In a recent Judgment, Supreme Court expounded that, "Having considered the purpose and object of the Article 299 of the Constitution of India, we are of the clear opinion that a contract entered into in the name of the President of India cannot and will not create immunity against the application of any statutory prescription imposing conditions on parties to an agreement when the Government chooses to enter into a contract".
Apex Court Bench headed by CJI Chandrachud and also comprising of Justice P.S Narsimha and Justice J.B Pardiwala further enunciated that, “We are unable to trace any immunity arising out of Article 299, to support the contention that for contracts expressed to be made by the President of India, the ineligibility of appointment as an arbitrator as contemplated under Section 12(5) of the Act, read with Schedule VII, will be inapplicable”.
Brief Facts of the Case:
An Application was filed before the Supreme Court under Section 11(6) of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as “Act, 1996”) for the appointment of a Sole Arbitrator by Glock Asia-Pacific Ltd.
The Ministry of Home Affairs (Procurement Division) initiated a tender to procure 31,756 Glock Pistols. The applicant won the bid and received a Tender of Acceptance from the respondent. As per Clause 6 of the Tender of Acceptance, the petitioner had to provide a performance bond of 10% of the contract value, amounting to USD 13,29,093/-. The applicant submitted the performance bank guarantee and fulfilled its contractual obligations. The entire supply under the contract was delivered, and the respondent accepted it, making the full payment.
During the contract period and even after its completion, the performance bank guarantee issued was extended several times until 2021, which was nine years after the delivery and final payment. The applicant notified the respondent that the performance bank guarantee would not be extended further. In response, the respondent promptly invoked the performance bank guarantee for INR 9 crores, referring to Clauses 11 and 18(c) of Schedule II of the Acceptance of Tender.
An Application was filed before the Supreme Court under Section 11(6) of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as “Act, 1996”) for the appointment of a Sole Arbitrator by Glock Asia-Pacific Ltd.
Procedural History:
The applicant issued a notice invoking arbitration and appointed a retired Judge of the High Court of Delhi as the sole arbitrator. The respondent was given 15 days to accept the nomination. In reply to the arbitration notice, the respondent stated in a letter that the nomination was against Clause 28 of the Conditions of Tender. According to that clause, disputes are to be referred to arbitration by an officer in the Ministry of Law appointed by the Ministry of Home Affairs Secretary. In light of the aforementioned circumstances, the applicant, being a foreign company, filed the application under Section 11(6) of the Act 1996 before the Court.
Contentions of the Applicant:
The applicant argued that appointing the sole arbitrator according to the respondent's letter would go against Section 12(5) of the Act 1996. In support of this argument, They referred to the judgment in Perkins Eastman Architects DPC and Another v. HSCC (India) Ltd. [(2020) 20 SCC 760]. The objection raised is that the respondent, Union of India, who is a party to the agreement, selecting their own employee, an officer in the Ministry of Law, as the sole arbitrator, would contradict the requirement stated in Section 12(5) of the Act, 1996.
Contentions of the Respondents:
The respondents argued that the judgment in Perkins (supra) is not applicable to the current case. They emphasized that the contract in this case, unlike in Perkins (supra), is made in the name of the President of India, which is a significant distinction. The respondents also referred to the case of Indian Oil Corporation Ltd. and Ors. v. Raja Transport Pvt. Ltd [(2009) 8 SCC 520] to assert that once a party agrees to the appointment of an arbitrator, the party cannot simply choose to disregard the arbitration clause. As an alternative argument, the respondents relied on the decision of the Court in Central Organisation for Railway Electrification v. ECI-SPIC-SMO-MCML (JV), A joint venture company [(2020) 14 SCC 712], where the appointment of a panel of arbitrators by the Ministry of Railways was deemed valid. Therefore, they contended that the authority to nominate an officer in the Ministry of Law does not conflict with Section 12(5) of the Act 1996.
Observations of the Court:
The Supreme Court reiterated that Article 299(1) of the Constitution requires a specific procedure for government agents to enter into contracts that bind the government and prevent unauthorized or illegitimate contracts. Consequently, contracts not meeting the form prescribed by Article 299(1) cannot be enforced by any party.
SC Bench observed that Article 299 solely addresses the formal requirements for government contractual obligations and does not encompass the substantive laws governing the government's contractual liability. Therefore, even if a contract is formally valid under Article 299, it may still fail to bind the government if it is void or unenforceable according to the general provisions of the law. Considering the purpose of Article 299, it is evident that a contract made in the name of the President of India does not grant immunity against the application of statutory conditions when the government chooses to enter into an agreement. Article 299 does not support the argument that the ineligibility for appointment as an arbitrator under Section 12(5) of the Act, 1996, in conjunction with Schedule VII, would not apply to contracts expressed to be made by the President of India.
The Supreme Court determined that individuals with an interest in the dispute outcome are ineligible to serve as arbitrators, and such individuals should not have the authority to appoint a sole arbitrator. Thus, the arbitration clause authorizing the Secretary of the Ministry of Home Affairs (an employee of the Union of India) to nominate an officer from the Ministry of Law and Justice as the sole arbitrator falls within the expressly ineligible category stated in Paragraph 1 of Schedule VII, read with Section 12(5) of the Act, 1996.
The decision of the Court:
The Supreme Court allowed the application submitted under Section 11(6) of the Arbitration and Conciliation Act, 1996. Ms. Justice Indu Malhotra, a former judge of the Court, has been designated as the sole arbitrator to resolve the disputes that arise from the Conditions of Tender between the involved parties. However, it is important to note that the appointment is contingent upon the obligatory disclosures outlined in the amended Section 12 of the Arbitration and Conciliation Act, 1996.
Case Title: M/s. Glock Asia-Pacific Ltd. v Union of India
Case No.: Arbitration Petition Civil No. 51 of 2022
Citation: 2023 Latest Caselaw 507 SC
Coram: Hon’ble Dr. CJI Dhananjaya Y Chandrachud, Hon'ble Mr. Justice J B Pardiwala, Hon'ble Mr. Justice Pamidighantam Sri Narasimha
Advocates for Applicant: Mr. Shyam D. Nandan, AOR
Advocates for Respondent: Mr. Tushar Mehta, S.G, Mrs. Aishwarya Bhati, A.S.G, Mr. Rajat Nair, Adv., Mr. Saurav Roy, Adv., Ms. Deepabali Dutta, Adv., Ms. Shivika Mehra, Adv. and Mr. Arvind Kumar Sharma, AOR
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