Full Judgment Text
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL ORIGINAL JURISDICTION
ARBITRATION PETITION NO. 51 OF 2022
M/S GLOCK ASIA-PACIFIC LTD. ...PETITIONER(S)
VERSUS
UNION OF INDIA …RESPONDENT(S)
J U D G M E N T
PAMIDIGHANTAM SRI NARASIMHA, J.
1. This is an application under Section 11(6) of the Arbitration and
1
Conciliation Act, 1996 for the appointment of a Sole Arbitrator by Glock
2
Asia-Pacific Ltd.
3
2. Facts: The Ministry of Home Affairs (Procurement Division) floated a
single party tender on 02.02.2011 for supply of 31,756 Glock Pistols. The bid
was confirmed in favour of the applicant and a Tender of Acceptance was
4
issued by the respondent on 31.03.2011. Clause 6 of the Tender of
1
Hereinafter referred as ‘the Act’
2
Hereinafter referred as ‘applicant’
3
Hereinafter referred as ‘respondent’.
4
“6. Performance Security Deposit- You will submit performance bond of 10% of value of contract i.e.
US$ 13,29,093/- (US dollars thirteen lakh twenty nine thousand and ninety three only) in the shape of
bank guarantee in the required Performa in favour of Joint Secretary (Police Modernisation), Ministry
of Home affairs, Jaisalmer House, New Delhi within 30 days here of i.e. by 30.04.2011. The Performance
guarantee will remain valid till two months after the expiry of warranty period, which will be 18 months
from the date of acceptance stores at the consignee location. If necessary, firm on their own will have to
direct their bankers to extend the performance bond to remain valid till two months after warranty period.
Signature Not Verified
Digitally signed by
CHETAN KUMAR
Date: 2023.05.19
18:46:23 IST
Reason:
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Acceptance, required the Petitioner to submit a performance bond of 10% of
the value of the contract, being USD 13,29,093/-. Applicant furnished the
5
performance bank guarantee on 24.08.2011 and proceeded to perform its
contractual obligations and in fact, by 06.08.2012 delivered the entire supply
under the contract. The respondent accepted the consignment and paid the
entire consideration by 11.11.2012.
3. The PBG which was issued on 24.08.2011 was extended from time to
time during the subsistence of the contract and also thereafter till 2021, i.e.,
for nine years after the completion of the delivery and final payment under
the contract. On 31.05.2021, the applicant informed the respondent that the
PBG will not be extended any further. The respondent immediately invoked
the PBG for INR 9,64,42,738/-, citing Clauses 11 and 18(c) of Schedule II of
the Acceptance of Tender. These clauses, which provide for Guarantee and
Warranty, are as follows:
“Clause 11. Guarantee/Warranty: 40,000 rounds for
pistol and ors. 18 months from the date of acceptance
of EQPT/ Stores in good condition at consignee
location in India.
Clause 18(c) Warranty: the supplier furnishes his
warranty that the goods supplied under the contract
on you, on use of the incorporate all recent
improvement in design and material. The supplier
shall for the warranty the goods supplied under this
contract shall have no defect arising from design,
material of workmanship or from any act or
Where the performance bank guarantee is obtained from a foreign bank, it shall be got confirmed by a
scheduled Indian Bank and will be governed by Indian Laws and be subject to the jurisdiction of Courts
of the place of issue of acceptance of Tender (A/T), i.e Delhi.”
5
Hereinafter referred as ‘PBG’.
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commission or the supplier normal use of the
supplied goods in the condition obtained in the
country of final destination. Warranty shall remain
valid up to 40,000 rounds of pistol and 18 months
from other items from the date of acceptance of
stores. The consignee shall promptly notify the
supplier in writing of any claim arising under this
warranty. Upon receipt of such notice the supplier
having been notified failed to remedy the defects
within the warranty period prescribed in this clause,
the purchaser may proceed to take such a medial
action as may be necessary at the suppliers risk and
expense and without prejudice to any other rights
which the purchaser may have under the contract.
