Stay of suit under arbitration clause may be refused where arbitrator impartiality is reasonably in doubt

A stay of suit under section 34 of the Indian Arbitration Act, 1940 may be refused despite an arbitration clause where surrounding circumstances make arbitration inappropriate. The Court treated the clause as working within the Co-operative Societies framework only to the extent consistent with the Arbitration Act, and noted that uncertainty over which rules would apply made compelled reference problematic. It also relied on the long pendency of the suit and the reasonable apprehension that the Registrar, having an official connection with the society and involvement in the termination, might not act with complete fairness as arbitrator. The refusal of stay was therefore upheld and the suit was allowed to proceed.

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Issues: Whether the proceedings in the suit should be stayed under section 34 of the Indian Arbitration Act, 1940 on the footing that the dispute was referable to arbitration under the managing agency agreement and the Co-operative Societies Act regime.

Analysis: The arbitration clause was treated as incorporating the procedural framework of the Co-operative Societies law rather than creating a statutory arbitration falling outside the ordinary discretion under section 34. The Court held that the Co-operative Societies Rules would govern the reference only so far as they were consistent with the Arbitration Act, which made it difficult to determine in advance which rules would apply. Independent of that difficulty, the suit had remained pending for many years, so further referral to arbitration would not serve speedy disposal. The Court also accepted the apprehension that the Registrar, who had an official connection with the society and had approved the termination, might not act with complete fairness as arbitrator, and held that a stay should be refused where there is good ground for such apprehension or where it is otherwise improper for the selected arbitrator to act.

Conclusion: The application for stay under section 34 was rightly refused and the suit was permitted to proceed.

Final Conclusion: The discretionary power to stay arbitration-bound proceedings was not attracted on the facts, and the challenge to the refusal of stay failed.

Ratio Decidendi: A stay of suit under section 34 of the Indian Arbitration Act, 1940 may be refused where there is a reasonable apprehension that the named arbitrator may not act fairly or where surrounding circumstances make it improper to compel arbitration, notwithstanding the existence of an arbitration clause.

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