M/S GLOCK ASIA-PACIFIC LIMITED v. UNION OF INDIA

P.S. Narasimha, J.:— This is an application under Section 11(6) of the Arbitration and Conciliation Act, 1996 for the appointment of a Sole Arbitrator by Glock Asia-Pacific Ltd.

2. Facts: The Ministry of Home Affairs (Procurement Division) floated a single party tender on 02.02.2011 for supply of 31,756 Glock Pistols. The bid was confirmed in favour of the applicant and a Tender of Acceptance was issued by the respondent on 31.03.2011. Clause 6 of the Tender of Acceptance, required the Petitioner to submit a performance bond of 10% of the value of the contract, being USD 13,29,093/-. Applicant furnished the performance bank guarantee on 24.08.2011 and proceeded to perform its contractual obligations and in fact, by 06.08.2012 delivered the entire supply under the contract. The respondent accepted the consignment and paid the entire consideration by 11.11.2012.

3. The PBG which was issued on 24.08.2011 was extended from time to time during the subsistence of the contract and also thereafter till 2021, i.e., for nine years after the completion of the delivery and final payment under the contract. On 31.05.2021, the applicant informed the respondent that the PBG will not be extended any further. The respondent immediately invoked the PBG for INR 9,64,42,738/-, citing Clauses 11 and 18(c) of Schedule II of the Acceptance of Tender. These clauses, which provide for Guarantee and Warranty, are as follows:

“Clause 11. Guarantee/Warranty : 40,000 rounds for pistol and ors. 18 months from the date of acceptance of EQPT/Stores in good condition at consignee location in India.

Clause 18(c) Warranty : the supplier furnishes his warranty that the goods supplied under the contract on you, on use of the incorporate all recent improvement in design and material. The supplier shall for the warranty the goods supplied under this contract shall have no defect arising from design, material of workmanship or from any act or commission or the supplier normal use of the supplied goods in the condition obtained in the country of final destination. Warranty shall remain valid up to 40,000 rounds of pistol and 18 months from other items from the date of acceptance of stores. The consignee shall promptly notify the supplier in writing of any claim arising under this warranty. Upon receipt of such notice the supplier having been notified failed to remedy the defects within the warranty period prescribed in this clause, the purchaser may proceed to take such a medial action as may be necessary at the suppliers risk and expense and without prejudice to any other rights which the purchaser may have under the contract. The manufacturer will be required by the indenter on actual price basis. Warranty support will include installation and commissioning of equipment free of charge. Operational training of the users personal free of cost at the site of installation and repair of the equipment when necessary free of cost during the warranty period.”

4. The applicant issued a notice invoking arbitration on 20.07.2022, and nominated a retired Judge of the High Court of Delhi as the Sole Arbitrator. The respondent was called upon to accept the nomination within 15 days. Replying to the notice invoking Arbitration, the respondent by a letter dated 03.10.2022, stated that the nomination was contrary to Clause 28 of the Conditions of Tender, as per which disputes are to be referred to arbitration by an officer in the Ministry of Law, appointed by the Secretary of Ministry of Home Affairs. Clause 28 is as under:

“28. ARBITRATION

In the event of any question, dispute or difference arising under these conditions or any special conditions of contract, or in connection with this contract (except as to any matters the decision of which is specially provided for by these or the special conditions) the same shall be referred to the sole arbitration of an officer in the Min. of Law, appointed to be the arbitrator by the Secretary, Ministry of Home Affairs. It will be no objection that the arbitrator is a Government Servant that he had to deal with the matters to which the contract relates or that in the course of his duties as a Government servant he has expressed views on all or any of the matters in dispute or difference. The award of the arbitrator shall be final and binding on the parties to this contract…..”

(emphasis supplied)

5. It is in the above-referred context that the applicant, being a foreign company, filed the present application under Section 11(6) of the Act before this Court.

6. Submissions: Mr. Ramakrishnan Viraraghavan, learned Senior Advocate, along with Mr. Shayam D. Nandan, AOR appearing for the applicant, submitted that appointment of the Sole Arbitrator as per the respondent's letter dated 03.10.2022 would be contrary to Section 12(5) of the Act. For this purpose, he also relied on the judgment of this Court in Perkins Eastman Architects DPC v. HSCC (India) Ltd.. (2020) 20 SCC 760 The objection is simply that the respondent, Union of India, being a party to the agreement, appointing its own employee, an officer in the Ministry of Law, as the Sole Arbitrator would conflict with the mandate of Section 12(5) of the Act.

