Himanshu Shekhar vs. Prabhat Shekhar, O.M.P. (T) (COMM.) 119/2021: Delhi High Court (decided on 31 May 2022)

Relevant Facts:

• The Petitioner and Respondent are brothers, inter alia, engaged in carrying on the family business of manufacturing and dealing in jewellery ornaments. Certain disputes had arisen between the parties and the parties contemplated referring the disputes to arbitration. After a round of discussions, the parties decided to mutually appoint a Sole Arbitrator. The Sole Arbitrator so appointed was equally related to both the parties, as their real niece was his daughter-in-law.

• The Petitioner filed an application dated 25.10.2021, under Section 16 of the Arbitration and Conciliation Act (“A&C Act”) read with Sections 12(5) and 14 of the A&C Act, before the Arbitrator, praying that he recuses himself from the arbitral proceedings. The Petitioner inter alia contended that he was ignorant about the proviso to Section 12(5) of the A&C Act when he had agreed for referring the disputes to the Arbitrator. The Arbitrator rejected the said application.
• The Petitioner then filed the petition under Sections 14(2) and 15 of the A&C Act contending that the Arbitrator is related to both the parties and is rendered ineligible in terms of Entry no. 9 of the Seventh Schedule of the A&C Act. It was also contended that the proviso to Section 12(5) of the A&C Act is not attracted as the Petitioner has not executed any agreement waiving the right to object to the ineligibility of the Arbitrator.
• On the other hand, the Respondent contended that the Arbitrator was equally related to the parties and not one of the parties. It was also contended that that the Arbitrator was related but was not “closely” related.

Issue:

Whether the Arbitrator is ineligible to be appointed as an arbitrator under Section 12(5) of the A&C Act?

Judgement:

• Mechanism Regarding Challenge to the Appointment of an Arbitrator: The Court explained the mechanism to challenge the appointment of an arbitrator under the A&C Act. It was explained that a party challenging the appointment of an arbitrator would necessarily have to confine itself to the scheme provided under Sections 12 and 13 of the A&C Act.
• Sub-section (5) of Section 12 of the A&C Act provides for ineligibility of a person to be appointed as an arbitrator and the Seventh Schedule of the A&C Act provides a non-exhaustive list of circumstances that would render a person ineligible to be appointed as an arbitrator.
• Section 12(5) of the A&C Act stands on a separate footing than the scheme to challenge an arbitrator under Section 12(3) of the A&C Act. In case of a challenge relating to ineligibility under Section 12(5) of the A&C Act, the party could directly seek recourse to Section 14 of the A&C Act (See HRD Corporation (Marcus Oil and Chemical Division) v. Gail (India) Limited (2018) 12 SCC 471).
• Interpretation of the expression “close family relationship” appearing in Entry no. 9 of the Seventh Schedule of the A&C Act:  Under Entry 9, it is not sufficient that the arbitrator is related to any one of the parties. The relationship must be a ‘family relationship’ and, that too, a close one.
• Entry 9 of the Seventh Schedule derives inspiration from Clause 2.3.8 of the Waivable Red List under the IBA Guidelines. At the same time, neither Entry 9 nor Clause 2.3.8 provides a definition of the term “close family relationship”.
• As a consequence, the Court had to rely upon external sources/statutes such as the Vermont Securities Regulations 2016, The Employment Standards Act, SNB 1982 (Canada) etc., to analyze the definition of the said expression. The Court also referred to Explanation I to the Seventh Schedule of the A&C Act, which defines the expression “close family member” as a spouse, sibling, child, parent or life partner.

Basis the above analysis, the Court ruled that that by no stretch, the relationship between the Arbitrator and the parties can be described as a close family relationship solely on the basis that the Arbitrator’s son is married to their niece, as is the situation in the present case. The relationship between the parties and the Arbitrator in the instant case can, at best, be described as distant.

The Court also made a very important clarification in the sense that the circumstances, as mentioned in the Seventh Schedule of the A&C Act, are indicative. Nonetheless, the plain language of Entry No. 9 indicates that it is not the legislative intent to render a distant relative of the parties to be ineligible for being appointed as an arbitrator, if both the parties so agree.

Comment:

The instant decision is quite interesting in terms of its observations and analysis. It can be expected that the decision would be relied upon by a number of other litigants as well as the Courts in similar proceedings i.e., where the eligibility of an arbitrator is challenged on the basis of his/her relationship with one of the parties or in rare situations, with both the parties, as was the situation in the present case.   

This reliance, however, would have to be carefully assessed. This is because the Court was dealing with a rather convenient factual scenario in the instant case, where the Sole Arbitrator was equally related to both the parties.

The biggest point of concern arises from a passing observation made by the Court in the instant case, wherein it stated that the Sole Arbitrator is not even a close family member of the elder brother of the parties, whose daughter was married to the son of the Sole Arbitrator. In the author’s opinion, this observation takes a slightly over technical view of the term “close family relationship” and ignores family/social dynamics that exist. In fact, The Employment Standards Act, SNB 1982, defines the term “close family relationship” in a broad manner and includes within its fold the relationships that demonstrate an intention to extend to one another the mutual affection and support normally associated with blood relationships or relationships formed by marriage. Therefore, the interpretative saga of “close family relationships” is far from over.