Supreme Court Invalidates Appointment of Government Employee as Arbitrator in Glock Asia-Pacific vs. Union of India (2023)

Date of the Judgment: 19 May 2023
Citation: 2023 INSC 568
Judges: Dr Dhananjaya Y Chandrachud, CJI, Pamidighantam Sri Narasimha, J., J.B. Pardiwala, J.
Can a government entity appoint its own employee as an arbitrator in a dispute with a private party? The Supreme Court of India recently addressed this critical question in a case involving Glock Asia-Pacific Ltd. and the Union of India. The court examined whether such an appointment would violate principles of impartiality and independence, particularly under Section 12(5) of the Arbitration and Conciliation Act, 1996. This judgment clarifies the scope of arbitrator eligibility, especially in cases involving government contracts. The bench consisted of Chief Justice of India Dr Dhananjaya Y Chandrachud and Justices Pamidighantam Sri Narasimha and J.B. Pardiwala, with the majority opinion authored by Justice Pamidighantam Sri Narasimha.

Case Background

The Ministry of Home Affairs (Procurement Division) issued a tender on 02 February 2011 for the supply of 31,756 Glock Pistols. The bid was awarded to Glock Asia-Pacific Ltd. (the applicant), and a Tender of Acceptance was issued on 31 March 2011. As per the tender, the applicant was required to submit a performance bond of 10% of the contract value, which amounted to USD 13,29,093. The applicant provided a performance bank guarantee (PBG) on 24 August 2011 and completed the supply by 06 August 2012. The respondent, Union of India, accepted the consignment and made full payment by 11 November 2012.

The PBG was extended multiple times until 2021, nine years after the completion of the contract. On 31 May 2021, the applicant informed the respondent that the PBG would not be extended further. Consequently, the respondent invoked the PBG for INR 9,64,42,738, citing Clauses 11 and 18(c) of Schedule II of the Acceptance of Tender, which pertained to Guarantee and Warranty.

Clause 11 specified a warranty of 40,000 rounds for the pistol and 18 months from the date of acceptance of the equipment at the consignee location. Clause 18(c) required the supplier to warrant that the goods supplied would be free from defects arising from design, material, or workmanship for the same period.

Timeline

Course of Proceedings

After the respondent invoked the PBG, the applicant issued a notice invoking arbitration on 20 July 2022, nominating a retired Judge of the High Court of Delhi as the Sole Arbitrator. The respondent objected to this nomination on 03 October 2022, citing Clause 28 of the Conditions of Tender, which stipulated that disputes should be referred to an officer in the Ministry of Law, appointed by the Secretary of Ministry of Home Affairs. This led the applicant, a foreign company, to file an application under Section 11(6) of the Arbitration and Conciliation Act, 1996, before the Supreme Court of India.

Legal Framework

The core legal issue revolves around Section 12(5) of the Arbitration and Conciliation Act, 1996, which states:
“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.”

The Seventh Schedule of the Act specifies the categories of relationships that disqualify a person from being an arbitrator. Paragraph 1 of the Seventh Schedule states:
“The arbitrator is an employee, consultant, advisor or has any other past or present business relationship with a party.”

The Court also considered Article 299 of the Constitution of India, which governs contracts made by the Union of India. Article 299(1) states:
“All contracts made in the exercise of the executive power of the Union or of a State shall be expressed to be made by the President, or by the Governor of the State, as the case may be, and all such contracts and all assurances of property made in the exercise of that power shall be executed on behalf of the President or the Governor by such persons and in such manner as he may direct or authorize.”

The Court clarified that Article 299 only lays down the formality necessary to bind the government with contractual liability, and it does not provide immunity against statutory prescriptions like Section 12(5) of the Arbitration and Conciliation Act, 1996.

Arguments

Applicant’s (Glock Asia-Pacific Ltd.) Arguments:

• The applicant argued that the appointment of an officer from the Ministry of Law as the sole arbitrator, as proposed by the respondent, would contravene Section 12(5) of the Arbitration and Conciliation Act, 1996.
• Relying on the judgment in Perkins Eastman Architects DPC and Another v. HSCC (India) Ltd. [(2020) 20 SCC 760], the applicant contended that the respondent, being a party to the agreement, cannot appoint its own employee as the sole arbitrator due to potential conflict of interest.

Respondent’s (Union of India) Arguments:

• The respondent argued that the Perkins judgment would not apply in this case as the contract was in the name of the President of India, unlike the contract in Perkins.
• The respondent relied on Indian Oil Corporation Ltd. and ors. v. Raja Transport Pvt. Ltd. [(2009) 8 SCC 520] to assert that once a party agrees to an arbitration clause, it cannot opt out of it.
• Alternatively, the respondent cited 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 held valid, to argue that the power to nominate an officer from the Ministry of Law is not in conflict with Section 12(5) of the Act.

