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Facts of The Case

It was an application under section 11(6) of the Arbitration and Conciliation Act 1996 (hereinafter referred to as “Act”). A single-party tender was floated by the Ministry of Home Affairs on 02.02.2011 for the supply of Glock Pistols. Bid was finalized in favor of the applicant. The tender required the Applicant to submit a performance bond of 10% of the value of the Contract which was duly furnished (in the form of a performance bank guarantee) and delivered the entire supply. The consignment was accepted and the entire consideration was paid by the Respondent. 

Performance bank guarantee which was issued on 24.08.2011 extended from time to time till 2021 i.e. nine years after the delivery and final payment. It was informed by the applicant that PBG would not extend any further. The respondent invoked PBG citing clauses of the contract.

The request for invoking arbitration was sent by the applicant to the Respondent nominating a retired Judge of the High Court of Delhi as the Sole Arbitrator. The respondent did not accept the said request on the ground that according to the terms of the tender, the Arbitration has to be initiated by an Officer of the Ministry of Law. Applicant, in the present application, contended that such an appointment would be contrary to section 12(5) of the Act.

The Hon’ble Court analyzed the prohibition under Section 12(5) of the Act dealing with conflict of interest along with the Seventh Schedule of the Act. The court further analyzed the contention of the respondent that the contract in question stands on a different footing as it was entered into in the name of the President of India under 299 as per Article 299 of the Constitution of India. On this, the Court held that Art. 299 only lays down a formality to bind the government and does not lay down any substantive law relating to its contractual liability.  Hence, the present contract would not be immune to the prohibition under Section 12(5) read with Schedule 7 of the Act.

The court further held that there cannot be any distinction between state and non-state parties with regard to the prohibition under Art. 12(5) of the Act. Hence, 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.

Hence, the court allowed the Arbitration application and appointed Ms. Justice Indu Malhotra, Former Judge of the Supreme Court as the sole arbitrator. 

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