Arbitration in Government Contracts: Supreme Court Strikes Down Biased Appointment Clause

The case of M/S Glock Asia-Pacific Ltd. vs. Union of India raises significant issues regarding arbitration in government contracts, particularly concerning the appointment of arbitrators. The Supreme Court was tasked with deciding whether an arbitration clause allowing the government to appoint its own officer as an arbitrator was valid under Section 12(5) of the Arbitration and Conciliation Act, 1996. The Court’s ruling in favor of an independent arbitrator reaffirms the principle of impartiality in arbitration proceedings.

Background of the Case

The dispute arose from a government contract for the procurement of 31,756 Glock pistols by the Ministry of Home Affairs (MHA). The contract was awarded to Glock Asia-Pacific Ltd. on March 31, 2011. The agreement required Glock to provide a performance bank guarantee (PBG) of 10% of the contract value (USD 13,29,093) and to ensure warranty compliance for the supplied pistols.

The company delivered all the pistols by August 6, 2012, and the government made full payment by November 11, 2012. However, despite the contract being completed, the government continued to demand an extension of the PBG. In May 2021, Glock refused to extend the PBG further, leading the government to invoke the guarantee for INR 9,64,42,738, citing warranty issues under Clauses 11 and 18(c) of the contract.

Glock invoked arbitration on July 20, 2022, and nominated a retired Delhi High Court judge as the sole arbitrator. The government rejected this nomination, arguing that as per Clause 28 of the contract, disputes had to be referred to an arbitrator appointed by the Secretary, Ministry of Home Affairs, from the Ministry of Law.

In response, Glock filed an application under Section 11(6) of the Arbitration and Conciliation Act, requesting the Supreme Court to appoint an independent arbitrator.

Petitioner’s Arguments

The petitioner, Glock Asia-Pacific Ltd., argued:

The government’s unilateral appointment of an arbitrator from the Ministry of Law violated Section 12(5) of the Arbitration and Conciliation Act, which prohibits any person who is an employee or consultant of a party from acting as an arbitrator.
The Supreme Court’s ruling in Perkins Eastman Architects DPC v. HSCC (India) Ltd. (2020) established that a party to a contract cannot unilaterally appoint an arbitrator, as it creates a conflict of interest.
Government contracts are not immune from the requirement of impartial arbitration.
The contract was completed in 2012, and invoking the PBG in 2021 was arbitrary and unjustified.

Respondent’s Arguments

The Union of India, represented by the Additional Solicitor General (ASG), countered:

The appointment of an arbitrator by the Ministry of Home Affairs was in line with the contract.
Since government contracts are executed in the name of the President of India under Article 299 of the Constitution, they are not bound by the restrictions in Section 12(5) of the Arbitration Act.
The Supreme Court’s ruling in Central Organisation for Railway Electrification v. ECI-SPIC-SMO-MCML (JV) (2020) upheld the validity of a panel of government-appointed arbitrators in railway contracts.
Glock had already agreed to this arbitration clause when signing the contract and could not now claim it was unfair.

Supreme Court’s Observations

The Supreme Court rejected the government’s arguments and made key observations:

Section 12(5) of the Arbitration Act clearly states that any arbitrator with a relationship to a party is ineligible.
Clause 28 of the contract, which allowed the MHA to appoint an arbitrator from the Ministry of Law, violated this provision and was unenforceable.
The Court dismissed the government’s claim that contracts under the President of India were exempt from Section 12(5), stating that all contracts must comply with applicable laws.
The judgment in Central Organisation for Railway Electrification was distinguishable, as it involved a panel of arbitrators rather than a sole arbitrator appointed by one party.

Key Judgment Excerpt

The Supreme Court ruled:

“In this very context, we can beneficially refer to the recommendation of the 246th 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.”

The Court also cited Perkins Eastman, reaffirming that:

“The party who has an interest in the outcome or decision of the dispute must not have the power to appoint a sole arbitrator.”

Final Verdict

The Supreme Court allowed Glock’s application and appointed former Supreme Court judge Indu Malhotra as the sole arbitrator to resolve the dispute.

The ruling sends a clear message that government contracts must adhere to principles of impartial arbitration, ensuring fairness and transparency in dispute resolution.

Petitioner Name: M/S Glock Asia-Pacific Ltd..
Respondent Name: Union of India.
Judgment By: Justice Dhananjaya Y Chandrachud, Justice Pamidighantam Sri Narasimha, Justice J.B. Pardiwala.
Place Of Incident: New Delhi, India.
Judgment Date: 19-05-2023.

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