Submissions Table

Issues Framed by the Supreme Court

The primary issue before the Supreme Court was:

1. Whether the appointment of an officer from the Ministry of Law, nominated by the Secretary of the Ministry of Home Affairs (a government employee), as the sole arbitrator, is valid under Section 12(5) of the Arbitration and Conciliation Act, 1996, read with the Seventh Schedule.

Treatment of the Issue by the Court

Authorities

Cases Relied Upon by the Court:

• Chatturbhuj Vithaldas Jasani v. Moreshwar Parashram & Ors [(1954) SCR 817]: The Supreme Court of India explained the rationale of Article 299(1) of the Constitution, stating that contracts must be made by authorized government agents to bind the government.
• Perkins Eastman Architects DPC and Another v. HSCC (India) Ltd. [(2020) 20 SCC 760]: The Supreme Court of India held that a person with an interest in the outcome of a dispute is ineligible to be an arbitrator and cannot appoint a sole arbitrator.
• Indian Oil Corporation Ltd. and ors. v. Raja Transport Pvt. Ltd. [(2009) 8 SCC 520]: The Supreme Court of India held that a party cannot opt out of an arbitration clause once agreed upon.
• Central Organisation for Railway Electrification v. ECI-SPIC-SMO-MCML (JV) A joint venture company [(2020) 14 SCC 712]: The Supreme Court of India upheld the appointment of a panel of arbitrators by the Ministry of Railways, noting that retired employees could be appointed as arbitrators.
• Voestalpine Schienen GmbH v. DMRC [(2017) 4 SCC 665]: The Supreme Court of India upheld the nomination of a panel of arbitrators comprising retired employees, emphasizing the use of their technical expertise.
• State of Assam and ors. v. Shri Kanak Chandra Dutta [(1967) 1 SCR 679]: The Supreme Court of India defined a person holding a post under a State as a person serving or employed under the State, establishing a master-servant relationship.

Legal Provisions Considered by the Court:

• Section 12(5) of the Arbitration and Conciliation Act, 1996: This section specifies that a person with certain relationships with the parties or the subject matter of the dispute is ineligible to be an arbitrator, notwithstanding any prior agreement.
• Paragraph 1 of the Seventh Schedule of the Arbitration and Conciliation Act, 1996: This paragraph states that an employee, consultant, advisor, or someone with a past or present business relationship with a party is ineligible to be an arbitrator.
• Article 299(1) of the Constitution of India: This article specifies that contracts made by the Union of India must be expressed to be made by the President.

Authorities Table

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• Chatturbhuj Vithaldas Jasani v. Moreshwar Parashram & Ors [(1954) SCR 817]: The Court used this case to explain the purpose of Article 299, clarifying it only lays down the formality for government contracts and does not grant immunity from statutory prescriptions.
• Perkins Eastman Architects DPC and Another v. HSCC (India) Ltd. [(2020) 20 SCC 760]: The Court relied on this case to emphasize that a person with an interest in the outcome of a dispute cannot appoint a sole arbitrator.
• Indian Oil Corporation Ltd. and ors. v. Raja Transport Pvt. Ltd. [(2009) 8 SCC 520]: The Court distinguished this case, stating that while parties cannot opt out of arbitration, the appointment of an arbitrator must still comply with Section 12(5).
• Central Organisation for Railway Electrification v. ECI-SPIC-SMO-MCML (JV) A joint venture company [(2020) 14 SCC 712]: The Court distinguished this case, noting that it involved a panel of arbitrators and not a sole arbitrator appointed by a party to the dispute.
• Voestalpine Schienen GmbH v. DMRC [(2017) 4 SCC 665]: The Court distinguished this case, noting that it involved a panel of retired employees as arbitrators, and not a sole arbitrator appointed by a party to the dispute.
• State of Assam and ors. v. Shri Kanak Chandra Dutta [(1967) 1 SCR 679]: The Court used this case to define the relationship between the State and its employees.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the need to uphold the principles of impartiality and independence in arbitration proceedings, particularly when one of the parties is the government. The Court emphasized that the statutory mandate of Section 12(5) of the Arbitration and Conciliation Act, 1996, read with the Seventh Schedule, is to ensure that arbitrators are free from any conflict of interest. The Court noted that the 246th Law Commission Report also highlighted the importance of having impartial and independent adjudicators, especially when the State is a party.

Fact:Law Ratio

The court’s reasoning was heavily based on legal interpretation and application of the law, with a lesser emphasis on the specific factual aspects of the case. The court’s analysis was primarily on the legal framework and the interpretation of Section 12(5) of the Arbitration Act.

