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M/s. Aculife Healthcare Private Ltd., Gujarat Previously Known as Nirma Limited (Healthcare Division), Represented by Its Regional Sales Manager, Ajish Mathew & Another v/s The Kerala Medical Service Corporation Limited, Thiruvananthapuram, Represented by Its Managing Director & Others

    A.R. No. 94 of 18 & WP(c). No. 17149 of 2018
    Decided On, 04 January 2019
    At, High Court of Kerala
    For the Petitioners: Biju Balakrishnan, V.S. Rakhee, P.V. Jeevesh, Advocates. For the Respondent: M. Ajay, Standing Counsel, M. Ajay, SC, Bijoy Chandran, Government Pleader.

Judgment Text
1. Petitioner was awarded a contract for supply of medical devices for the year 2013-14 pursuant to Annexure A1 tender document. Certain disputes arose between the petitioner and the respondent in respect of the articles supplied. Notices were issued to the petitioner in respect of the complaints and petitioner submitted his explanations. Petitioner had approached the Secretary to Government, Health and Family Welfare Department and a personal hearing was held. While so, the respondent published another tender document on 27.11.2015 for the year 2016-17. The tender submitted by the petitioner was rejected as per Annx.A14. Annx.A16 order was issued on 01.03.2016 blacklisting 5cc needle which was being supplied by the petitioner on the basis of Annexure A1 tender document for the year 2013-14. Simultaneously as per Annexure A17 petitioner was blacklisted in respect of 2CC needle also. Petitioner challenged the same in WP(C).No.11876 of 2016 and it was disposed of directing consideration of his representation by the Government. Government rejected all such representations issuing orders similar to Annexure A22. Petitioner challenged the same in W.P.(C).No.24656 of 2016. As per Annexure A25 judgment dated 01.11.2017, Government order was set aside, directing reconsideration by the Secretary to Government. Government rejected the representation again. Respondent issued Annx.A27 order on 27.12.2016, deducting a sum of Rs.45,06,800/- towards the value of 5cc and 2cc needles. Petitioner challenged the same in W.P.(C) No.17149/2018. Respondent filed a statement therein, agreeing to refer the matter to arbitration in accordance with clause 6.37.2 of Annx.A1 tender document. Clause 6.37.2 of Annx.A1 reads as follows.

'6.37.2 If the parties fail to resolve their dispute or difference by such mutual consultation within twenty-one days of its occurrence, then, unless otherwise provided in the Tender Document, either the Tender Inviting Authority or the successful bidder may give notice to the other party of its intention to commence arbitration, as provided the applicable arbitration procedure will be as per the Arbitration and Conciliation Act, 1996 of India'.

2. Thereupon, the petitioner issued Annx.A28 notice dated 05.09.2018 requesting the respondent to refer the dispute to Arbitrator as provided under clause 6.37.2 of Annex.A1, as agreed by the respondent in the statement dated 16.07.2018 filed in W.P.(C) No.17149/2018. Accordingly, the petitioner nominated Adv.C.S.Dias as the sole Arbitrator and called for the opinion of the respondent on the said nomination. Respondent thereupon issued Annx.A29 reply dated 5.10.2018 stating that they are amenable to have the dispute resolved through arbitration as provided in the terms and conditions in the tender, according to which Secretary to Government, Health and Family Welfare Department is the sole Arbitrator for settling the dispute. It was further stated that Mr.Rajeev Sadanandan IAS, the Additional Chief Secretary to Government, was the only one Secretary available then for the Health and Family Welfare Department. Stating that he, being the Ex-officio Chairman of the Corporation, was disqualified under the Arbitration and Conciliation Act, 1996 (hereinafter referred to as 'the Act') as amended, the respondent nominated Dr.Rajan Khobragade IAS, Commissioner of Commercial Taxes as the Arbitrator. The petitioner was asked to offer acceptance of the nominated Arbitrator. This Arbitration Request was filed at that stage.

