The Supreme Court has
held that the government, when entering into a contract under the President’s
name, cannot claim immunity from the legal provisions of that contract under
Article 299 of the Constitution, in a recent case.
A Bench led by Chief
Justice of India (CJI) DY Chandrachud said, “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”.
The case dealt with an
application filed by Glock Asia-Pacific Limited, a pistol manufacturing company,
against the Centre regarding the appointment of an arbitrator in a
tender-related dispute.
Article 298 grants the
Centre and the state governments the power to carry on trade or business,
acquire, hold, and dispose of property, and make contracts for any purpose,
while Article 299 delineates the manner in which these contracts will be
concluded. Articles 298 and 299 came after the Constitution came into effect
and the government entered into contracts even in the pre-independence era.
According to the Crown Proceedings Act of 1947, the Crown could not be sued in
court for a contract it entered into.
Article 299 of the
Constitution provides that “all contracts made in the exercise of the executive
power of the Union or of a State shall be expressed to be made by the President
or by the Governor of the State” and that all such contracts and “assurances of
property made in the exercise of that power shall be executed” on behalf of the
President or the Governor by persons in a manner as directed and authorised by
them.
Further, the phrase
‘expressed to be made and executed’ under Article 299 (1) means that there must
be a deed or contract in writing and that it should be executed by a person
duly authorised by the President of the Governor on their behalf.
The objective behind
Article 299(1), as per the 1954 top court ruling in ‘Chatturbhuj Vithaldas
Jasani v. Moreshwar Parashram & Ors’, is that there must be a definite
procedure according to which contracts must be made by agents acting on the
government’s behalf; otherwise, public funds may be depleted by unauthorized or
illegitimate contracts. It implies that contracts not adhering to the manner
given in Article 299(1) cannot be enforced by any contracting party.
However, Article 299
(2) says that essentially, neither the President nor the Governor can be
personally held liable for such contracts.
What was the case?
The May 19 ruling
delivered by the Bench, also comprising Justices PS Narasimha and JB Pardiwala,
dealt with an application filed by Glock Asia-Pacific Limited against the
Centre on the appointment of an arbitrator in a dispute.
Glock Asia Pacific
entered into a contract with the Ministry of Home Affairs for the supply of
31,756 Glock pistols. Subsequently, there was a dispute between the two parties
due to the Centre invoking a performance bank guarantee. A performance bank
guarantee, similar to a letter of credit, is the bank’s promise that it will
meet the debtor’s liabilities, provided that he fails to meet the contractual
obligations.
Glock then issue a
notice invoking arbitration, nominating a retired Delhi High Court judge as the
sole arbitrator. When the government was called to accept this, it said that
the arbitrator’s nomination violated one of the tender conditions that said an
officer in the Law Ministry, appointed by the MHA Secretary, would be the
arbitrator in case of a dispute.
Thus, Glock challenged
this clause in the agreement, which allowed a government officer to resolve the
difference between the two parties as an arbitrator, as one party here was the
MHA itself.
What did the court
hold?
One of the major
grounds of the challenge given under Section 12(5) of the Arbitration and
Conciliation Act, 1996, says that notwithstanding any prior agreement, any
person whose relationship with the parties or counsel of the dispute falls
under any of the categories in the Seventh Schedule will be ineligible to be
appointed as an arbitrator. The Seventh Schedule includes relationships where
the arbitrator is an employee, consultant, advisor, or has any other past or
present business relationship with a party.
Deciding the case in
Glock’s favour, the court observed that the arbitration clause allowed a
“serving employee of the Union of India, a party to the contract, to nominate a
serving employee of the Union of India as the Sole Arbitrator.” Holding this to
be in conflict with Section 12(5), the court allowed the present application.
The court also
appointed former SC judge Justice Indu Malhotra “as the Sole Arbitrator to
adjudicate upon the disputes” in the case.
Referring to the
recommendation of the 246th Law Commission Report, which dealt with the issue
of contracts with government entities, the court observed that when the party
appointing an arbitrator is the State, “the duty to appoint an impartial and
independent adjudicator is even more onerous.”
Thus, the court
rejected the Centre’s reliance on Article 299, saying, “Article 299 only lays
down the formality that is necessary to bind the government with contractual
liability” and not “the substantial law relating to the contractual liability
of the Government”, which is to be found in the general laws of the land.
What are the
requirements for government or state contracts?
In its judgement, the
court referred to its 1966 ruling in ‘K.P. Chowdhry v. State of Madhya Pradesh.
And Others’, which laid down essential requirements for government contracts
under Article 299.
In that ruling, the
top court had reiterated three conditions to be met before a binding contract
against the government could arise, namely: “(1) the contract must be expressed
to be made by the Governor or the Governor-General; (ii) it must be executed in
writing, and (iii) the execution should be by such persons and in such manner
as the Governor or the Governor-General might direct or authorise.” Prior to
this, the Apex Court, in its 1962 ruling in ‘State of Bihar v. Messrs. Karam
Chand Thapar’, had laid down these three conditions too.
(Courtesy:- The Indian
Express, 30 May 2023)
No comments:
Post a Comment