Article 299 | No Immunity From Statute Merely Because Contract Is Entered In President's Name : Supreme Court

The Supreme Court, while adjudicating an application for appointment of arbitrator, has held that a contract entered into in the name of the President of India, does 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”, the Bench observed.

The Bench comprising of the Chief Justice Dr. Dhananjaya Y. Chandrachud, Justice PS Narasimha and Justice J. B. Pardiwala, while adjudicating an appeal  M/s Glock Asia-Pacific Ltd. v Union of India, observed that the Union of India is a party to the contract in respect of which arbitration is being invoked. Therefore, the Arbitrator appointed by Union, who is an employee of the Union, is ineligible to be appointed as the Arbitrator as per Para 1 of Schedule VII read with Section 12(5) of the Arbitration and Conciliation Act, 1996.

BACKGROUND FACTS

In 2011, the Ministry of Home Affairs, Government of India (“Ministry”) floated a tender for the purchase of Glock pistols. The Conditions of Tender contained an Arbitration clause as per which the Secretary of Ministry of Home Affairs was to appoint an employee of the Ministry of Law and Justice (Government of India) as sole arbitrator.

Dispute arose between the Parties. On 20.07.2022 the Applicant issued a notice invoking arbitration and nominated a retired Judge of the Delhi High Court as the Sole Arbitrator. However, the Ministry opposed the appointment on the ground that as per Conditions of Tender an officer of Ministry of Law, appointed by the Secretary of Ministry of Home Affairs has to become an arbitrator.

The Applicant, being a foreign company, filed an application under Section 11(6) of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) before the Supreme Court.

The Section 12(5) of the Arbitration Act enumerates the grounds of challenge for appointment of an arbitrator. If the arbitrator is an employee, consultant, advisor or has any other past or present business relationship with a party, then he/she is ineligible to be appointed as an Arbitrator.

The Applicant placed reliance on the judgment in Perkins Eastman Architects DPC and Another v. HSCC (India) Ltd., (2020) 20 SCC 760, wherein it was held that any person having an interest in the outcome of the dispute would be ineligible to be an arbitrator. It was contended that if Union of India being a party to the Contract, appoints its own employee as the Sole Arbitrator, then it would violate Section 12(5) of the Arbitration Act.

SUPREME COURT VERDICT

Contract entered into in the name of the President of India, does not create an immunity against application of any statutory prescription

The 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.

While placing reliance on the judgment in Chatturbhuj Vithaldas Jasani v Moreshwar Parashram & Ors., (1954) SCR 817, the Bench opined that contract, where the Government is a party, must be formed by its agents in conformity with form given by Article 299(1) of the Constitution. Otherwise, such contract cannot be enforced at the instance of any contracting party.

The Bench observed as under:

“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.”

On the issue of whether a contract entered into in the name of President would entail any immunity against the application of statutory prescription, the Bench held as under:

“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.”

The Bench rejected the contention 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.

Arbitrator proposed by Union falls under ineligible category of Schedule VII, read with Section 12(5) of the Arbitration Act

The Bench held that the Arbitrator appointed by Union, who is an employee of the Union, is ineligible to be appointed as the Arbitrator as per Para 1 of Schedule VII read with Section 12(5) of the Arbitration Act.

“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 Bench allowed the application under Section 11(6) of the Arbitration Act, 1996 and has appointed Justice Indu Malhotra (Retd.), former judge of the Supreme Court, as the Sole Arbitrator to adjudicate upon the disputes arising from the Conditions of Tender.

Case Title: M/s Glock Asia-Pacific Ltd. v Union of India

Citation:  2023 LiveLaw (SC) 459

Counsel for Petitioner: Mr. Ramakrishnan Viraraghavan (Sr. Adv.) and Mr. Shayam D. Nandan (AoR).

Counsel for Respondent: Ms. Aishwarya Bhati (Additional Solicitor General).

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