7. Ms. Aishwarya Bhati, learned Additional Solicitor General appearing for the respondent, submitted that the judgment in Perkins (supra) would have no application to the facts of the present case. She would point out that the contract in the present case, unlike in Perkins (supra), is in the name of the President of India, and that is a clear point of distinction. The learned ASG also relied on Indian Oil Corporation Ltd. v. Raja Transport Pvt. Ltd. (2009) 8 SCC 520 to contend that once a party enters into an agreement for the appointment of a person as an arbitrator, it cannot simply opt-out of the arbitration clause. In the alternative, the ASG also relied on the decision of this Court in Central Organisation for Railway Electrification v. ECI-SPIC-SMO-MCML (JV) A joint venture company (2020) 14 SCC 712, where appointment of a panel of arbitrators by the Ministry of Railways was held to be valid. She would, therefore, contend that the power to nominate an officer in the Ministry of Law is not in conflict with Section 12(5) of the Act.

8. Analysis: As the objection about appointment of the arbitrator as per Clause 28 of the Conditions of Tender is based on the statutory prohibition under Section 12(5) of the Act, we will reproduce relevant part of the section for ready reference:

“12. Grounds of Challenge:…

(1) When a person is approached in connection with his possible appointment as an arbitrator, he shall disclose in writing any circumstances, —

(5) Notwithstanding any prior agreement to the contrary, any person whose relationship, with the parties or counsel or the subject-matter of the dispute, falls under any of the categories specified in the Seventh Schedule shall be ineligible to be appointed as an arbitrator:

Provided that parties may, subsequent to disputes having arisen between them, waive the applicability of this sub-section by an express agreement in writing”

(emphasis supplied)

9. The category of relationship relevant for our purposes as provided in the Seventh Schedule to the Act is as under:

“The Seventh Schedule:

Arbitrator's relationship with the parties or counsel;

1. The arbitrator is an employee, consultant, advisor or has any other past or present business relationship with a party.”

Re : Submission regarding contracts expressed in the name of the President of India.

10. We will first deal with the submission of learned ASG, Ms Bhati that the contract in the present case stands on a different footing as it is entered into in the name of the President of India. Article 299 of the Constitution of India provides that all contracts made in exercise of the executive power of the Union shall be expressed to be made in the name of the President. The phrase ‘expressed to be made’ and the word ‘executed’ are intended to mean that there must be a deed or contract, in writing, and executed by a person duly authorized by the President of the Governor in that behalf.

11. The rationale of Article 299(1), as explained in Chatturbhuj Vithaldas Jasani v. Moreshwar Parashram 1954 SCR 817 is that there must be a definite procedure according to which contracts must be made by the agents of the government in order to bind the government, otherwise public funds may deplete by unauthorized or illegitimate contracts. It implies that contracts not couched in the particular form stipulated by Article 299(1) of the Constitution cannot be enforced at the instance of any contracting party.

12. It must be emphasized that Article 299 only lays down the formality that is necessary to bind the government with contractual liability. It is important to note that Article 299 does not lay down the substantial law relating to the contractual liability of the Government, which is to be found in the general laws of the land. It is for this reason that, even though a contract may be formally valid under Article 299, it may nevertheless fail to bind the Government if it is void or unenforceable under the general provisions of law. 1954 SCR 817, (1966) 3 SCR 919, (1962) 2 SCR 880, (1968) 3 SCR 214

13. Having considered the purpose and object of Article 299, we are of the clear opinion 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.

14. We have 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.

Re : Conflict of the Arbitration Clause with Section 12(5) read with paragraph 1 of the Seventh Schedule of the Act.

