Director Of Govt Dept Ineligible To Act As Arbitrator In Dispute Between Dept & Other Party Due To Bar U/S 12(5) Of A&C Act: HP High Court

Brief Facts:

The present petition has been filed challenging the appointment of the Arbitrator.

The petitioner has a two-fold grievance regarding the appointment of the arbitrator. First, the arbitrator was unilaterally appointed by the respondents without consulting the petitioner. Second, the appointment of the Director, Department of Digital Technologies and Governance, H.P., is challenged as being contrary to Section 12(5) read with Schedule 7 of the Arbitration and Conciliation Act, 1996 (“ Arbitration Act”).

Observations:

The court, after referring to the arbitration clause of the agreement executed between the parties, observed that there was no authority with the respondents to have unilaterally appointed the arbitrator. The respondents have clearly overlooked the provisions of the Act while appointing the Director, Department of Digital Technologies and Governance, H.P., as the sole arbitrator.

It further opined that a plain reading of Section 12(5) and the Seventh Schedule of the Act shows that any person whose relationship with the parties, counsel, or the subject matter falls within the categories listed in the Seventh Schedule is ineligible to be appointed as an arbitrator.

It further added that the Schedule clearly defines what constitutes such relationships, including current or past employment, consultancy, advisory roles, or any business relationship with a party. Any such privity of contract, whether present or past, acts as an embargo and prevents that person from acting as or continuing as an arbitrator.

The court further opined that the adjudication by an arbitrator must be such that neither party has even the slightest doubt about the arbitrator's impartiality. To eliminate any such remote doubt, Parliament inserted subsection (5) of Section 12, anticipating such situations. The Seventh Schedule prescribes that any relationship which may give rise to even a remote doubt regarding the arbitrator's impartiality acts as an embargo, preventing the arbitrator from being appointed or continuing in office.

It further said that if an arbitrator falls within the categories specified in items 1 to 14 of the Seventh Schedule, the embargo under Section 12(5) applies, and in such circumstances, the arbitrator must withdraw to allow the appointment of another arbitrator to adjudicate the dispute.

The Supreme Court in Jaipur Zila Dugdh Utpadak Sahkari Sangh Ltd. Vs. Ajay Sales and Suppliers, 2021 held that considering the object and purpose of Section 12(5) read with the Seventh Schedule, the Chairman of the petitioner Sangh is 'ineligible' to continue as an arbitrator. Although the term 'Chairman' is not explicitly mentioned, the role falls within Clauses 1, 2, 5, and 12, as the Chairman is an elected member/director of the Sangh, making them ineligible under the Arbitration Act.

In light of the above discussion, the court concluded that “the statutory bar contained in subsection (5) of Section 12 would squarely be applicable as the Director, Department of Digital Technologies and Governance, cannot be held to be independent and impartial arbitrator because he could be a consultant or a advisor of the respondents.”

Accordingly, the present petition was allowed.

Case Title: M/s Oasys Cybernetics Pvt. Ltd. Versus State of H.P. & Anr.

Case Number: CWP No. 8122 of 2025

Judgment Date: 19/05/2025

For the petitioner : Mr. Sanjeev Bhushan, Senior Advocate with Mr. Rajesh Kumar, Advocate.

For the respondents : Mr. Anup Rattan, Advocate General with Mr. Ramakant Sharma, Mr. Navlesh Verma, Ms. Sharmila Patial, Mr. Sushant Keprate, Additional Advocates General and Mr. Raj Negi, Deputy Advocate General.

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