M/S GLOCK ASIA-PACIFIC LTD. versus UNION OF INDIA on 19 May 2023

1. This is an application under Section 11(6) of the Arbitration andConciliation Act, 1996[1] for the appointment of a Sole Arbitrator by GlockAsia-Pacific Ltd.[2]

2. Facts: The Ministry of Home Affairs (Procurement Division)[3]floated a single party tender on 02.02.2011 for supply of 31,756 GlockPistols. The bid was confirmed in favour of the applicant and a Tenderof Acceptance was issued by the respondent on 31.03.2011. Clause 6[4]of the Tender of Acceptance, required the Petitioner to submit aperformance bond of 10% of the value of the contract, being USD13,29,093/-. Applicant furnished the performance bank guarantee[5] on24.08.2011 and proceeded to perform its contractual obligations and infact, by 06.08.2012 delivered the entire supply under the contract. The 1 Hereinafter referred as ‘the Act’

2 Hereinafter referred as ‘applicant’

3 Hereinafter referred as ‘respondent’.

4"6. Performance Security Deposit- You will submit performance bond of 10% of valueof contract i.e. US$ 13,29,093/- (US dollars thirteen lakh twenty nine thousand andninety three only) in the shape of bank guarantee in the required Performa in favour ofJoint Secretary (Police Modernisation), Ministry of Home affairs, Jaisalmer House,New Delhi within 30 days here of i.e. by 30.04.2011. The Performance guarantee willremain valid till two months after the expiry of warranty period, which will be 18 monthsfrom the date of acceptance stores at the consignee location. If necessary, firm on theirown will have to direct their bankers to extend the performance bond to remain valid tilltwo months after warranty period. Where the performance bank guarantee is obtainedfrom a foreign bank, it shall be got confirmed by a scheduled Indian Bank and will begoverned by Indian Laws and be subject to the jurisdiction of Courts of the place ofissue of acceptance of Tender (A/T), i.e Delhi.”

5 Hereinafter referred as ‘PBG’.

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Arespondent accepted the consignment and paid the entire considerationby 11.11.2012.

3. The PBG which was issued on 24.08.2011 was extended fromtime to time during the subsistence of the contract and also thereafter till2021, i.e., for nine years after the completion of the delivery and finalBpayment under the contract. On 31.05.2021, the applicant informed therespondent that the PBG will not be extended any further. The respondentimmediately invoked the PBG for INR 9,64,42,738/-, citing Clauses 11and 18(c) ofSchedule II of theAcceptance of Tender. These clauses,which provide for Guarantee and Warranty, are as follows:

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

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Clause 18(c) Warranty: the supplier furnishes his warrantythat the goods supplied under the contract on you, on use ofthe incorporate all recent improvement in design and material.The supplier shall for the warranty the goods supplied underthis contract shall have no defect arising from design, materialof workmanship or from any act or commission or the suppliernormal use of the supplied goods in the condition obtainedin the country of final destination. Warranty shall remain validup to 40,000 rounds of pistol and 18 months from other itemsfrom the date of acceptance of stores. The consignee shallpromptly notify the supplier in writing of any claim arisingunder this warranty. Upon receipt of such notice the supplierhaving been notified failed to remedy the defects within thewarranty period prescribed in this clause, the purchaser mayproceed to take such a medial action as may be necessary atthe suppliers risk and expense and without prejudice to anyother rights which the purchaser may have under the contract.The manufacturer will be required by the indenter on actualprice basis. Warranty support will include installation andcommissioning of equipment free of charge. Operationaltraining of the users personal free of cost at the site ofinstallation and repair of the equipment when necessary freeof cost during the warranty period.”

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

“28. ARBITRATION

In the event of any question, dispute or difference arisingunder these conditions or any special conditions of contract,or in connection with this contract (except as to any mattersthe decision of which is specially provided for by these or thespecial conditions) the same shall be referred to the solearbitration of an officer in the Min. of Law, appointed to bethe arbitrator by the Secretary, Ministry of Home Affairs. Itwill be no objection that the arbitrator is a GovernmentServant that he had to deal with the matters to which thecontract relates or that in the course of his duties as aGovernment servant he has expressed views on all or any ofthe matters in dispute or difference. The award of thearbitrator shall be final and binding on the parties to thiscontract…..”

