apprehension of bias.
18. Same principles have been reiterated in Perkins Eastman Architects DPC and Another2.
3Haryana Space Application Centre (HARSAC) and Another versus Pan India Consultants Private Limited (2021) 3 SCC 103 1 Bharat Broadband Network Ltd. versus United Telecoms Ltd. (2019) 5 SCC 755, 2 Perkins Eastman Architects DPC and Another versus HSCC (India) Ltd., (2020) 20 SCC Page 15 of 22 Downloaded on : Sun Sep 17 00:17:14 IST 2023 NEUTRAL CITATION C/ARBI.P/36/2022 JUDGMENT DATED: 04/08/2023 undefined
19. In light of the above principles, the Court is required to record the factual aspects of the instant case.
20. The petitioner herein, as per the statement made in the petition, is engaged in the business of providing specialized engineering services in the field of design, engineering, procure, manufacturing, supply, erection and commissioning of sugar plant, co-generation plant, power plant and related services in various states in the country. It is registered with the National Federation of Co-operative Sugar Factories Ltd., New Delhi for the above services. The respondent herein namely Kaveri Vibhag Sahakari Khand Udhyog Mandali Ltd., is a cooperative society incorporated under the provisions of Gujarat Co-operative Societies Act, 1956. A contract has been awarded by the respondent society in favour of petitioner for erection and for commissioning plant and machinery for sugar producing plant under the agreement dated 02.03.2017. Another agreement dated 28.02.2017 has been entered into between the parties for design, procure, manufacturing, supply, Page 16 of 22 Downloaded on : Sun Sep 17 00:17:14 IST 2023 NEUTRAL CITATION C/ARBI.P/36/2022 JUDGMENT DATED: 04/08/2023 undefined erection and commissioning and machinery and equipment of gravity flow type sugar plant including civil work. The Third contract dated 08.03.2017 is again to erect and keep ready for commissioning of equipment for complete sugar plant of 2500 TCD for new sugar plant set up by the society. The dispute between the parties herein have arisen out of these three contract / agreements, which contain arbitration clause No. 13 as extracted herein before.
21. The arbitrator under the three agreements, which were admittedly executed after incorporation of sub-section (5) of Section 12 on 23.10.2015, is Director (Sugar), Government of Gujarat. It has been placed before the Court and no plausible dispute could be raised by the petitioner with regard to the fact that the arbitrator mentioned in Clause 13 of the agreements / contracts in question is neither a member of the management committee of the society nor it has any control over the management of the society. The respondent - society is a registered Co- operative society, which is member of the Federation. There is no master - servant relationship between the Director Page 17 of 22 Downloaded on : Sun Sep 17 00:17:14 IST 2023 NEUTRAL CITATION C/ARBI.P/36/2022 JUDGMENT DATED: 04/08/2023 undefined (Sugar) Government of Gujarat and the respondent society. It could not be disputed that Director (Sugar) Government of Gujarat has no financial control over the society. The Gujarat State Federation of Cooperative Sugar Factories Ltd. is a body registered in 1960 at Ahmedabad as facilitator of Sugar Cooperatives with the following objectives : -
"To Coordinate activities of different Co-operative Sugar Factories.
To provide technical support and guidance for the expansion, renovation and modernization of the existing units and in by product utilization and sale.
To assist the units in programming funds from the financial institutions and government bodies.
To encourage the research work for better quality of Sugar lane Crop. thereby achieving the Optimum production.
To provide technical and professional training to the farmers to improve their field.
To be a important interface between the Co-operative Sugar factories and the government bodies."