15. The tender notice dated 02.02.2011 was issued by the Government of India, Ministry of Home Affairs for the purchase of Glock pistols. Applicant's bid was accepted on 31.03.2011 as per the Terms and Conditions contained in the Tender No. D/21013/30/3218/2.11.2011/PW-3. The said Terms and Conditions specifically provided for Arbitration as per Clause 28 of the Schedule appended to the Tender. The Arbitration clause enables the Secretary, Ministry of Home Affairs, to appoint an arbitrator for the resolution of disputes arising out of this contract. The Ministry of Home Affairs is a party to the contract. The arbitration clause enables the Secretary representing the Ministry to appoint an officer in the Ministry of Law as the arbitrator. In other words, the proposed arbitrator would be an employee of the Ministry of Law and Justice, Government of India, and at the same time, the appointing authority, the Secretary of the Ministry of Home Affairs, is also an employee of the Government of India. (1967) 1 SCR 679

16. In this very context, we can beneficially refer to the recommendation of the 246 Law Commission Report which reflected on the issue of contracts with State entities and observed that when the party appointing an arbitrator is the State, the duty to appoint an impartial and independent adjudicator is even more onerous. Their deliberations and recommendations, which led to the introduction of Section 12(5) with the Seventh Schedule in the Act, are extracted as follows:

“56. The limits of this provision has been tested in the Indian Supreme Court in the context of contracts with State entities naming particular persons/designations (associated with that entity) as a potential arbitrator. It appears to be settled by a series of decisions of the Supreme Court (See Executive Engineer, Irrigation Division, Puri v. Gangaram Chhapolia, (1984) 3 SCC 627; Secretary to Government Transport Department, Madras v. Munusamy Mudaliar, 1988 Supp SCC 651; International Authority of India v. K.D. Bali, (1988) 2 SCC 360; S. Rajan v. State of Kerala, (1992) 3 SCC 608; Indian Drugs & Pharmaceuticals v. Indo-Swiss Synthetics Germ Manufacturing Co. Ltd., (1996) 1 SCC 54; Union of India v. M.P. Gupta, (2004) 10 SCC 504; Ace Pipeline Contract Pvt. Ltd. v. Bharat Petroleum Corporation Ltd., (2007) 5 SCC 304) that arbitration agreements in government contracts which provide for arbitration by a serving employee of the department, are valid and enforceable. While the Supreme Court, in Indian Oil Corp. Ltd. v. Raja Transport (P) Ltd., (2009) 8 SCC 520 carved out a minor exception in situations when the arbitrator “was the controlling or dealing authority in regard to the subject contract or if he is a direct subordinate (as contrasted from an officer of an inferior rank in some other department) to the officer whose decision is the subject matter of the dispute”, and this exception was used by the Supreme Court in Denel Propreitory Ltd. v. Govt. of India, Ministry of Defence, (2012) 2 SCC 759 : AIR 2012 SC 817 and Bipromasz Bipron Trading SA v. Bharat Electronics Ltd., (2012) 6 SCC 384, to appoint an independent arbitrator under section 11, this is not enough.

57. The balance between procedural fairness and binding nature of these contracts, appears to have been tilted in favour of the latter by the Supreme Court, and the Commission believes the present position of law is far from satisfactory. Since the principles of impartiality and independence cannot be discarded at any stage of the proceedings, specifically at the stage of constitution of the arbitral tribunal, it would be incongruous to say that party autonomy can be exercised in complete disregard of these principles - even if the same has been agreed prior to the disputes having arisen between the parties. There are certain minimum levels of independence and impartiality that should be required of the arbitral process regardless of the parties' apparent agreement. A sensible law cannot, for instance, permit appointment of an arbitrator who is himself a party to the dispute, or who is employed by (or similarly dependent on) one party, even if this is what the parties agreed. The Commission hastens to add that Mr. PK Malhotra, the ex officio member of the Law Commission suggested having an exception for the State, and allow State parties to appoint employee arbitrators. The Commission is of the opinion that, on this issue, there cannot be any distinction between State and non-State parties. The concept of party autonomy cannot be stretched to a point where it negates the very basis of having impartial and independent adjudicators for resolution of disputes. In fact, when the party appointing an adjudicator is the State, the duty to appoint an impartial and independent adjudicator is that much more onerous - and the right to natural justice cannot be said to have been waived only on the basis of a “prior” agreement between the parties at the time of the contract and before arising of the disputes.”