The manufacturer will be required by the indenter on
actual price basis. Warranty support will include
installation and commissioning of equipment free of
charge. Operational training of the users personal
free of cost at the site of installation and repair of the
equipment when necessary free of cost during the
warranty period.”
4. The applicant issued a notice invoking arbitration on 20.07.2022, and
nominated a retired Judge of the High Court of Delhi as the Sole Arbitrator.
The respondent was called upon to accept the nomination within 15 days.
Replying to the notice invoking Arbitration, the respondent by a letter dated
03.10.2022, stated that the nomination was contrary to Clause 28 of the
Conditions of Tender, as per which disputes are to be referred to arbitration
by an officer in the Ministry of Law, appointed by the Secretary of Ministry
of Home Affairs. Clause 28 is as under:
“28. ARBITRATION
In the event of any question, dispute or difference
arising under these conditions or any special conditions
of contract, or in connection with this contract (except
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as to any matters the decision of which is specially
provided for by these or the special conditions) the same
shall be referred to the sole arbitration of an officer in
the Min. of Law, appointed to be the arbitrator by the
Secretary, Ministry of Home Affairs. It will be no
objection that the arbitrator is a Government Servant
that he had to deal with the matters to which the contract
relates or that in the course of his duties as a
Government servant he has expressed views on all or
any of the matters in dispute or difference. The award of
the arbitrator shall be final and binding on the parties
to this contract…..”
(emphasis supplied)
5. It is in the above-referred context that the applicant, being a foreign
company, filed the present application under Section 11(6) of the Act before
this Court.
6. Submissions: Mr. Ramakrishnan Viraraghavan, learned Senior
Advocate, along with Mr. Shayam D. Nandan, AOR appearing for the
applicant, submitted that appointment of the Sole Arbitrator as per the
respondent’s letter dated 03.10.2022 would be contrary to Section 12(5) of
the Act. For this purpose, he also relied on the judgment of this Court in
6
Perkins Eastman Architects DPC and Another v. HSCC (India) Ltd . The
objection is simply that the respondent, Union of India, being a party to the
agreement, appointing its own employee, an officer in the Ministry of Law,
as the Sole Arbitrator would conflict with the mandate of Section 12(5) of the
Act.
6
(2020) 20 SCC 760.
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7. Ms. Aishwarya Bhati, learned Additional Solicitor General appearing
for the respondent, submitted that the judgment in Perkins (supra) would have
no application to the facts of the present case. She would point out that the
contract in the present case, unlike in Perkins (supra), is in the name of the
President of India, and that is a clear point of distinction. The learned ASG
also relied on Indian Oil Corporation Ltd. and ors. v. Raja Transport Pvt.
7
Ltd. to contend 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.
In the alternative, the ASG also relied on the decision of this Court in Central
Organisation for Railway Electrification v. ECI-SPIC-SMO-MCML (JV) A
8
joint venture company , where appointment of a panel of arbitrators by the
Ministry of Railways was held to be valid. She would, therefore, contend that
the power to nominate an officer in the Ministry of Law is not in conflict with
Section 12(5) of the Act.
8. Analysis: As the objection about appointment of the arbitrator as per
Clause 28 of the Conditions of Tender is based on the statutory prohibition
under Section 12(5) of the Act, we will reproduce relevant part of the section
for ready reference:
“ 12. Grounds of Challenge :…
(1) When a person is approached in connection with his
possible appointment as an arbitrator, he shall disclose
in writing any circumstances, ––
7
(2009) 8 SCC 520.
8
(2020) 14 SCC 712.
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...