3. The petitioner claims that appointment of Secretary to Government, Health and Family Welfare Department is prohibited under Section 12 (5) of the Act read with schedule 7 thereto; the named Arbitrator under Annx.A1 tender document, as well as the Commissioner of Commercial Taxes, who was nominated as Arbitrator in Annx.A29 letter are also disqualified, as they are affiliates of the respondent; as the respondent company is owned by Government, any official under the Government of Kerala is precluded from arbitrating the issue. Relying on the judgment of the Apex Court in Voestalpine Schienen GmbH v. Delhi Metro Rail Corpn. Ltd.:(2017) 4 SCC 665, the learned Counsel for the petitioner argued that an independent Arbitrator unconnected with the respondent or the Government is necessary, in order to have independence in the arbitration proceedings. The learned counsel for the petitioner relied on the judgments of the Apex Court in Aravali Power Co. (P) Ltd. v. Era Infra Engg. Ltd. : (2017) 15 SCC 32, TRF Ltd. v. Energo Engg. Projects Ltd.: (2017) 8 SCC 377, etc. and argued that the respondent themselves agreed for arbitration by filing a statement in W.P(C).No.17149 of 2018 and they have also admitted that the Secretary to Government, who is the Chairman and Managing Director of the Corporation, is disabled from acting as the Arbitrator. Therefore, in the light of the aforesaid judgments it is necessary to have an independent Arbitrator, who does not have any involvement in matters relating to the respondent or the Government.

4. At the same time, the learned Standing Counsel for the respondent points out that the cause of action for the arbitration arises on account of Annx.A1 tender document which relates to the period 2013-14. There has been disputes between the parties for which correspondence was going on from 04.05.2015 onwards. The respondent has issued orders after issuing show cause notice to petitioner after considering its objection and blacklisted the petitioner as per orders issued on 01.03.2016. Relying on the judgment in Aravali Power Co. (P) Ltd. v. Era Infra Engg. Ltd.: (2017) 15 SCC 32, Indian Oil Corpn. Ltd. v. Raja Transport (P) Ltd., (2009) 8 SCC 520, S. Rajan v. State of Kerala: (1992) 3 SCC 608, etc., it was argued that the Arbitrator nominated by the respondent did not have any disqualification. The learned Counsel, on instructions pointed out that the nominated Arbitrator, who was at the relevant time the Commissioner of Commercial Taxes Department, has since been appointed as the Secretary to Government, Department of Health and Family Welfare and his appointment as Arbitrator would be perfectly in accordance with the relevant clause in the agreement. According to the learned Counsel, except the Additional Chief Secretary of the Department of Health and Family welfare, no other Secretaries of that Department or any other Department has any control or role in the affairs of the respondent Corporation or even in respect of the contract in question. Therefore, it is argued that there is no illegality in the appointment of Sri. Rajan Khobragade IAS, who was the Commissioner of Commercial Taxes at the time of his nomination, taking charge as Secretary to Government in the Department of Health and as he does not have any role or control over the Corporation, his nomination has become valid and therefore the Arbitration request itself is liable to be rejected. It was argued that the fact that there cannot be a presumption of bias or partiality or lack of independence on his part, only on the ground that he is a Secretary to Government.

5. Having heard the contentions on both sides, it is relevant to note that the amendment was effected to Section 12(5) of the Arbitration and Conciliation Act, 1996, in order to ensure that there is complete independence and impartiality for the Arbitrators. The agreements providing for arbitration would not have any force in the eye of law in case the Arbitrator to be appointed under it is having relationship, with the parties or the subject matter of the dispute or comes under any of the categories specified in the seventh schedule. The non obstante clause in Subsection 5 of Section 12, introduced by way of the 2015 Amendment Act, makes the agreements executed by the parties in respect of appointment of Arbitrators who are included in any of the categories in the 7th schedule, unenforceable. 7th schedule to the Act includes employee, consultant, adviser or any person having past or present business relationship with a party to one who currently represents one of the parties or an affiliate to one of the parties. Under serial no.5 if he is a manager, director or part of the management, or has a similar controlling influence, is affiliate of one of the parties and if the affiliate is directly involved in the matter in dispute in the arbitration, are disqualified.

6. In this context it is necessary to examine the relevant provision in Annexure A1 agreement providing for arbitration and the relevant provisions in the Act. As per Clause 6.37.2, if the parties fail to resolve the disputes amicably by mutual consultation, either of the parties have to give notice to the other, within 21 days of its occurrence, of its intention to commence arbitration in accordance with the procedure provided in the Act. As per clause 6.37.3, the dispute shall be referred to the sole arbitration of Secretary to Health, Govt. of Kerala, whose decision shall be final. Though Annexure I tender document was for the year 2013-14, and the amended Section 12(5) of the Act came into force on 23.10.2015, the respondent themselves informed their willingness to resort to arbitration issuing Annexure A29 reply and they nominated the Arbitrator only as per that letter, issued on 05.10.2018, after Section 12(5) was amended. Section 12(5) of the Act, as amended, reads as follows:

' Section 12. Grounds for challenge


(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 subsection by an express agreement in writing.'

