Allahabad High Court Upholds Arbitrator’s Appointment in Custom Milled Rice Dispute: Reinforces Waiver Doctrine and Importance of Raising Jurisdictional Objections at the Earliest Stage in Arbitration

Court’s Decision

This case revolves around a dispute concerning the recovery of dues related to the Custom Milled Rice (CMR) scheme. The petitioner is engaged in the business of milling paddy into rice. The dispute began when the concerned authorities issued recovery certificates for an alleged deficit in CMR supply for the year 2018-19. Despite the petitioner’s objections, additional recovery notices were issued, leading to a legal challenge.

When the petitioner initially approached the High Court with a writ petition to contest the recovery, the court directed them to pursue arbitration. The petitioner then initiated arbitration proceedings, but the arbitrator—who was also an official responsible for issuing the recovery certificates—rejected the petitioner’s claim. This led to the issuance of further recovery notices and a prohibition on the petitioner’s milling operations for the year 2024-25.

The primary legal question before the court was whether the arbitrator’s appointment was valid, given their prior involvement in issuing the recovery certificates. The petitioner argued that this constituted a conflict of interest and affected the fairness of the arbitration process.

Facts

• The petitioner is a business entity engaged in milling paddy into rice.
• The dispute arose due to an alleged deficit in Custom Milled Rice (CMR) for the 2018-19 period.
• Recovery certificates were issued against the petitioner on March 4, 2020.
• The petitioner made representations against these certificates, but the authorities issued a fresh recovery citation on May 29, 2023.
• The petitioner initially filed a writ petition in 2023 but later withdrew it, opting for arbitration as per the court’s direction.
• Arbitration proceedings commenced, and the appointed arbitrator, who was also responsible for issuing recovery certificates, rejected the petitioner’s claim in an order dated November 19, 2024.
• As a result, additional recovery certificates were issued on November 20, 2024, and an order dated November 29, 2024, restrained the petitioner from conducting its milling operations for 2024-25.

Legal Issues Before the Court

1. Impartiality of the Arbitrator: Could an official responsible for issuing the recovery certificates serve as a neutral arbitrator?
2. Waiver of Objection: Did the petitioner forfeit its right to challenge the arbitrator’s appointment by failing to raise an objection during arbitration?
3. Legal Precedents: Did previous legal principles support the petitioner’s claim that the arbitrator was biased?

Petitioner’s Arguments

• The petitioner argued that the arbitrator lacked neutrality since they had earlier issued the recovery certificates being contested in the case.
• It was contended that this situation created a conflict of interest, making the arbitrator unsuitable to hear the dispute.
• The petitioner maintained that the decision of the arbitrator was influenced by prior involvement in the matter and should be set aside.

Respondent’s Arguments

• The respondent countered that under Section 21 of the Code of Civil Procedure (CPC), 1908, any objection to an arbitrator’s jurisdiction should have been raised at the earliest possible stage.
• The respondent also relied on Section 16 of the Arbitration and Conciliation Act, 1996, which states that objections regarding an arbitrator’s competence must be raised during the arbitration proceedings, not afterward.
• The petitioner participated in the arbitration without objecting to the arbitrator’s appointment and could not now challenge it.
• It was further argued that the petitioner failed to show any actual prejudice resulting from the arbitrator’s appointment.

Legal Analysis

1. Section 21 of the CPC, 1908 (Objections to Jurisdiction Must Be Raised Early)

• This section requires parties to raise objections regarding jurisdiction at the earliest opportunity.
• If a party does not object early, it is deemed to have waived its right to challenge jurisdiction later.
• The court held that the petitioner failed to object at the start of arbitration and could not raise the issue afterward.

2. Section 16 of the Arbitration and Conciliation Act, 1996 (Competence of the Arbitral Tribunal)

• This section provides that an arbitral tribunal has the authority to rule on its own jurisdiction.
• If a party believes the arbitrator is not competent, it must raise this objection before submitting its defense in arbitration.
• Since the petitioner participated in the arbitration without contesting the arbitrator’s appointment, they could not raise this issue at a later stage.

3. The Doctrine of Waiver

• Courts have consistently held that failure to challenge an arbitrator’s appointment in a timely manner results in waiver of the right to object.
• The petitioner’s conduct—actively participating in the arbitration without raising concerns—suggested an implied acceptance of the arbitrator.

Precedent Analysis

• The court cited previous rulings where parties who failed to raise jurisdictional objections during arbitration were later barred from challenging them in court.
• The ruling aligns with prior judgments emphasizing the finality and efficiency of arbitration by discouraging belated objections.

Court’s Reasoning

• The petitioner did not contest the arbitrator’s appointment at the appropriate time.
• No evidence was presented showing that the arbitrator acted with bias or caused actual prejudice.
• The arbitrator’s decision was based on legal principles, not personal bias.
• The petitioner’s failure to raise the issue earlier meant that their challenge was legally untenable.

Conclusion

• The judgment reinforces that jurisdictional objections must be raised promptly.
• A party cannot remain silent during arbitration and later claim bias or lack of jurisdiction.
• The ruling protects the integrity of arbitration by preventing unnecessary delays caused by belated objections.
• Businesses engaging in arbitration should carefully assess arbitrator appointments at the outset to avoid forfeiting their right to challenge later.

Implications of the Judgment

1. Strengthening Arbitration Process: The decision upholds arbitration as an effective dispute resolution mechanism by discouraging post-facto challenges.
2. Precedent for Future Cases: Other courts may refer to this ruling when dealing with similar challenges to arbitrator appointments.
3. Guidance for Businesses: Entities engaging in arbitration should raise jurisdictional objections at the outset or risk waiving their right to contest.

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