Milk union's chairman can't be arbitrator, Supreme Court rules

The milk union's contract said: if there's a fight, the chairman decides. The Supreme Court just said: that's exactly who can't decide.

The judgment landed on a September morning in 2021. The courtroom had the quiet rustle of paper as the two-judge bench — Justice M.R. Shah and Justice Aniruddha Bose — read out the ratio. They shut down a cooperative milk union's attempt to force its own distributors into arbitration before the union's chairman. The case — Jaipur Zila Dugdh Utpadak Sahkari Sangh Limited & Ors. v. M/s Ajay Sales & Suppliers — turned on one question: can the person who runs the organisation also judge disputes involving that organisation?

The answer was no. And the reasoning reaches into every business contract in India that names a company insider as arbitrator.

When the milk soured

March 2015. A cooperative milk union in Jaipur — the Jaipur Zila Dugdh Utpadak Sahkari Sangh Limited — signed distributorship agreements. The union supplied milk and buttermilk; the distributors sold it. Straightforward business. But buried in the fine print was Clause 13 — a single paragraph in what must have felt like 8-point font.

It said: if any dispute arises, the matter goes to arbitration — and the sole arbitrator will be the union's Chairman.

Disputes did arise. By August 2018, the distributors had grievances. They were told to approach the Chairman-arbitrator, as the contract required. The file before the Chairman opened in October 2019, the pages smelling of old paper and fresh frustration.

Then the distributors did something unexpected. Instead of continuing, they went to the Rajasthan High Court and asked for an independent arbitrator under Section 11 of the Arbitration and Conciliation Act, 1996 (the provision that lets a court appoint an arbitrator when parties cannot agree on one).

Why the Chairman couldn't sit in judgment

The High Court agreed. It appointed a retired District and Sessions Judge as the arbitrator, replacing the Chairman. The court found the Chairman ineligible under Section 12(5) of the Arbitration Act read with the Seventh Schedule — a set of rules that lists who cannot act as an arbitrator because of a conflict of interest.

The milk union was not happy. It filed Special Leave Petitions in the Supreme Court, arguing four points.

First, the union said Section 12(5) did not apply — the agreement was signed in March 2015, before the provision was inserted by an amendment that took effect on 23 October 2015. The contract predated the law, so the law should not govern it.

Second, the union said the Chairman, being an elected member of the cooperative society, did not fall within the disqualification categories in the Seventh Schedule. He was not an employee or a director in the traditional corporate sense — he was an elected representative of the society's members.

Third, the union pointed to Section 58 of the Rajasthan Cooperative Societies Act, 2001, which deals with settlement of disputes involving cooperative societies. This provision, the union argued, barred the jurisdiction of courts under the Arbitration Act entirely — disputes involving a cooperative society could only go through the state law mechanism.

Fourth, the union said the distributors had waived their right to object. They attended hearings, filed submissions — they could not now turn around and say the Chairman was ineligible.

Why the Supreme Court said no — in four short answers

The bench dismissed all four arguments in a single, tightly reasoned judgment. The courtroom fell silent as the court read out its reasoning on the non-obstante clause.

On the first point — that Section 12(5) could not apply to a pre-amendment agreement — the court relied on its own decisions in TRF Ltd. v. Energo Engineering Projects Ltd. (2017) and Bharat Broadband Network Limited v. United Telecoms Limited (2019). The key was the non-obstante clause in Section 12(5) — a legal phrase meaning "notwithstanding anything to the contrary". This clause overrides any prior agreement. It does not matter when the contract was signed. If the arbitrator falls within the Seventh Schedule categories, the arbitrator is ineligible — period.

On the second point — that an elected Chairman is not covered — the court looked at Clauses 1, 2, 5, and 12 of the Seventh Schedule. They disqualify anyone who is a director, a member of management, or someone who has a controlling influence over one of the parties. The Chairman of a cooperative society, the court held, is exactly that — an elected member who is part of the management and exercises a controlling influence. The Chairman could not be neutral because the Chairman was, in effect, one side of the dispute wearing an arbitrator's robe.

On the third point — that the Rajasthan Cooperative Societies Act ousted the Arbitration Act — the court drew a clear line. The Arbitration Act is a special statute. Where parties have voluntarily agreed to resolve disputes through arbitration, that agreement binds them. Section 58 of the state law does not override the parties' contractual choice. The distributorship agreement contained an arbitration clause; the parties were bound by it — but the arbitrator had to be independent.

On the fourth point — waiver — the court was equally firm. The proviso to Section 12(5) allows parties to waive the ineligibility of an arbitrator, but only through an express agreement in writing, made after the dispute has arisen, with full knowledge that the arbitrator is disqualified under the Seventh Schedule. Mere participation — attending hearings, filing papers — does not amount to waiver. Silence is not consent. The court held that "mere participation in arbitration proceedings before an ineligible arbitrator does not constitute waiver under the proviso to Section 12(5)." The distributors had never signed a written agreement saying they accepted the Chairman despite his ineligibility. There was no waiver.

Every contract now faces this test

The judgment is a warning to companies, cooperatives, and any organisation that drafts arbitration clauses naming its own officers as arbitrators. The Supreme Court has now said that Section 12(5) applies retrospectively — it governs agreements signed before the 2015 amendment. And the disqualification covers not just employees and directors in the corporate sense, but elected office-bearers of cooperative societies who exercise management control.

For practitioners, the takeaway is simple: if your client's contract names the managing director, the chairman, or any senior officer as the sole arbitrator, that clause is dead on arrival if challenged. The only way to save it is to get the other party to sign a written waiver — after the dispute has arisen — explicitly acknowledging the arbitrator's ineligibility and agreeing to proceed anyway.

THE PLAY: Review every arbitration clause in your organisation's contracts that names an insider as arbitrator — and amend it before a dispute arises and a court strikes it down.

The milk union's Chairman never got to decide the dispute. The retired District Judge did. The file on the Chairman's desk — thin, smelling of old paper — was closed before it could grow heavy with arguments. The Supreme Court had spoken, and the answer was clear: the person who runs the organisation cannot also judge the disputes that involve it.