Can the govt claim immunity when entering contracts under the President’s name? Here’s what SC has ruled

Source: The post is based on the article “Can the govt claim immunity when entering contracts under the President’s name? Here’s what SC has ruled” published in Indian Express on 31st May 2023

What is the News?

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.

What is Article 298 and Article 299 of the Indian Constitution?

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.

Article 299 delineates the manner in which these contracts will be concluded. It 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 shall be executed on behalf of the President or the Governor by persons in a manner as directed and authorized by them.

Article 299(2) says that neither the President nor the Governor can be personally held liable for such contracts.

What is the objective behind Article 299 as per the Supreme Court?

According to the 1954 Supreme Court ruling in ‘Chatturbhuj Vithaldas Jasani v. Moreshwar Parashram & Ors’, the objective behind Article 299 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 cannot be enforced by any contracting party.

What are the Requirements for Government or State Contracts?

In 1966, the Supreme Court in n ‘K.P. Chowdhry v. State of Madhya Pradesh. And Others’ laid down three essential requirements for government contracts under Article 299 to be met before a binding contract against the government could arise.These conditions are:

Firstly, the contract must be expressed to be made by the Governor or the President;

Secondly, it must be executed in writing and;

Thirdly, the execution should be by such persons and in such a manner as the Governor or the President might direct or authorize.

What was the case about and what did the court rule?

A petition was filed by Glock-Asia Pacific Limited in the Supreme Court against the Centre regarding the appointment of an arbitrator by the firm in a dispute regarding a tender.

Glock Asia-Pacific Limited had entered into a contract with the Union home ministry for the supply of pistols. However, after a dispute arose about the invocation of a bank guarantee, the company invoked arbitration and nominated a ​​retired Delhi High Court judge as the sole arbitrator.

However, the Centre cited a condition of the tender which mandated that the dispute had to be referred to the sole arbitration of an officer from the law ministry, who was to be appointed by the home secretary.

Glock challenged the provision in the agreement that enabled the appointment of an officer from the law ministry as the arbitrator.

Note: According to the Arbitration and Conciliation Act, 1996, any person whose relationship with the parties or counsel of the dispute falls under the 7th Schedule (of the Act) will be ineligible to be appointed as an arbitrator.  The 7th Schedule includes relationships where the arbitrator is an employee, consultant, advisor, or has any other past or present business relationship with a party.

On this, the Supreme Court said that a person chosen by the State as an arbitrator must be “impartial and independent” with no past or present professional ties with the government.

The court held that contracts made under Article 299 of the Constitution do not give the government power to break statutory laws.

Hence, the court-appointed former Supreme Court judge, Justice Indu Malhotra, as the sole arbitrator to adjudicate the dispute.