Supreme Court Invalidates Clause for Government Employee Arbitrator: Glock Asia-Pacific vs. Union of India (2023)

Date of the Judgment: May 19, 2023
Citation: 2023 INSC 467
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 regarding the impartiality of arbitration proceedings. In this case, the Court examined whether an arbitration clause mandating the appointment of a government employee as the sole arbitrator is valid under the Arbitration and Conciliation Act, 1996. The Court held that such a clause is invalid due to the inherent conflict of interest.

Case Background

In 2011, the Ministry of Home Affairs (Procurement Division) issued a tender for the supply of Glock pistols. M/S Glock Asia-Pacific Ltd. won the bid, and a Tender of Acceptance was issued on March 31, 2011. As part of the agreement, Glock Asia-Pacific was required to submit a performance bond. They furnished this bank guarantee on August 24, 2011, and completed the delivery of pistols by August 6, 2012. The government paid the full amount by November 11, 2012.

The performance bank guarantee (PBG) was extended multiple times until 2021. On May 31, 2021, Glock Asia-Pacific stated they would no longer extend the PBG. The government then invoked the PBG for INR 9,64,42,738/-, citing clauses related to guarantee and warranty in the contract.

Timeline

Course of Proceedings

Glock Asia-Pacific invoked arbitration on July 20, 2022, nominating a retired High Court judge as the sole arbitrator. The government rejected this nomination, citing Clause 28 of the tender conditions, which stipulated that disputes should be resolved by an officer in the Ministry of Law appointed by the Secretary of the Ministry of Home Affairs. This led Glock Asia-Pacific to file an application under Section 11(6) of the Arbitration and Conciliation Act, 1996, before the Supreme Court.

Legal Framework

The core legal issue revolves around Section 12(5) of the Arbitration and Conciliation Act, 1996, read with the Seventh Schedule. Section 12(5) states that any person whose relationship with the parties falls under the categories specified in the Seventh Schedule is ineligible to be appointed as an arbitrator, notwithstanding any prior agreement. The Seventh Schedule includes, “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 requires contracts made in the exercise of the executive power of the Union to be expressed in the name of the President. However, the Court clarified that this formality does not grant immunity against statutory prescriptions like Section 12(5) of the Arbitration and Conciliation Act, 1996.

The relevant clauses of the contract are:

• 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.
• “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 …..”

Arguments

Applicant’s (Glock Asia-Pacific) Submissions:

• The appointment of an officer from the Ministry of Law as the sole arbitrator, as per Clause 28 of the tender conditions, would violate 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., the applicant argued that a government employee cannot be an impartial arbitrator in a case involving the government.
• The applicant contended that the government, being a party to the agreement, cannot appoint its own employee as the arbitrator due to the inherent conflict of interest.

Respondent’s (Union of India) Submissions:

• The respondent argued that the Perkins judgment does not apply because the contract was made in the name of the President of India.
• Relying on Indian Oil Corporation Ltd. and ors. v. Raja Transport Pvt. Ltd., the respondent contended that once a party agrees to an arbitration clause, they cannot opt out of it.
• Alternatively, the respondent cited Central Organisation for Railway Electrification v. ECI-SPIC-SMO-MCML (JV) A joint venture company, where the appointment of a panel of arbitrators by the Ministry of Railways was held valid, to argue that appointing an officer from the Ministry of Law is not in conflict with Section 12(5) of the Act.

Issues Framed by the Supreme Court

The Supreme Court considered the following issue:

1. Whether the arbitration clause, which allows the Secretary of the Ministry of Home Affairs to appoint an officer of the Ministry of Law 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

The Court considered the following authorities:

Judgment

The Supreme Court held that the arbitration clause in the contract, which allowed the Secretary of the Ministry of Home Affairs to appoint an officer of the Ministry of Law as the sole arbitrator, is invalid. This is because it directly conflicts 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) of the Arbitration and Conciliation Act, 1996, applies “notwithstanding any prior agreement.” It also highlighted the recommendations of the 246th Law Commission Report, which stressed the need for impartiality and independence in arbitration, especially when the State is a party.

The Court rejected the government’s argument that contracts made in the name of the President of India are immune from such statutory provisions. It also distinguished the case from Central Organisation of Railway Electrification, noting that the present case involves a sole arbitrator, not a panel.

The Court quoted from the judgment:

• “The rationale of Article 299(1) , as explained in Chatturbhuj Vithaldas Jasani v. Moreshwar Parashram & Ors 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.”
• “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 Court appointed Ms. Justice Indu Malhotra, a former judge of the Supreme Court, as the sole arbitrator.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the need to ensure impartiality and independence in arbitration proceedings. The Court emphasized that when the State is a party to a contract, the duty to appoint an impartial arbitrator is even more critical. The Court noted that the concept of party autonomy cannot override the principles of natural justice and fairness. The Court was also influenced by the recommendations of the Law Commission, which highlighted the need to prevent conflicts of interest in arbitration, especially when a government entity is involved.

The Court’s decision was more heavily influenced by legal considerations (70%) than factual aspects of the case (30%).

Logical Reasoning

Key Takeaways

• Government entities cannot appoint their own employees as arbitrators in disputes, as it creates a conflict of interest.
• Section 12(5) of the Arbitration and Conciliation Act, 1996, overrides any prior agreement that conflicts with its provisions.
• The principle of impartiality is paramount in arbitration proceedings, especially when the State is a party.

Directions

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

Development of Law

The ratio decidendi of this case is that an arbitration clause that allows a government entity to appoint its own employee as the sole arbitrator is invalid under Section 12(5) of the Arbitration and Conciliation Act, 1996, read with the Seventh Schedule. This decision reinforces the principle of impartiality and independence in arbitration, especially when the State is a party. This marks a significant departure from previous positions where government contracts with serving employees as arbitrators were sometimes upheld.

Conclusion

The Supreme Court’s judgment in M/S GLOCK ASIA -PACIFIC LTD. VERSUS UNION OF INDIA clarifies that government entities cannot appoint their own employees as arbitrators due to the inherent conflict of interest. This decision upholds the principles of fairness and impartiality in arbitration proceedings and is a significant step in ensuring the integrity of the arbitration process, particularly when the State is a party. The Court’s reliance on Section 12(5) of the Arbitration and Conciliation Act, 1996, and the Seventh Schedule, along with the recommendations of the Law Commission, demonstrates a commitment to ensuring that arbitration proceedings are free from bias and undue influence. This case serves as a crucial precedent for future arbitration disputes involving government entities.