Therefore, if the Arbitrator mentioned in clause 6.37.3 would come within any of the categories specified in 7th schedule, he is ineligible to become an Arbitrator. The arbitration clause provided for appointment of Secretary to Government, Health Department as Arbitrator, when that Secretary is the Chairman of the Corporation. In Annexure A29 letter, the respondent Corporation found that after the amendment the Secretary to that Department has become disabled to be an Arbitrator. When the relevant clause in Annexure A1 provides for arbitration and the named Arbitrator therein is disqualified by operation of law, the respondent cannot have any right to nominate an Arbitrator unless the petitioner agrees to it. Therefore, even if the person who was nominated has since become the Secretary, it cannot be said that he is to be appointed as Arbitrator.

7. However in view of the subsequent events, the Arbitrator who was nominated by the respondent Corporation, at a time when the respondent did not have any authority to do so, has now become the Secretary to Government, who is not the Ex-Officio Chairman of the Corporation. Therefore, it would be apposite to examine whether a Secretary to the Department of Health, who is junior to the Additional Chief Secretary who is the Ex-Officio Chairman of the respondent Corporation and belonging to the very same department, is disabled for appointment as Arbitrator under Section 12(5) of the Act read with the Seventh Schedule. Under the 7th schedule, an employee, consultant, advisor or a person who has any other past or present business relationship with either of the parties are ineligible to tbe appointed as Arbitrator. An affiliate of one of the parties is incompetent. A manager, director or a person having any part in the management, or having a controlling influence, in an affiliate of one of the parties if the affiliate is directly involved in the matters in dispute in the arbitration, is also incompetent. An affiliate of the appointing party is incompetent even if the Arbitrator or his or her firm does not derive a significant financial income therefrom, is also incompetent. Those having close connection with the persons in the management and controlling the company, are incompetent. Those with significant financial interest in one of the parties or an affiliate of one of the parties is also incompetent. A legal representative of either parties in the arbitration and those with previous involvement in the case are incompetent to be nominated as Arbitrator. As per Explanation 2 to the 7th schedule, companies in one group of companies including the parent company is termed as 'affiliate' .

8. The respondent is a Corporation fully owned by Government with the Secretary to Government in Health and Family Welfare Department as its Chairman. Even assuming that all the Secretaries to Health and Family Welfare Department are not supposed to have any control over the Department as well as Corporation, as it is the Additional Chief Secretary to that Department who is the Chairman of the Corporation, it cannot be said that, being an associate of the Chairman who is from the very same Department, he would be able to maintain independence as well as impartiality, as required for an Arbitrator without giving rise to any amount of suspicion in the mind of others.

9. In the judgment in Aravali Power Co. (P) Ltd. (supra), relied on by the learned Counsel for the respondent, the Apex Court was considering a case where the Arbitrator was appointed and he commenced his proceedings prior to the amendment. Moreover, the petitioner participated in the proceedings without raising any objection over the appointment. Even then, in respect of appointment of Arbitrators subsequent to amendment of the Act, i.e after 23.10.2015, it was held by the Apex Court in para 22.2. of the judgment, that even if the appointment of the Arbitrator is apparently in conformity with the arbitration clause in the agreement, it would be illegal if it is contrary to the amended provisions and in such cases the court would be within its powers to appoint arbitrators.

10. In TRF Ltd's case (supra) the question which arose for consideration was whether the Managing Director who was disabled could nominate anybody as Arbitrator. It was held that once the Arbitrator has become ineligible by operation of amended Subsection 5 of Section 12 of the Act, he would not have any authority to nominate another as an Arbitrator. Once the identity of the Managing Director as the sole Arbitrator is lost, the power to nominate someone else as an Arbitrator is also obliterated. The relevant arbitration clause considered therein provided for referring the disputes to sole Arbitrator or Managing Director or his nominee. Taking note of Section 12(5) and schedule 7, it was held that if the relationship between parties or the subject matter of dispute falls under the category specified, he shall be ineligible for appointment as an Arbitrator.