Logical Reasoning

Judgment

The Supreme Court held that the arbitration clause in the tender, which allowed the Secretary of the Ministry of Home Affairs to appoint an officer from the Ministry of Law as the sole arbitrator, was in direct conflict with Section 12(5) of the Arbitration and Conciliation Act, 1996, read with Paragraph 1 of the Seventh Schedule. The Court emphasized that the statutory mandate of Section 12(5) applies “notwithstanding any prior agreement to the contrary.”

The Court rejected the argument that contracts entered into in the name of the President of India are immune from the provisions of Section 12(5). It clarified that Article 299 of the Constitution only lays down the formality for government contracts and does not grant immunity from statutory prescriptions.

The Court distinguished the case from 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 upheld. The Court noted that in the present case, the arbitration clause enabled a serving employee of the Union of India to nominate another serving employee as the sole arbitrator, which is a clear conflict of interest.

The Court quoted the following from the judgment:

“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.”

“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.”

The Court allowed the application under Section 11(6) of the Arbitration and Conciliation Act, 1996, and appointed Ms. Justice Indu Malhotra, a former judge of the Supreme Court, as the sole arbitrator.

Key Takeaways

• Government entities cannot appoint their own employees as sole arbitrators in disputes, as this violates the principles of impartiality and independence under Section 12(5) of the Arbitration and Conciliation Act, 1996.
• Article 299 of the Constitution of India does not provide immunity to government contracts from statutory prescriptions like Section 12(5) of the Arbitration Act.
• The judgment reinforces the importance of having impartial and independent adjudicators, especially in cases where the government is a party to the dispute.

Directions

The Supreme Court appointed Ms. Justice Indu Malhotra, a former judge of the Supreme Court, as the sole arbitrator to adjudicate the disputes between the parties.

Development of Law

The ratio decidendi of this case is that an employee of a party to a dispute cannot be appointed as a sole arbitrator, as it violates the principles of impartiality and independence enshrined in Section 12(5) of the Arbitration and Conciliation Act, 1996. This judgment clarifies that government contracts are not immune from the provisions of Section 12(5) and reinforces the importance of independent adjudication. This decision further solidifies the position of law established in Perkins Eastman Architects DPC and Another v. HSCC (India) Ltd. [(2020) 20 SCC 760].

Conclusion

The Supreme Court’s judgment in M/S GLOCK ASIA-PACIFIC LTD. vs. UNION OF INDIA is a significant ruling that reinforces the principles of impartiality and independence in arbitration proceedings. By invalidating the appointment of a government employee as an arbitrator, the Court has upheld the statutory mandate of Section 12(5) of the Arbitration and Conciliation Act, 1996, and ensured that government contracts are not exempt from the requirements of fair and unbiased dispute resolution. This decision sets a clear precedent for future cases involving government contracts and arbitration.

Category

Parent Category: Arbitration Law

Child Categories:

• Section 12(5), Arbitration and Conciliation Act, 1996
• Seventh Schedule, Arbitration and Conciliation Act, 1996
• Impartiality of Arbitrators
• Government Contracts
• Conflict of Interest

Parent Category: Arbitration and Conciliation Act, 1996

Child Category: Section 12(5), Arbitration and Conciliation Act, 1996

FAQ

Q: Can a government employee be appointed as an arbitrator in a dispute involving the government?
A: No, according to this Supreme Court judgment, a government employee cannot be appointed as a sole arbitrator in a dispute where the government is a party. This is because it creates a conflict of interest and violates Section 12(5) of the Arbitration and Conciliation Act, 1996.

Q: What is Section 12(5) of the Arbitration and Conciliation Act, 1996?
A: Section 12(5) of the Arbitration and Conciliation Act, 1996, states that a person with certain relationships with the parties or the subject matter of the dispute is ineligible to be an arbitrator, regardless of any prior agreement.

Q: What does the Seventh Schedule of the Arbitration and Conciliation Act, 1996, say?
A: The Seventh Schedule specifies the categories of relationships that disqualify a person from being an arbitrator. Paragraph 1 states that an employee, consultant, advisor, or someone with a past or present business relationship with a party is ineligible.

Q: Does Article 299 of the Constitution of India provide immunity to government contracts from Section 12(5) of the Arbitration Act?
A: No, Article 299 only lays down the formality for government contracts and does not grant immunity from statutory prescriptions like Section 12(5) of the Arbitration Act.

Q: What should I do if I am in a dispute with the government and the arbitration clause appoints a government employee as an arbitrator?
A: You can challenge the appointment of the government employee as an arbitrator based on this Supreme Court judgment and Section 12(5) of the Arbitration and Conciliation Act, 1996. You can request the court to appoint an independent arbitrator.