Sitson India Pvt. Ltd vs Kaveri Vibhag Sahakari Khand ...
2023 Latest Caselaw 5677 Guj

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     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
==========================================================

    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

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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

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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

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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

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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

Bharat Broadband Network Ltd. versus United Telecoms Ltd. (2019) 5 SCC 755,

Perkins Eastman Architects DPC and Another versus HSCC (India) Ltd., (2020) 20 SCC

Haryana Space Application Centre (HARSAC) and Another versus Pan India Consultants Private Limited (2021) 3 SCC 103

Ellora Paper Mills Limited versus State of Madhya Pradesh, (2022) 3 SCC 1

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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

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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

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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),

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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

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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

Ellora Paper Mills Limited versus State of Madhya Pradesh, (2022) 3 SCC 1

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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

Voestalpine Schienen GmbH versus Delhi Metro Rail Corporation Ltd., (2017) 4 SCC 665

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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

Bharat Broadband Network Ltd. versus United Telecoms Ltd. (2019) 5 SCC 755,

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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.

Haryana Space Application Centre (HARSAC) and Another versus Pan India Consultants Private Limited (2021) 3 SCC 103

Bharat Broadband Network Ltd. versus United Telecoms Ltd. (2019) 5 SCC 755,

Perkins Eastman Architects DPC and Another versus HSCC (India) Ltd., (2020) 20 SCC

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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,

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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

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(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

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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),

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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

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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

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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