Court Bars Appointment of Managing Director as Arbitrator in Lease Dispute
Last Updated on December 15, 2024 by Athi Venkatesh
The Jammu & Kashmir and Ladakh High Court has ruled that a Managing Director or Chairman of a party to an arbitration agreement cannot act as an arbitrator under Section 12(5) of the Arbitration and Conciliation Act, 1996, read with the Seventh Schedule. The court made this decision while appointing an independent arbitrator in a lease dispute.
The petitioner sought the appointment of an independent arbitrator under Section 11 of the Arbitration Act. The dispute arose when the respondent failed to hand over possession of a plot of land in Udhampur, despite the petitioner depositing the required amount. In 2020, the respondent allotted a new plot and signed a lease deed in 2022. However, the petitioner argued that the operationalization timeline was unrealistic given the delay. Despite compliance with payment and site plan submissions, the respondent canceled the lease in March 2023.
The petitioner challenged the cancellation in court under Section 9, securing interim relief that stayed the order. They further argued that appointing the respondent’s Managing Director as arbitrator under Clause 41 of the lease deed violated Section 12(5) of the Arbitration Act.
The respondent contended that the lease deed explicitly mandated arbitration by the Managing Director under Clause 41. They argued the arbitration clause was binding.The court referred to precedents, including HARSAC v. Pan India Consultants (2021) and Ellora Paper Mills v. Madhya Pradesh (2022). It held that Section 12(5) is mandatory, barring interested individuals from serving as arbitrators unless expressly agreed in writing. The court found Clause 41 invalid and non-compliant with the law.
The court allowed the petition, invalidated the appointment of the Managing Director as arbitrator, and appointed an independent arbitrator to resolve the dispute. This ruling reinforces the impartiality principle in arbitration proceedings.