(2)…
(3)…
(4)…
(5) Notwithstanding any prior agreement to the
contrary, any person whose relationship, with the
parties or counsel or the subject-matter of the dispute,
falls under any of the categories specified in the Seventh
Schedule shall be ineligible to be appointed as an
arbitrator:
Provided that parties may, subsequent to disputes
having arisen between them, waive the applicability of
this sub-section by an express agreement in writing”
(emphasis supplied)
9. The category of relationship relevant for our purposes as provided in
the Seventh Schedule to the Act is as under:
“ The Seventh Schedule:
Arbitrator’s relationship with the parties or counsel;
1. The arbitrator is an employee, consultant, advisor
or has any other past or present business relationship
with a party. ”
Re: Submission regarding contracts expressed in the name of the President
of India.
10. We will first deal with the submission of learned ASG, Ms Bhati that
the contract in the present case stands on a different footing as it is entered
into in the name of the President of India. Article 299 of the Constitution of
9
India provides that all contracts made in exercise of the executive power of
9
“ 299. Contracts
(1) 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, as the case may be , and all such contracts and all
assurances of property made in the exercise of that power shall be executed on behalf of the President or the
Governor by such persons and in such manner as he may direct or authorize.
(2) Neither the President nor the Governor shall be personally liable in respect of any contract or assurance made
or executed for the purposes of this Constitution, or for the purposes of any enactment relating to the Government
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the Union shall be expressed to be made in the name of the President. The
phrase ‘expressed to be made’ and the word ‘executed’ are intended to mean
that there must be a deed or contract, in writing, and executed by a person
duly authorized by the President of the Governor in that behalf.
11. The rationale of Article 299(1), as explained in Chatturbhuj Vithaldas
10
Jasani v. Moreshwar Parashram & Ors is that there must be a definite
procedure according to which contracts must be made by the agents of the
government in order to bind the government, otherwise public funds may
deplete by unauthorized or illegitimate contracts. It implies that contracts not
couched in the particular form stipulated by Article 299(1) of the Constitution
cannot be enforced at the instance of any contracting party.
12. It must be emphasized that Article 299 only lays down the formality
that is necessary to bind the government with contractual liability. It is
important to note that Article 299 does not lay down the substantial law
relating to the contractual liability of the Government, which is to be found
in the general laws of the land. It is for this reason that, even though a contract
may be formally valid under Article 299, it may nevertheless fail to bind the
Government if it is void or unenforceable under the general provisions of
11
law.
of India heretofore in force, nor shall any person making or executing any such contract or assurance on behalf
of any of them be personally liable in respect thereof”
10
(1954) SCR 817.
11
See Chatturbhuj Vithaldas Jasani v. Moreshwar Parashram And Others (1954) SCR 817; K.P.Chowdhry v .
State of Madhya Pradesh. And Others (1966) 3 SCR 919; Bhikraj Jaipuria v. Union of India (1962) 2 SCR 880;
Page 7 of 16
13. 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. 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.
14. We have no hesitation in rejecting the submission of the learned ASG
that the contracts entered into by the Union of India in the name of the
President of India are immune from provisions that protect against conflict
of interest of a party to a contract, under Section 12(5) of the Act.
Re: Conflict of the Arbitration Clause with Section 12(5) read with
paragraph 1 of the Seventh Schedule of the Act.
15. The tender notice dated 02.02.2011 was issued by the Government of
India, Ministry of Home Affairs for the purchase of Glock pistols.
Applicant’s bid was accepted on 31.03.2011 as per the Terms and Conditions
contained in the Tender No. D/21013/30/3218/2.11.2011/PW-3. The said
Terms and Conditions specifically provided for Arbitration as per Clause 28
Mulamchand v. State of Madhya Pradesh (1968) 3 SCR 214; Also see , DD Basu, Constitution of India (Vol 3),
13601-13619 .
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of the Schedule appended to the Tender. The Arbitration clause enables the
Secretary, Ministry of Home Affairs, to appoint an arbitrator for the
resolution of disputes arising out of this contract. The Ministry of Home
Affairs is a party to the contract. 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
12
also an employee of the Government of India.