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

6. Submissions : Mr. Ramakrishnan Viraraghavan, learned SeniorAdvocate, along with Mr. Shayam D. Nandan, AOR appearing for theapplicant, submitted that appointment of the Sole Arbitrator as per therespondent’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 Courtin Perkins Eastman Architects DPC and Another v. HSCC (India)Ltd.[6] The objection is simply that the respondent, Union of India, being aparty to the agreement, appointing its own employee, an officer in theMinistry of Law, as the Sole Arbitrator would conflict with the mandateof Section 12(5) of the Act.

6 (2020) 20SCC 760.

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6 (2020) 20SCC 760.

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A7. Ms. Aishwarya Bhati, learned Additional Solicitor Generalappearing for the respondent, submitted that the judgment in Perkins(supra) would have no application to the facts of the present case. Shewould 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 pointof distinction. The learned ASG also relied on Indian Oil CorporationBLtd. and ors. v. Raja Transport Pvt. Ltd.[7 ]to contend that once a partyenters into an agreement for the appointment of a person as an arbitrator,it cannot simply opt-out of the arbitration clause. In the alternative, theASG also relied on the decision of this Court inCentral Organisationfor Railway Electrification v. ECI-SPIC-SMO-MCML (JV) A jointCventure company[8], where appointment of a panel of arbitrators by theMinistry of Railways was held to be valid. She would, therefore, contendthat the power to nominate an officer in the Ministry of Law is not inconflict with Section 12(5) of the Act.

8. Analysis : As the objection about appointment of the arbitratorDas per Clause 28 of the Conditions of Tender is based on the statutoryprohibition under Section 12(5) of the Act, we will reproduce relevantpart of the section for ready reference:

“12. Grounds of Challenge:…

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

...

(2) …

F(3)…

(4) …

(5) Notwithstanding any prior agreement to the contrary, anyperson whose relationship, with the partiesor counsel or thesubject-matter of the dispute, falls under any of the categoriesGspecified in the Seventh Schedule shall be ineligible to beappointed as an arbitrator:

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7 (2009) 8 SCC 520.

8 (2020) 14 SCC 712.

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

9. The category of relationship relevant for our purposes asprovided 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 hasany other past or present business relationship with a party.”

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

10. We will first deal with the submission of learned ASG, MsBhati that the contract in the present case stands on a different footingas it is entered into in the name of the President of India. Article 299 ofthe Constitution of India[9] provides that all contracts made in exercise ofthe executive power of the Union shall be expressed to be made in thename of the President. The phrase ‘expressed to be made’ and theword ‘executed’ are intended to mean that there must be a deed orcontract, in writing, and executed by a person duly authorized by thePresident of the Governor in that behalf.

11. The rationale of Article 299(1), as explained in ChatturbhujVithaldas Jasaniv.Moreshwar Parashram & Ors[10 ]is that there mustbe a definite procedure according to which contracts must be made bythe agents of the government in order to bind the government, otherwise 9 “299. Contracts

(1) All contracts made in the exercise of the executive power of the Union or of a Stateshall be expressed to be made by the President, or by the Governor of the State, as thecase may be, and all such contracts and all assurances of property made in the exerciseof that power shall be executed on behalf of the President or the Governor by suchpersons and in such manner as he may direct or authorize.

(2) Neither the President nor the Governor shall be personally liable in respect of anycontract or assurance made or executed for the purposes of this Constitution, or for thepurposes of any enactment relating to the Government of India heretofore in force, norshall any person making or executing any such contract or assurance on behalf of anyof them be personally liable in respect thereof”10(1954) SCR 817.

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Apublic funds may deplete by unauthorized or illegitimate contracts. Itimplies that contracts not couched in the particular form stipulated byArticle 299(1) of the Constitution cannot be enforced at the instance ofany contracting party.

12. It must be emphasized that Article 299 only lays down theBformality that is necessary to bind the government with contractualliability. It is important to note that Article 299 does not lay down thesubstantial 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 reasonthat, even though a contract may be formally valid under Article 299, itmay nevertheless fail to bind the Government if it is void or unenforceableCunder the general provisions of law.[11]

13. Having considered the purpose and object of Article 299, weare of the clear opinion that a contract entered into in the name of thePresident of India, cannot and will not create an immunity against theapplication of any statutory prescription imposing conditions on partiesDto an agreement, when the Government chooses to enter into a contract.We are unable to trace any immunity arising out of Article 299, to supportthe contention that for contracts expressed to be made by the Presidentof India, the ineligibility of appointment as an arbitrator as contemplatedunder Section 12(5) of the Act, read with Schedule VII, will beEinapplicable.