(emphasis supplied)

17. Following the recommendation of the Law Commission, sub-section (5) to Section 12 was inserted to the Act with effect from 23.10.2015. As the statutory mandate of Section 12(5) of the Act is to apply “notwithstanding any prior agreement”, Clause 28 of the Agreement (Conditions of Tender) falls foul of Paragraph 1 of the Seventh Schedule to the Act.

18. In Perkins (supra), 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 relevant portion of this judgment is as under:

21. But, in our view that has to be the logical deduction from TRF Ltd. Para 50 of the decision shows that this Court was concerned with the issue, “whether the Managing Director, after becoming ineligible by operation of law, is he still eligible to nominate an arbitrator” The ineligibility referred to therein, was as a result of operation of law, in that a person having an interest in the dispute or in the outcome or decision thereof, must not only be ineligible to act as an arbitrator but must also not be eligible to appoint anyone else as an arbitrator and that such person cannot and should not have any role in charting out any course to the dispute resolution by having the power to appoint an arbitrator. The next sentences in the paragraph, further show that cases where both the parties could nominate respective arbitrators of their choice were found to be completely a different situation. The reason is clear that whatever advantage a party may derive by nominating an arbitrator of its choice would get counter-balanced by equal power with the other party. But, in a case where only one party has a right to appoint a sole arbitrator, its choice will always have an element of exclusivity in determining or charting the course for dispute resolution. Naturally, the person who has an interest in the outcome or decision of the dispute must not have the power to appoint a sole arbitrator. That has to be taken as the essence of the amendments brought in by the Arbitration and Conciliation (Amendment) Act, 2015 (3 of 2016) and recognised by the decision of this Court in TRF Ltd. [TRF Ltd. v. Energo Engg. Projects Ltd., (2017) 8 SCC 377.

(emphasis supplied)

19. In conclusion, 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.

Re : Reliance on the decision in Central Organisation of Railway Electrifications

20. We will now deal with the last limb of the learned ASG's submissions, which relates to the precedent of Central Organisation of Railway Electrifications (supra). In this case, Clause 64(3)(b) provided for the constitution of an Arbitral Tribunal consisting of three members. The appointment procedure contemplated was such that the General Manager of the Appellant was required to nominate the panel of four retired railway officers, out of which the respondent-Contractor had to select two names. The General Manager was required to appoint at least one out of the selected officers as the contractor's nominee arbitrator(s), and unilaterally appoint the remaining arbitrators as well as the presiding officer to the tribunal. The decision of Perkins (supra) was not applicable therein as the contract contemplated a three-member arbitral tribunal, while Perkins (supra) applies to cases of unilateral appointment of Sole Arbitrators. Further, the Court noted that, “absolutely, there is no bar under Section 12(5) of the Arbitration and Conciliation (Amendment) Act, 2015 for appointment of a retired employee to act as an arbitrator” (2020) 14 SCC 712. The Court in Central Organisation of Railway Electrifications (supra) also relied on the principle elucidated in the case of Voestalpine Schienen GmbH v. DMRC, (2017) 4 SCC 665 wherein DMRC nominated a five-member panel comprising names of employees of Railways, Central Public Works Department or public sector undertakings and the Court upheld the nomination inter alia noting that empaneling of such retired persons was intended to utilise their technical expertise. In Central Organisation of Railway Electrifications (supra) this Court relied on the aforementioned judgment to state that:

“27. … As held in Voestalpine Schienen GmbH [Voestalpine Schienen GmbH v. DMRC, (2017) 4 SCC 665 : (2017) 2 SCC (Civ) 607], 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.”

(emphasis supplied)

21. 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 (supra) and Central Organisation of Railway Electrifications (supra), and is in conflict with Section 12(5) of the Act. It was informed at the bar that the correctness of judgment of Central Organisation of Railway Electrifications has been challenged and referred to a larger bench in Union of India v. Tantia Constructions Ltd. SLP (C) No. 12670/2020 as well as JWS Steel Ltd. v. Southwestern Railways SLP (C) No. 9462/2022. As we have noticed that the decision in Central Organisation of Railway Electrifications (supra) is not applicable in the present case, its reference to the larger Bench will have no bearing on the outcome of the present case.

22. For the reasons stated above, the present application under Section 11(6) of the Arbitration and Conciliation Act, 1996 is allowed. We hereby appoint Ms. Justice Indu Malhotra, a former judge of this Court 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.