16. In this very context, we can beneficially refer to the recommendation
th
of the 246 Law Commission Report which reflected on the issue of contracts
with State entities and observed that when the party appointing an arbitrator
is the State, the duty to appoint an impartial and independent adjudicator is
even more onerous. Their deliberations and recommendations, which led to
the introduction of Section 12(5) with the Seventh Schedule in the Act, are
extracted as follows:
“ 56 . The limits of this provision has been tested in the
Indian Supreme Court in the context of contracts with
State entities naming particular persons/designations
(associated with that entity) as a potential arbitrator. It
appears to be settled by a series of decisions of the
12
In State of Assam and ors. v. Shri Kanak Chandra Dutta , (1967) 1 SCR 679, this Court held that:
“ 9. ... A person holding a post under a State is a person serving or employed under the State. See the marginal
notes to Articles 309, 310 and 311. The heading and the sub-heading of Part XIV and Chapter I emphasise the
element of service. There is a relationship of master and servant between the State and a person holding a post
under it. The existence of this relationship is indicated by the State's right to select and appoint the holder of the
post, its right to suspend and dismiss him, its right to control the manner and method of his doing the work and
the payment by it of his wages or remuneration ...”
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Supreme Court (See Executive Engineer, Irrigation
Division, Puri v. Gangaram Chhapolia, 1984 (3) SCC
627; Secretary to Government Transport Department,
Madras v. Munusamy Mudaliar, 1988 (Supp) SCC 651;
International Authority of India v. K.D.Bali and Anr,
1988 (2) SCC 360; S.Rajan v. State of Kerala, 1992 (3)
SCC 608; M/s. Indian Drugs & Pharmaceuticals v. M/s.
Indo-Swiss Synthetics Germ Manufacturing Co.Ltd.,
1996 (1) SCC 54; Union of India v. M.P.Gupta, (2004)
10 SCC 504; Ace Pipeline Contract Pvt. Ltd. v. Bharat
Petroleum Corporation Ltd., 2007 (5) SCC 304) that
arbitration agreements in government contracts which
provide for arbitration by a serving employee of the
department, are valid and enforceable. While the
Supreme Court, in Indian Oil Corp. Ltd. v. Raja
Transport (P) Ltd., 2009 8 SCC 520 carved out a minor
exception in situations when the arbitrator “was the
controlling or dealing authority in regard to the subject
contract or if he is a direct subordinate (as contrasted
from an officer of an inferior rank in some other
department) to the officer whose decision is the subject
matter of the dispute”, and this exception was used by
the Supreme Court in Denel Propreitory Ltd. v. Govt. of
India, Ministry of Defence, AIR 2012 SC 817 and
Bipromasz Bipron Trading SA v. Bharat Electronics
Ltd., (2012) 6 SCC 384, to appoint an independent
arbitrator under section 11, this is not enough.
57 . The balance between procedural fairness and
binding nature of these contracts, appears to have been
tilted in favour of the latter by the Supreme Court, and
the Commission believes the present position of law is
far from satisfactory. Since the principles of impartiality
and independence cannot be discarded at any stage of
the proceedings, specifically at the stage of constitution
of the arbitral tribunal, it would be incongruous to say
that party autonomy can be exercised in complete
disregard of these principles – even if the same has been
agreed prior to the disputes having arisen between the
parties. There are certain minimum levels of
independence and impartiality that should be required
of the arbitral process regardless of the parties’
apparent agreement. A sensible law cannot, for
instance, permit appointment of an arbitrator who is
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himself a party to the dispute, or who is employed by (or
similarly dependent on) one party, even if this is what
the parties agreed. The Commission hastens to add that
Mr. PK Malhotra, the ex officio member of the Law
Commission suggested having an exception for the
State, and allow State parties to appoint employee
arbitrators. The Commission is of the opinion that, on
this issue, there cannot be any distinction between State
and non-State parties. The concept of party autonomy
cannot be stretched to a point where it negates the very
basis of having impartial and independent adjudicators
for resolution of disputes. In fact, when the party
appointing an adjudicator is the State, the duty to
appoint an impartial and independent adjudicator is
that much more onerous – and the right to natural
justice cannot be said to have been waived only on the
basis of a “prior” agreement between the parties at the
time of the contract and before arising of the disputes. ”
(emphasis supplied)
17. Following the recommendation of the Law Commission, sub-section
(5) to Section 12 was inserted to the Act with effect from 23.10.2015. As the
statutory mandate of Section 12(5) of the Act is to apply “ notwithstanding
any prior agreement ”, Clause 28 of the Agreement (Conditions of Tender)
falls foul of Paragraph 1 of the Seventh Schedule to the Act.