14. We have no hesitation in rejecting the submission of the learnedASG that the contracts entered into by the Union of India in the name ofthe President of India are immune from provisions that protect againstconflict of interest of a party to a contract, under Section 12(5) of theAct.FRe: Conflict of the Arbitration Clause with Section 12(5) readwith paragraph 1 of the Seventh Schedule of the Act.

15. The tender notice dated 02.02.2011 was issued by theGovernment of India, Ministry of Home Affairs for the purchase ofGGlock pistols. Applicant’s bid was accepted on 31.03.2011 as per the 11See Chatturbhuj Vithaldas Jasaniv. Moreshwar Parashram And Others (1954) SCR817; K. P.C howdhry v. State of Madhya Pradesh. And Others (1966) 3 SCR 919;Bhikraj Jaipuria v. Union of India (1962) 2 SCR 880; Mulamchand v. State of MadhyaPradesh (1968) 3 SCR 214; Also see, DD Basu, Constitution of India (Vol 3),13601-H13619.

Terms and Conditions contained in the Tender No. D/21013/30/3218/2.11.2011/PW-3. The said Terms and Conditions specifically providedfor 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 thiscontract. The Ministry of Home Affairs is a party to the contract. Thearbitration clause enables the Secretary representing the Ministry toappoint an officer in the Ministry of Law as the arbitrator. In other words,the proposed arbitrator would be an employee of the Ministry of Lawand Justice, Government of India, and at the same time, the appointingauthority, the Secretary of the Ministry of Home Affairs, is also anemployee of the Government of India.[12]

16. In this very context, we can beneficially refer to therecommendation of the 246[th] Law Commission Report which reflectedon the issue of contracts with State entities and observed that when theparty appointing an arbitrator is the State, the duty to appoint an impartialand independent adjudicator is even more onerous. Their deliberationsand 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 IndianSupreme Court in the context of contracts with State entitiesnaming particular persons/designations(associated with thatentity) as a potential arbitrator. It appears to be settled by aseries of decisions of the Supreme Court (See ExecutiveEngineer, Irrigation Division, Puri v. Gangaram Chhapolia,1984 (3) SCC 627; Secretary to Government TransportDepartment, Madras v. Munusamy Mudaliar, 1988 (Supp)SCC 651; International Authority of India v. K.D.Bali andAnr, 1988 (2) SCC 360; S.Rajan v. State of Kerala, 1992 (3)SCC 608; M/s. Indian Drugs & Pharmaceuticals v. M/s. Indo- 12In State of Assam and ors.v.Shri Kanak Chandra Dutta, (1967) 1 SCR 679, this Courtheld that:

“9. ... A person holding a post under a State is a person serving or employed under theState. See the marginal notes to Articles 309, 310 and 311. The heading and the sub-heading of Part XIV and Chapter I emphasise the element of service. There is arelationship of master and servant between the State and a person holding a post underit. The existence of this relationship is indicated by the State’s right to select and appointthe holder of the post, its right to suspend and dismiss him, its right to control themanner and method of his doing the work and the payment by it of his wages orremuneration...”

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Swiss Synthetics Germ Manufacturing Co.Ltd., 1996 (1) SCC54; Union of India v. M.P.Gupta, (2004) 10 SCC 504; AcePipeline Contract Pvt. Ltd. v. Bharat Petroleum CorporationLtd., 2007 (5) SCC 304) that arbitration agreements ingovernment contracts which provide for arbitration by aserving employee of the department, are valid andenforceable. While the Supreme Court, in Indian Oil Corp.Ltd. v. Raja Transport (P) Ltd., 2009 8 SCC 520 carved out aminor exception in situations when the arbitrator “was thecontrolling or dealing authority in regard to the subjectcontract or if he is a direct subordinate (as contrasted froman officer of an inferior rank in some other department) tothe officer whose decision is the subject matter of the dispute”,and this exception was used by the Supreme Court in DenelPropreitory Ltd. v. Govt. of India, Ministry of Defence, AIR2012 SC 817 and Bipromasz Bipron Trading SA v. BharatElectronics Ltd., (2012) 6 SCC 384, to appoint an independentarbitrator under section 11, this is not enough.

