The Supreme Court has held that the government cannot claim immunity from the application of law to a contract merely because one of the parties to it is the President of India.
‘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,” a Bench of Chief Justice of India and Justice P.S. Narasimha held in a recent judgment.
Moreover, when tasked with the job to find an arbitrator, the state should ensure that the person it chooses is an “impartial and independent” adjudicator with no professional ties to it, past or present.
The judgment came in a petition filed by Glock-Asia Pacific Limited against the Union regarding the appointment of an arbitrator to a dispute regarding a tender.
Glock had appealed against an arbitration clause in the agreement which enabled the Home Secretary to appoint an officer in the Ministry of Law to be the sole arbitrator.
Justice Narasimha, who authored the judgment, said the clause was a clear violation of Section 12(5) of the Arbitration Act.
The provision mandates that any person with prior or existing relationship with any of the parties to the arbitration in the capacity of an employee, consultant, advisor or any other past or present business relationship, would be ineligible to be appointed as arbitrator.
Additional Solicitor General Aishwarya Bhati, for the Union government, contended that the party to the contract with Glock was none other than the President of India, and this was a “clear point of distinction” from other cases.
Ms. Bhati also contended that once a party enters into an agreement for the appointment of a person as an arbitrator, it cannot simply opt-out of the arbitration clause. She had contended that the power to nominate an officer in the Ministry of Law was not in conflict with Section 12(5) of the Act.
Addressing the point that a contract entered into in the name of the President enjoys immunity, the Supreme Court said Article 299 (contracts made by the Union or State in the name of the President or Governor) of the Constitution does not give the government power to break the statutory law.
“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,” Justice Narasimha observed.
When the party appointing an arbitrator is the State, the duty to appoint an impartial and independent adjudicator was even more onerous, the court responded to Ms. Bhati’s argument that the Home Secretary appointing a Law Ministry officer as arbitrator was not a violation of Section 12(5).
The state has a duty to appoint an independent and impartial arbitrator in case it is given the task.
“The arbitration clause enables the Secretary representing the Ministry to appoint an officer in the Ministry of Law as the arbitrator. In other words, the proposed arbitrator would be an employee of the Ministry of Law and Justice, Government of India, and at the same time, the appointing authority, the Secretary of the Ministry of Home Affairs, is also an employee of the Government of India… Any person who has an interest in the outcome of the dispute would be ineligible to be an arbitrator. Naturally, such a person should not have the power to appoint a sole arbitrator,” Justice Narasimha reasoned.
The court appointed former Supreme Court judge, Justice Indu Malhotra, as the sole arbitrator to adjudicate the dispute.
