Appointment Of Arbitrator As 'Observer' In Another Matter Does Not Render Him Ineligible Under 5th & 7th Schedule Of A&C Act: Delhi High Court

The Delhi High Court bench of Justice Jasmeet Singh has held that the appointment of an arbitrator as an observer in a matter unrelated to the arbitration dispute does not constitute de facto or de jure ineligibility under the Fifth or Seventh Schedules of the Arbitration and Conciliation Act, 1996 (Arbitration Act). Consequently, the arbitrator's mandate cannot be terminated on this ground under Section 14 of the Act. However, the court permitted the petitioner to raise this objection under Section 34 after the award is passed. Brief Facts: The petitioner, one of 26 similarly placed claimants, challenges the respondent's alleged wrongful sealing of their commercial premises on 29.05.2020 at Hotel Hyatt Regency, New Delhi. The dispute was referred to arbitration pursuant to an arbitration clause, and a sole arbitrator was appointed by this Court on 02.09.2024, who entered reference on 07.09.2024 and declared his neutrality. Subsequently, the petitioner learned that the arbitrator had earlier been appointed as “Administrator” of Exclusive Capital Ltd. (ECL) by the NCLT on 15.05.2024 in a petition by ECL shareholders who were also shareholders of the respondent. That order was stayed by the NCLAT on 22.05.2024 and modified on 31.05.2024, directing the arbitrator to act as Observer pending appeal. Thereafter, the petitioner filed an application under Section 12 of the Act on 24.01.2025 seeking recusal of the learned arbitrator, which was opposed by the respondent. Vide the order dated 25.03.3025 passed by the learned arbitrator, the said application was rejected. Contentions: The Petitioner submitted that there existed prior involvement of the learned arbitrator in overseeing the affairs of ECL in relation to the respondent, however, no such disclosure was made by the learned arbitrator in his declaration dated 07.09.2024, which is mandatory under the Act. It was further submitted that the learned arbitrator was both de jure and de facto disqualified from accepting the arbitral reference due to his ongoing role in ECL related proceedings, which involved scrutiny of the respondent. The lack of disclosure regarding this conflict rendered the arbitral proceedings legally untenable. Per contra, the Respondent submitted that the role of the learned arbitrator as an Administrator/Observer does not equate to being part of the management of ECL or its affiliates. The appointment of the learned arbitrator as an “Observer” does not relate to the operations and affairs of the respondent company and further, the petitioner has not substantiated its claims regarding bias. It was further submitted that the petitioner has failed to specify relevant entries from the Fifth Schedule of the Act that would support claims of bias. Further, the delay in filing the application on behalf of the petitioner is also questioned, as the NCLT and NCLAT Orders were issued before the disputes were referred to the learned tribunal. Observations: The court noted that the Delhi High Court in National Highways Authority of India v. K.K. Sarin & Ors., 2009 held that an important question arises as to whether an unsuccessful challenge to the arbitrator under Section 13(1) of the Arbitration Act confines the aggrieved party's remedy solely to Section 34, given that Section 13(5) does not refer to Section 14. However, interpreting the provision in this manner would render the concept of de jure inability—such as bias—ineffective. It further added that the scheme of the Act suggests that after an unsuccessful challenge under Section 13, the party has two possible courses: either await the final award and then challenge it under Section 34, or immediately approach the court under Section 14 to seek termination of the arbitrator's mandate. The court in the above acse further held that when approached under Section 14, the court must first assess whether the issue of bias or de jure inability can be decided summarily. If it can, and bias is established, the court may terminate the arbitrator's mandate. The court in the above concluded that If the challenge is found to be frivolous or vexatious, the petition will be dismissed. In cases where the issue requires deeper examination or appreciation of evidence, the court may still dismiss the Section 14 petition but preserve the petitioner's right to raise the issue under Section 34. The Supreme Court in Chennai Metro Rail Ltd. held that the provisions of the Arbitration Act aim to eliminate ambiguity and ensure impartiality, rendering an arbitrator's appointment void if any Seventh Schedule condition exists—unless expressly waived in writing by the affected party. The Apex Court also held that the argument that de jure ineligibility can arise from grounds not listed in the Seventh Schedule, as contended by Chennai Metro, is untenable. Recognizing such exceptions would undermine the ...

Appointment Of Arbitrator As 'Observer' In Another Matter Does Not Render Him Ineligible Under 5th & 7th Schedule Of A&C Act: Delhi High Court

Mohd Malik Chauhan

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