57. The balance between procedural fairness and bindingnature of these contracts, appears to have been tilted infavour of the latter by the Supreme Court, and the Commissionbelieves the present position of law is far from satisfactory.Since the principles of impartiality and independence cannotbe discarded at any stage of the proceedings, specifically atthe stage of constitution of the arbitral tribunal, it would beincongruous to say that party autonomy can be exercised incomplete disregard of these principles – even if the same hasbeen agreed prior to the disputes having arisen between theparties. There are certain minimum levels of independenceand impartiality that should be required of the arbitral processregardless of the parties’ apparent agreement. A sensible lawcannot, for instance, permit appointment of an arbitrator whois himself a party to the dispute, or who is employed by (orsimilarly dependent on) one party, even if this is what theparties agreed. The Commission hastens to add that Mr. PKMalhotra, the ex officio member of the Law Commissionsuggested having an exception for the State, and allow Stateparties to appoint employee arbitrators. The Commission isof the opinion that, on this issue, there cannot be any distinction between State and non-State parties. The conceptof party autonomy cannot be stretched to a point where itnegates the very basis of having impartial and independentadjudicators for resolution of disputes. In fact, when the partyappointing an adjudicator is the State, the duty to appoint animpartial and independent adjudicator is that much moreonerous – and the right to natural justice cannot be said tohave been waived only on the basis of a “prior” agreementbetween the parties at the time of the contract and beforearising of the disputes.”

17. Following the recommendation of the Law Commission, sub-section (5) to Section 12 was inserted to the Act with effect from23.10.2015. As the statutory mandate of Section 12(5) of the Act is toapply “notwithstandingany prior agreement”, Clause 28 of theAgreement (Conditions of Tender) falls foul of Paragraph 1 of the SeventhSchedule to the Act.

18. In Perkins (supra), this Court held that any person who hasan interest in the outcome of the dispute would be ineligible to be anarbitrator. Naturally, such a person should not have the power to appointa sole arbitrator. The relevant portion of this judgment is as under:

21. But, in our view that has to be the logical deductionfrom TRF Ltd. Para 50 of the decision shows that this Courtwas concerned with the issue, “whether the ManagingDirector, after becoming ineligible by operation of law, is hestill eligible to nominate an arbitrator” The ineligibilityreferred to therein, was as a result of operation of law, in thata person having an interest in the dispute or in the outcomeor decision thereof, must not only be ineligible to act as anarbitrator but must also not be eligible to appoint anyoneelse as an arbitrator and that such person cannot and shouldnot have any role in charting out any course to the disputeresolution by having the power to appoint an arbitrator. Thenext sentences in the paragraph, further show that caseswhere both the parties could nominate respective arbitratorsof their choice were found to be completely a differentsituation. The reason is clear that whatever advantage a party AB

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Amay derive by nominating an arbitrator of its choice wouldget counter-balanced by equal power with the other party.But, in a case where only one party has a right to appoint asole arbitrator, its choice will always have an element ofexclusivity in determining or charting the course for disputeresolution. Naturally, the person who has an interest in theBoutcome or decision of the dispute must not have the powerto appoint a sole arbitrator. That has to be taken as theessence of the amendments brought in by the Arbitration andConciliation (Amendment) Act, 2015 (3 of 2016) andrecognised by the decision of this Court in TRF Ltd. [TRFCLtd. v. Energo Engg. Projects Ltd., (2017) 8 SCC 377.

19. In conclusion, the arbitration clause which authorises theSecretary, Ministry of Home Affairs, whose relationship with Union ofIndia is that of an employee, to nominate an officer of the Ministry ofDLaw and Justice to act as a Sole Arbitrator, clearly falls within theexpressly ineligible category provided in Paragraph 1 of Schedule VII,read with Section 12(5) of the Act. As the grounds of challenge to theappointment of an arbitrator under Section 12(5) of the Act operatenotwithstanding any prior agreement to the contrary, we cannot giveEeffect to the appointment of an officer of the Ministry of Law and Justiceas an arbitrator. The submission of the learned ASG in favour of such anappointment is therefore rejected.

