In a petition filed before the Delhi High Court under Section 14 read with Section 12(5) of the Arbitration and Conciliation Act, 1996 (A&C Act) for termination of the mandate and substitution of the arbitrator, a Single Judge Bench of Justice Avneesh Jhingan allowed the petition and substituted the arbitrator for being ineligible.
The parties were brothers engaged in a family jewelry business under the name of ‘Manohar Lal Sarraf and Sons Jewelers Private Limited’. There were three directors in the business, each holding an equal share of 33.33%. Both present parties entered into an understanding on 04-10-2021 to resolve disputes regarding reconciliation, scrutiny, and settlement of accounts by arbitration. The name of the sole arbitrator was mutually agreed upon by the parties.
The arbitrator passed orders dated 04-10-2021 and 08-10-2021 under Section 17 of the A&C Act, directing the parties to maintain the status quo regarding all properties in the arbitral dispute. The third brother, as well as the business, filed appeals under Section 37 of the A&C Act whereby both orders were set aside with the consent of the parties.
Earlier, an application was filed under Section 14(2), read with Section 15, of the A&C Act, seeking termination of the sole arbitrator’s mandate for violating entry no. 9 of the Seventh Schedule to the A&C Act. The Court rejected this holding that an arbitrator cannot be described as having a close family relation with the brother of the parties in dispute. The Court took note of the third brother’s statement that he would like to join the arbitral proceedings and be a signatory, provided the arbitrator is substituted. It was also noted that since the third brother held an equal share, an effective resolution may not be possible without his participation in the arbitral proceedings. A Special Leave Petition against the Court’s decision was dismissed.
Thereafter, the respondent filed an application to implead the third brother, the business, and Manohar Lal Sarraf & Sons Private Limited. On 14-11-2025, the petitioner sent an email to the arbitrator for filing a fresh declaration under Section 12 of the A&C Act. On 24-11-2025, the petitioner sent an application to the arbitrator with a copy of a cheque of Rs. 1 Crore issued by the arbitrator in favour of the third brother. It was stated that there was a financial interest between the arbitrator and the third brother, which is why the arbitrator could not continue under Section 12(5) read with the Seventh Schedule of the Act.
The arbitrator, without filing a declaration under Section 12 of the A&C Act, proceeded to decide the application for impleadment, which was dismissed. It was held that, because of the dismissal, there was no requirement to file a fresh declaration and that the one filed on 04-10-2021 was sufficient.
The petitioner contended that the disclosure under Section 12 was a continuing requirement, whereas the respondent asserted that the remedy available for the petitioner against the dismissal was at the stage of Section 34 and that the grievance could not be raised at the present stage.
The Court stated that the arbitrator adopted a novel approach of not filing a Section 12 declaration and waited for the outcome of the impleadment application to be decided solely by him. It was said that, after violating the statutory provisions, the arbitrator decided on the arbitral tribunal’s jurisdiction with regard to non-signatories to the agreement.
Reference was made to HRD Corporations v. GAIL (India) Limited (2018) 12 SCC 471, wherein the Supreme Court held that the ineligibility of an arbitrator under Section 12(5), read with the Seventh Schedule, can be decided by the court in an application filed under Section 14 of the Act. The Court stated that Section 12, read with the Seventh Schedule, is not applicable vis-à-vis a non-signatory, even if it is claimed that the party is bound by the agreement and is a necessary party to the proceedings.
The Court rejected the respondent’s contention that repeated challenges to the arbitrator’s jurisdiction would stall the proceedings and said that the arbitrator’s eligibility is consequent to the impleadment application and would give a new cause of action to the petitioner.
Further, it was stated that the circumstances, in the present case, changed with the filing of the impleadment application, and the duty was cast upon the arbitrator to make a declaration under Section 12. It was held that the arbitrator erred in proceeding under Section 16 to decide the impleadment application and that non-compliance with Section 12 was an error, especially when the cheque issued was neither denied nor explained.
The Court stated that Section 14 cannot be invoked on an apprehension of bias and held that the arbitrator was de jure ineligible under Section 12(5) read with the Seventh Schedule. The Court substituted the earlier arbitrator and directed the sole arbitrator to comply with Section 12 before entering upon reference.
Thus, the petition was allowed.
Appearances:
For Petitioner – Mr. Manish Vashisht (Sr. Adv), Mr. Rajeev Ahuja, Mr. Harshit Ahuja, Mr. Shikhar Bansal
For Respondent – Mr. Sandeep Sethi (Sr. Adv), Mr. Ravi Prakash, Ms. Nupur Singh, Ms. Riya Kumar, Ms. Shreya Sethi, Mr. Krishna Gembheer
