Govt can't appoint its own employee as sole arbitrator, Supreme Court rules

The government bought 31,756 pistols from Glock. Nine years later, it encashed a ₹9.64 crore bank guarantee. Then Glock asked for an independent arbitrator — and the government said no.

The dispute had nothing to do with faulty weapons or late delivery. Glock Asia-Pacific had delivered every single pistol. The government had paid the full price. But the performance bank guarantee — a security deposit that should have been returned — stayed alive for nine years. When Glock finally refused to extend it, the government simply took the money. And when Glock demanded arbitration, the government pointed to a clause in the contract: the Home Secretary would pick the arbitrator. From the government's own law ministry.

The question before the Supreme Court was deceptively simple: Can a government department appoint its own employee as the sole arbitrator in a dispute where the government itself is a party?

When the pistols arrived but the guarantee stayed

In 2011, the Ministry of Home Affairs issued a tender for 31,756 Glock pistols. The crates of weapons — sleek, black, imported — arrived at government depots by August 2012. The government paid the full price by November 2012. But Glock had also furnished a performance bank guarantee (PBG) — a promise from a bank that it would pay the government if Glock failed to meet its obligations.

That guarantee should have been released after delivery and payment. Instead, Glock kept extending it year after year. For nine years, the bank guarantee letter sat in a government file, gathering dust. In May 2021, Glock finally said no — it would not extend the PBG any further. The government immediately encashed the guarantee, taking ₹9.64 crores.

A dispute arose. Glock wanted to arbitrate and nominated a retired High Court judge. The government rejected that nomination and insisted on its contractual right: Clause 28 of the agreement allowed the Secretary of Home Affairs to appoint an officer from the Ministry of Law as the sole arbitrator. That officer would be a serving government employee.

Glock filed an application in the Supreme Court under Section 11(6) of the Arbitration and Conciliation Act, 1996 (a provision that allows a party to ask the court to appoint an arbitrator when the other side refuses or the agreed mechanism fails).

"The President signed it" — the government's first defence

The Union of India raised three defences. First, the contract was signed in the name of the President of India under Article 299 of the Constitution (a provision that governs how government contracts are validly executed). The government argued this created a distinct legal position — the President was not an "employee" of the Union, so the disqualification rules did not apply.

Second, party autonomy must be respected. The parties had agreed to Clause 28. Both sides signed it. The court should not rewrite their bargain.

Third, the Supreme Court's own precedent in Central Organisation for Railway Electrification v. ECI-SPIC-SMO-MCML (JV) — (2020) 14 SCC 712 — had permitted government departments to appoint arbitrators in certain circumstances. That precedent, the government said, controlled this case.

Glock countered with a different set of precedents. In TRF Ltd. v. Energo Engineering Projects Ltd. — (2017) 8 SCC 377 — the Supreme Court had held that if a person is ineligible to be an arbitrator, they cannot appoint an arbitrator either. In Perkins Eastman Architects DPC v. HSCC (India) Ltd. — (2020) 20 SCC 760 — the court had extended this logic: a party cannot appoint its own employee as a sole arbitrator.

The real question, Glock argued, was whether Section 12(5) of the Arbitration Act (a provision that lists categories of people who are ineligible to serve as arbitrators) read with Paragraph 1 of the Seventh Schedule (which specifically disqualifies an employee of a party) made Clause 28 inoperative.

Why the court rejected the Article 299 defence

The Supreme Court bench — Dr. Dhananjaya Y. Chandrachud, Pamidighantam Sri Narasimha, and J.B. Pardiwala — delivered its judgment on May 19, 2023. The courtroom fell silent as the presiding judge began reading the operative portion of the order. The only sound was the rustle of paper as counsel leaned forward, straining to catch every word.

The court began with the Article 299 argument. The government had relied on two old precedents: Chatturbhuj Vithaldas Jasani v. Moreshwar Parashram (1954) and State of Assam v. Shri Kanak Chandra Dutta (1967). Those cases, the government said, established that contracts made in the name of the President have a special character.

The court disagreed. "A contract under Article 299 does not create any immunity against the application of statutory prescriptions," the judgment held. The Arbitration Act applies to all contracts — including those signed by the President. If the Act says a certain category of people cannot be arbitrators, no contract can override that.

Then the court turned to the core issue: Clause 28.

The fatal flaw in Clause 28

The arbitration clause authorised the Secretary of Home Affairs to appoint an officer of the Ministry of Law as the sole arbitrator. That officer would be a serving employee of the Union of India — the very party in the dispute.

Section 12(5) of the Arbitration Act says that a person who falls under any of the categories listed in the Seventh Schedule is ineligible to be an arbitrator. Paragraph 1 of the Seventh Schedule covers "an employee or consultant of a party." A serving law officer of the Union government, the court held, falls squarely within this description.

The government tried to distinguish its case from Perkins Eastman. In that case, the managing director of a government company had appointed himself as arbitrator. Here, the Secretary was appointing someone else — a different officer. But the court was unimpressed. The logic of TRF Ltd. applied: if the person appointed is ineligible, the person doing the appointing — being an employee of the same party — is also disabled from making that appointment.

The court also clarified the scope of Central Organisation for Railway Electrification. That case, the court explained, dealt with retired government employees — people who had no ongoing connection with the government. It did not authorise the appointment of serving employees. "The appointment of serving employees of the government as arbitrators in disputes where the government is a party is fundamentally distinct from the appointment of retired employees who have no connection with the party," the judgment held. There is a fundamental distinction between a retired judge or officer who has no current relationship with a party, and a serving employee who reports to the same chain of command.

What the court ordered

The Supreme Court allowed Glock's application and appointed Ms. Justice Indu Malhotra, a former judge of the Supreme Court, as the sole arbitrator. The court directed that she would adjudicate all disputes arising under the tender conditions, subject to the mandatory disclosures required under Section 12 of the Act.

The judgment effectively struck down Clause 28 of the contract — not by rewriting it, but by declaring it inoperative under the law.

THE PLAY: If your arbitration clause allows a party to appoint its own serving employee as the sole arbitrator, that clause is dead — regardless of what the contract says or who signed it.

The government encashed the guarantee. It will now have to defend that decision before an arbitrator it never wanted.

What this means for government contracts

The judgment in M/s Glock Asia-Pacific Ltd. v. Union of India (2023 LiveLaw (SC) 459) settles a question that had been simmering for years. Government departments across the country — from defence procurement to public works — routinely inserted arbitration clauses that gave a senior official the power to appoint an arbitrator. Often, that arbitrator was a serving government lawyer or a retired officer with ongoing ties to the department.

The Supreme Court has now made clear: that practice is illegal. Section 12(5) of the Arbitration Act is a mandatory provision. It cannot be contracted out of. Any arbitration clause that violates it is inoperative from the start.

The decision also clarifies the relationship between Article 299 of the Constitution and the Arbitration Act. The government cannot hide behind the President's name to avoid statutory disqualifications. A contract is a contract, whether signed by the President or by a junior officer. The same rules apply.

For companies that deal with the Indian government — especially foreign companies like Glock — this judgment provides a crucial safeguard. They no longer have to submit to arbitration before a government employee who reports to the very department they are disputing with. They can demand an independent arbitrator. And if the government refuses, they can go to court.

The Glock case is now headed for arbitration before Justice Indu Malhotra. The government will have to explain why it encashed a bank guarantee nine years after the pistols were delivered and paid for. That explanation will come before a neutral arbitrator — not a law officer of the Union government.

For the thousands of other government contracts that contain similar clauses, the message is clear: rewrite them now. The old clause is dead.