18. In Perkins (supra), this Court held that 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. The relevant portion of this judgment is as under:
21. But, in our view that has to be the logical deduction
from TRF Ltd. Para 50 of the decision shows that this
Court was concerned with the issue, “whether the
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Managing Director, after becoming ineligible by
operation of law, is he still eligible to nominate an
arbitrator” The ineligibility referred to therein, was as
a result of operation of law, in that a person having an
interest in the dispute or in the outcome or decision
thereof, must not only be ineligible to act as an
arbitrator but must also not be eligible to appoint
anyone else as an arbitrator and that such person
cannot and should not have any role in charting out any
course to the dispute resolution by having the power to
appoint an arbitrator. The next sentences in the
paragraph, further show that cases where both the
parties could nominate respective arbitrators of their
choice were found to be completely a different situation.
The reason is clear that whatever advantage a party
may derive by nominating an arbitrator of its choice
would get counter-balanced by equal power with the
other party. But, in a case where only one party has a
right to appoint a sole arbitrator, its choice will always
have an element of exclusivity in determining or
charting the course for dispute resolution. Naturally, the
person who has an interest in the outcome or decision
of the dispute must not have the power to appoint a sole
arbitrator. That has to be taken as the essence of the
amendments brought in by the Arbitration and
Conciliation (Amendment) Act, 2015 (3 of 2016) and
recognised by the decision of this Court in TRF
Ltd. [TRF Ltd. v. Energo Engg. Projects Ltd., (2017) 8
SCC 377.
(emphasis supplied)
19. In conclusion, 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.
As the grounds of challenge to the appointment of an arbitrator under Section
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12(5) of the Act operate notwithstanding any prior agreement to the contrary ,
we cannot give effect to the appointment of an officer of the Ministry of Law
and Justice as an arbitrator. The submission of the learned ASG in favour of
such an appointment is therefore rejected.
Re: Reliance on the decision in Central Organisation of Railway
Electrifications
20. We will now deal with the last limb of the learned ASG’s submissions,
which relates to the precedent of Central Organisation of Railway
Electrifications (supra). In this case, Clause 64(3)(b) provided for the
constitution of an Arbitral Tribunal consisting of three members. The
appointment procedure contemplated was such that the General Manager of
the Appellant was required to nominate the panel of four retired railway officers,
out of which the respondent-Contractor had to select two names. The General
Manager was required to appoint at least one out of the selected officers as the
contractor’s nominee arbitrator(s), and unilaterally appoint the remaining
arbitrators as well as the presiding officer to the tribunal. The decision of
Perkins (supra) was not applicable therein as the contract contemplated a
three-member arbitral tribunal, while Perkins (supra) applies to cases of
unilateral appointment of Sole Arbitrators. Further, the Court noted that,
“ absolutely, there is no bar under Section 12(5) of the Arbitration and
Conciliation (Amendment) Act, 2015 for appointment of a retired employee
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13
to act as an arbitrator ” . The Court in Central Organisation of Railway
Electrifications (supra) also relied on the principle elucidated in the case of
14
Voestalpine Schienen GmbH v. DMRC , wherein DMRC nominated a five-
member panel comprising names of employees of Railways, Central Public
Works Department or public sector undertakings and the Court upheld the
nomination inter alia noting that empaneling of such retired persons was
15
intended to utilise their technical expertise. In Central Organisation of
Railway Electrifications (supra) this Court relied on the aforementioned
judgment to state that:
“27. ... As held in Voestalpine Schienen GmbH
[Voestalpine Schienen GmbH v. DMRC, (2017) 4
SCC 665 : (2017) 2 SCC (Civ) 607] , the very reason
for empanelling the retired railway officers is to
ensure that the technical aspects of the dispute are
suitably resolved by utilising their expertise when
they act as arbitrators. Merely because the panel of
the arbitrators are the retired employees who have
13
(2020) 14 SCC 712, para 26.
