2023 (5) TMI 886 - SC - Indian Laws

Arbitration clause voided; Justice Indu Malhotra appointed as Sole Arbitrator under amended law

M/s GLOCK ASIA-PACIFIC LTD. Versus UNION OF INDIA

The court concluded that the arbitration clause authorizing the Secretary, Ministry of Home Affairs, to appoint an officer of the Ministry of Law as the ... Appointment of a Sole Arbitrator - Section 11(6) of the Arbitration and Conciliation Act, 1996. Contracts expressed in the name of the President of India - HELD THAT:- A contract entered into in the name of the President of India, cannot and will not create an immunity against the application of any statutory prescription imposing conditions on parties to an agreement, when the Government chooses to enter into a contract. 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 - there are no hesitation in rejecting the submission of the learned ASG that the contracts entered into by the Union of India in the name of the President of India are immune from provisions that protect against conflict of interest of a party to a contract, under Section 12(5) of the Act. Conflict of the Arbitration Clause with Section 12(5) read with paragraph 1 of the Seventh Schedule of the Act - HELD THAT:- In Perkins [2019 (11) TMI 1154 - SUPREME COURT], this Court held that any person who has an interest in the outcome of the dispute would be ineligible to be an arbitrator. Naturally, such a person should not have the power to appoint a sole arbitrator. the arbitration clause which authorises the Secretary, Ministry of Home Affairs, whose relationship with Union of India is that of an employee, to nominate an officer of the Ministry of Law and Justice to act as a Sole Arbitrator, clearly falls within the expressly ineligible category provided in Paragraph 1 of Schedule VII, read with Section 12(5) of the Act. As the grounds of challenge to the appointment of an arbitrator under Section 12(5) of the Act operate notwithstanding any prior agreement to the contrary, we cannot give effect to the appointment of an officer of the Ministry of Law and Justice as an arbitrator. The submission of the learned ASG in favour of such an appointment is therefore rejected. Reliance on the decision in Central Organisation of Railway Electrifications - HELD THAT:- In Central Organisation of Railway Electrifications this Court has held that As held in Voestalpine Schienen GmbH [Voestalpine Schienen GmbH v. DMRC, [2017 (2) TMI 1239 - SUPREME COURT], the very reason for empanelling the retired railway officers is to ensure that the technical aspects of the dispute are suitably resolved by utilising their expertise when they act as arbitrators. Merely because the panel of the arbitrators are the retired employees who have worked in the Railways, it does not make them ineligible to act as the arbitrators. In contrast, the arbitration clause in the present case enables a serving employee of the Union of India, a party to the contract, to nominate a serving employee of the Union of India as the Sole Arbitrator. Such an authorisation is clearly distinct from the arbitration clause in Voestalpine Schienen GmbH and Central Organisation of Railway Electrifications, and is in conflict with Section 12(5) of the Act. Ms. Justice Indu Malhotra, a former judge of this Court appointed as the Sole Arbitrator to adjudicate upon the disputes arising under and in connection with the Conditions of Tender entered into between the parties, subject to the mandatory disclosures under the amended Section 12 of the Arbitration and Conciliation Act, 1996 - the present application under Section 11(6) of the Arbitration and Conciliation Act, 1996 is allowed. Issues Involved:1. Appointment of Sole Arbitrator under Section 11(6) of the Arbitration and Conciliation Act, 1996.2. Validity of the arbitration clause in light of Section 12(5) of the Act.3. Applicability of Article 299 of the Constitution of India.4. Conflict of interest concerning the appointment of arbitrators.Summary:1. Appointment of Sole Arbitrator:This application was filed under Section 11(6) of the Arbitration and Conciliation Act, 1996 by the applicant for the appointment of a Sole Arbitrator. The respondent had floated a tender for the supply of Glock pistols, which was accepted by the applicant. The applicant provided a performance bank guarantee (PBG) and completed the supply, but disputes arose regarding the invocation of the PBG by the respondent.2. Validity of Arbitration Clause:The applicant invoked arbitration and nominated a retired judge as the Sole Arbitrator. The respondent objected, citing Clause 28 of the Conditions of Tender, which mandated arbitration by an officer in the Ministry of Law. The applicant contended that this clause was contrary to Section 12(5) of the Act, which prohibits the appointment of an arbitrator who has any relationship with a party.3. Applicability of Article 299 of the Constitution of India:The respondent argued that the contract, being in the name of the President of India, stood on a different footing. However, the court held that Article 299 only lays down the formality necessary to bind the government and does not provide immunity from statutory prescriptions like Section 12(5) of the Act. Therefore, contracts entered into in the name of the President of India are not immune from the provisions protecting against conflicts of interest.4. Conflict of Interest:The court examined Clause 28 of the Conditions of Tender, which allowed the Secretary, Ministry of Home Affairs, to appoint an arbitrator. The court found this clause to be in conflict with Section 12(5) read with Paragraph 1 of the Seventh Schedule of the Act, which prohibits the appointment of an arbitrator who is an employee of one of the parties. The court relied on the judgment in Perkins Eastman Architects DPC and Another v. HSCC (India) Ltd. to support this view.Conclusion:The court concluded that the arbitration clause authorizing the Secretary, Ministry of Home Affairs, to appoint an officer of the Ministry of Law as the Sole Arbitrator was invalid under Section 12(5) of the Act. Consequently, the application under Section 11(6) of the Act was allowed, and Ms. Justice Indu Malhotra, a former judge of the Supreme Court, was appointed as the Sole Arbitrator to adjudicate the disputes, subject to mandatory disclosures under the amended Section 12 of the Act.