Re: Reliance on the decision in Central Organisation ofRailway Electrifications F

20. We will now deal with the last limb of the learned ASG’ssubmissions, which relates to the precedent of Central Organisationof Railway Electrifications (supra). In this case, Clause 64(3)(b)provided for the constitution of an Arbitral Tribunal consisting of threemembers. The appointment procedure contemplated was such that theGGeneral Manager of the Appellant was required to nominate the panelof four retired railway officers, out of which the respondent-Contractorhad to select twonames. The General Manager was required to appointat least one out of the selected officers as the contractor’snomineearbitrator(s), and unilaterally appoint the remaining arbitrators as well asthe presiding officer to the tribunal. The decision of Perkins (supra)Hwas not applicable therein as the contract contemplated a three-member arbitral tribunal, while Perkins (supra) applies to cases of unilateralappointment of Sole Arbitrators. Further, the Court noted that,“absolutely, there is no bar under Section 12(5) of the Arbitrationand Conciliation (Amendment) Act, 2015 for appointment of a retiredemployee to act as an arbitrator”[13]. The Court in CentralOrganisation of Railway Electrifications (supra) also relied on theprinciple elucidated in the case of Voestalpine Schienen GmbH v.DMRC,[14] wherein DMRC nominated a five-member panel comprisingnames of employees of Railways, Central Public Works Department orpublic sector undertakings and the Court upheld the nomination interalia noting that empaneling of such retired persons was intended toutilise their technical expertise.[15] In Central Organisation of RailwayElectrifications (supra) this Court relied on the aforementioned judgmentto state that:

“27. ... As held in Voestalpine Schienen GmbH [VoestalpineSchienen GmbH v. DMRC, (2017) 4 SCC 665 : (2017) 2 SCC

13 (2020) 14 SCC 712, para 26.14(2017) 4 SCC 665.15ibid, Paras 24, 28:

“24. They cannot be treated as employee of consultant or adviser of the respondentDMRC. If this contention of the petitioner is accepted, then no person who had earlierworked in any capacity with the Central Government or other autonomous or publicsector undertakings would be eligible to act as an arbitrator even when he is not evenremotely connected with the party in question, like DMRC in this case. The amendedprovision puts an embargo on a person to act as an arbitrator, who is the employee ofthe party to the dispute. It also deprives a person to act as an arbitrator if he had beenthe consultant or the advisor or had any past or present business relationship withDMRC. No such case is made out by the petitioner.”

“26. It cannot be said that simply because the person is a retired officer who retiredfrom the government or other statutory corporation or public sector undertaking andhad no connection with DMRC (the party in dispute), he would be treated as ineligibleto act as an arbitrator. Had this been the intention of the legislature, the SeventhSchedule would have covered such persons as well. Bias or even real likelihood of biascannot beattributed to such highly qualified and experienced persons, simply on theground that they served the Central Government or PSUs, even when they had noconnection with DMRC. The very reason for empanelling these persons is to ensurethat technical aspects of the dispute are suitably resolved by utilising their expertisewhen they act as arbitrators. It may also be mentioned herein that the Law Commissionhad proposed the incorporation of the Schedule which was drawn from the red andorange list of IBA guidelines on conflict of interest in international arbitration with theobservation that the same would be treated as the guide “to determine whethercircumstances exist which give rise to such justifiable doubts”. Such persons do not getcovered by red or orange list of IBA guidelines either.”

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A(Civ) 607] , the very reason for empanelling the retired railwayofficers is to ensure that the technical aspects of the disputeare suitably resolved by utilising their expertise when theyact as arbitrators. Merely because the panel of the arbitratorsare the retired employees who have worked in the Railways,”it does not make them ineligible to act as the arbitrators.B

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21. In contrast, the arbitration clause in the present case enablesa serving employee of the Union of India, a party to the contract, tonominate a serving employee of the Union of India as the Sole Arbitrator.CSuch an authorisation is clearly distinct from the arbitration clause inVoestalpine Schienen GmbH (supra) and Central Organisation ofRailway Electrifications (supra), and is in conflict with Section 12(5)of the Act. It was informed at the bar that the correctness of judgementof Central Organisation of Railway Electrifications[16 ]has beenchallenged and referred to a larger bench in Union of India v. M/sDTantia Constructions Ltd[17] as well as JWS Steel Ltd v. SouthwesternRailways and Anr[18]. As we have noticed that the decision in CentralOrganisation of Railway Electrifications (supra) is not applicable inthe present case, its reference to the larger Bench will have no bearingon the outcome of the present case.

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22. For the reasons stated above, the present application underSection 11(6) of the Arbitration and Conciliation Act, 1996 is allowed.We hereby appoint Ms. Justice Indu Malhotra, a former judge of thisCourt as the Sole Arbitrator to adjudicate upon the disputes arising underand in connection with the Conditions of Tender entered into betweenFthe parties, subject to the mandatory disclosures under the amendedSection 12 of the Arbitration and Conciliation Act, 1996.

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Divya Pandey

(Assisted by : Shevali Monga, LCRA)

Application allowed.

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16Ibid.