22. Amongst 15 members of the Board of Directors of the Federation, the Director of Sugar, Gujarat State is only one of the members. The Sugar Factories registered as Page 18 of 22 Downloaded on : Sun Sep 17 00:17:14 IST 2023 NEUTRAL CITATION C/ARBI.P/36/2022 JUDGMENT DATED: 04/08/2023 undefined Cooperative Societies are members of the Federation and the respondent herein is one of them. Looking to the nature of services provided by the Federation to assist and help Sugar Factories in various activities of manufacturing and marketing of sugar produced by it, this Court do not find any reason to doubt the stand of the respondent that the Director (Sugar), Government of Gujarat being a member of the Board of Director of the Federation acts as a Facilitator only. The nomination of this Government Authority in the Federation is by virtue of office. As regards the powers of Director of Sugar, State of Gujarat as an authority under the Sugar Lane (Control) Order, 1996, the supervisory jurisdiction conferred on it to safeguard the interest of the farmers, it has no relevance insofar as the disputes between the parties herein, which has arisen out of the agreements for construction of foundation and buildings, erection and commissioning of the plant and machinery for sugar mills set up by the respondent society.
23. In the above scenario, the contention of the learned counsel for the petitioner that the Director (Sugar), Page 19 of 22 Downloaded on : Sun Sep 17 00:17:14 IST 2023 NEUTRAL CITATION C/ARBI.P/36/2022 JUDGMENT DATED: 04/08/2023 undefined Government of Gujarat is ineligible to be appointed as an Arbitrator in view of sub-section (5) of Section 12 read with Clause 12 in the Seventh Schedule is found devoid of substance. Clause 12 in the Seventh Schedule, as noted above, makes a person ineligible to be appointed as an Arbitrator who is a Manager, Director or part of the management, or has similar controlling influence on one of the parties. None of these conditions can be said to be have been fulfilled in the facts and circumstances of the instant case, as noted above. The doubts raised by the petitioner upon independence and impartiality of the Director (Sugar), Government of Gujarat are unfounded.
24. Moreover, the petitioner herein had entered into three agreements with the respondent society in the year 2017, much after the insertion of sub-section (5) of Section 12 containing ineligibility clause. In all three agreements signed by the petitioner with open eyes, it had agreed to the appointment of Director (Sugar) Government of Gujarat as an Arbitrator. It was brought before the Court that both the parties have voluntarily, after several rounds of negotiations Page 20 of 22 Downloaded on : Sun Sep 17 00:17:14 IST 2023 NEUTRAL CITATION C/ARBI.P/36/2022 JUDGMENT DATED: 04/08/2023 undefined and discussions, have agreed to appoint Director (Sugar), Government of Gujarat as sole Arbitrator for resolution of disputes between the parties, if any. In the original arbitration petition filed after inception of the disputes between the parties, prayer was made to appoint arbitrator in terms of clause 13 of the agreements. The issue with regard to ineligibility of the Director (Sugar), Government of Gujarat has been raised only by way of amendment, subsequent to the stand of the respondent that they are agreeable to appointment of the Arbitrator for adjudication of disputes between the parties as per the arbitration clause.
25. In view of the above, this Court finds some substance in the contentions of the respondent to the extent that the petitioner has waived the applicability of sub-section (5) of Section 12 willingly by an express agreement in writing, by signing the agreements-in-question containing clause 13 and by their subsequent conduct.
26. For the above discussion, this Court does not find any good ground to sustain the challenge to the competence Page 21 of 22 Downloaded on : Sun Sep 17 00:17:14 IST 2023 NEUTRAL CITATION C/ARBI.P/36/2022 JUDGMENT DATED: 04/08/2023 undefined of Director (Sugar), Government of Gujarat to be appointed as an Arbitrator in accordance with Clause 13 of the agreements-in-question. As the parties have not been able to reach at a consensus on the appointment of the Arbitrator, the case would fall under sub-section (5) of Section 11 for appointment of Arbitrator by this Court. The Director (Sugar), Government of Gujarat, as per Clause 13 of the agreements-in-question, is hereby appointed as an Arbitrator to resolve the disputes between the parties.
27. All three Arbitration Petitions are accordingly, DISPOSED OF by this common judgment.
28. The oral request made by the Counsel for the petitioners for stay of the operative portion of this judgment, is hereby turned down.
Sd/-
(SUNITA AGARWAL, CJ ) AMAR SINGH Page 22 of 22 Downloaded on : Sun Sep 17 00:17:14 IST 2023