14
(2017) 4 SCC 665.
15
ibid , Paras 24, 28:
“ 24. They cannot be treated as employee of consultant or adviser of the respondent DMRC. If this
contention of the petitioner is accepted, then no person who had earlier worked in any capacity with the
Central Government or other autonomous or public sector undertakings would be eligible to act as an
arbitrator even when he is not even remotely connected with the party in question, like DMRC in this
case . The amended provision puts an embargo on a person to act as an arbitrator, who is the employee of
the party to the dispute. It also deprives a person to act as an arbitrator if he had been the consultant or
the advisor or had any past or present business relationship with DMRC. No such case is made out by the
petitioner.”
“ 26. It cannot be said that simply because the person is a retired officer who retired from the government
or other statutory corporation or public sector undertaking and had no connection with DMRC (the
party in dispute), he would be treated as ineligible to act as an arbitrator. Had this been the intention of
the legislature, the Seventh Schedule would have covered such persons as well. Bias or even real
likelihood of bias cannot be attributed to such highly qualified and experienced persons, simply on the
ground that they served the Central Government or PSUs, even when they had no connection with DMRC.
The very reason for empanelling these persons is to ensure that technical aspects of the dispute are
suitably resolved by utilising their expertise when they act as arbitrators . It may also be mentioned herein
that the Law Commission had proposed the incorporation of the Schedule which was drawn from the red
and orange list of IBA guidelines on conflict of interest in international arbitration with the observation
that the same would be treated as the guide “to determine whether circumstances exist which give rise to
such justifiable doubts”. Such persons do not get covered by red or orange list of IBA guidelines either.”
Page 14 of 16
worked in the Railways, it does not make them
ineligible to act as the arbitrators.”
(emphasis supplied)
21. In contrast, the arbitration clause in the present case enables 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. Such an authorisation
is clearly distinct from the arbitration clause in Voestalpine Schienen GmbH
(supra) and Central Organisation of Railway Electrifications (supra), and is
in conflict with Section 12(5) of the Act. It was informed at the bar that the
correctness of judgement of Central Organisation of Railway
16
Electrifications has been challenged and referred to a larger bench in Union
17
of India v. M/s Tantia Constructions Ltd as well as JWS Steel Ltd v.
18
Southwestern Railways and Anr . As we have noticed that the decision in
Central Organisation of Railway Electrifications (supra) is not applicable in
the present case, its reference to the larger Bench will have no bearing on the
outcome of the present case.
22. For the reasons stated above, the present application under Section
11(6) of the Arbitration and Conciliation Act, 1996 is allowed. We hereby
appoint Ms. Justice Indu Malhotra, a former judge of this Court as the Sole
Arbitrator to adjudicate upon the disputes arising under and in connection
16
Ibid.
17
SLP (C) No. 12670/2020
18
SLP (C) No. 9462/2022
Page 15 of 16
with the Conditions of Tender entered into between the parties, subject to the
mandatory disclosures under the amended Section 12 of the Arbitration and
Conciliation Act, 1996.
……..……………………………….CJI.
[Dr Dhananjaya Y Chandrachud]
……………….………………………….J.
[Pamidighantam Sri Narasimha]
……………….………………………….J.
[J.B. Pardiwala]
New Delhi;
May 19, 2023
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