11. It is relevant to note that the Law Commission had in paragraphs 53 to 60 of its report, after discussing a series of judgments including those in Rajan's case and Indian Oil Corporation's case (etc), (relied on by the respondents herein) found the necessity to maintain minimum levels of independence and impartiality in the matter of appointment of Arbitrators. The cases where appointment was to be made by Government or was arising out of agreements executed with Government, were also considered by the Law Commission and in paragraph 57 of its report, it was found as follows:

'xxxxx 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.'

The amendment to subsection 5 of Section 12 of the Act was carried out in the light of the aforeassid recommendations of the Law Commission.

12. In Voestalpine Schienen GmbH's case (supra), the Apex Court has considered all the cases relied on by the learned Counsel for the respondent. It is relevant to note the observations of the Apex Court, referring to the report of the Law Commission. Even after seeing that the panel of Arbitrators contained both serving and retired employees of various Government and Public Sector Undertakings, the respondents were directed to provide a more extensive list. It was found that the nomination of Arbitrator by the petitioner was from a list which contained only 5 names, given by the respondent, the choice of the petitioner was restricted. Similar defect was found in the matter of appointment of the 3rd Arbitrator from the list furnished by the respondent. After referring to the terms of the agreement providing for arbitration, it was found necessary to delete certain portions and thereafter in paras.29 and 30 of the judgement it was observed as follows:

'29. Some comments are also needed on Clause 9.2(a) of GCC/SCC, as per which DMRC prepares the panel of 'serving or retired engineers of government departments or public sector undertakings'. It is not understood as to why the panel has to be limited to the aforesaid category of persons. Keeping in view the spirit of the amended provision and in order to instil confidence in the mind of the other party, it is imperative that panel should be broadbased. Apart from serving or retired engineers of government departments and public sector undertakings, engineers of prominence and high repute from private sector should also be included. Likewise panel should comprise of persons with legal background like Judges and lawyers of repute as it is not necessary that all disputes that arise, would be of technical nature. There can be disputes involving purely or substantially legal issues, that too, complicated in nature. Likewise, some disputes may have the dimension of accountancy, etc. Therefore, it would also be appropriate to include persons from this field as well.

30. xxx Further, as highlighted by the Law Commission also in its report, duty becomes more onerous in government contracts, where one of the parties to the dispute is the Government or public sector undertaking itself and the authority to appoint the arbitrator rests with it. In the instant case also, though choice is given by DMRC to the opposite party but it is limited to choose an arbitrator from the panel prepared by DMRC. It, therefore, becomes imperative to have a much broadbased panel, so that there is no misapprehension that principle of impartiality and independence would be discarded at any stage of the proceedings, specially at the stage of constitution of the Arbitral Tribunal.'

13. In the present case, when the Arbitration request was filed the person nominated by the respondent was the Commissioner of Commercial Taxes. Such nomination or appointment was without any authority. When the sole Arbitrator was fixed as Secretary to Government, as per Clause 6.37.3 and when there is no provision authorising the respondent to appoint any Arbitrator of their choice in its place, it cannot be said that the Arbitration Request was unnecessary, as alleged by the respondent.

14. In view of the recommendation of the Law Commission which led to the amendment of Section 12(5) of the Act and the insertion of 7th schedule and the observations in paras.28 to 30 of the judgment of the Apex Court in Voestalpine Schienen GmbH's case (supra), the contention raised on behalf of the respondent, at the time of hearing that the person nominated himself has become the Secretary to Government and therefore his appointme

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nt as Arbitrator would be in accordance with the agreement and he does not have disability, cannot be accepted. Even assuming that the Secretary to Government, Health Department, is not having any control over the respondent Corporation, when the Additional Chief Secretary of the very same department is the exofficio Chairman, it would not be proper to appoint another Secretary of the very same Department as Arbitrator. Though the learned Counsel for the respondents vehemently argued that the Apex Court has upheld the appointment of a Superintending Engineer as Arbitrator, by the Chief Engineer and in another case an employee under one of the parties, all those judgments relied on by the learned Counsel relate to appointments made prior to the amendment in 2015, which are not applicable to the present case, as held in Aravally Power Company's case (supra) itself. It is also pertinent to note from Annexure-A26 order that the appeal filed by the petitioner against blacklisting was heard by Deputy Secretary once, thereafter by the Joint Secretary and Annexure-A26 order was passed by the Joint Secretary. Therefore, the contention of the learned counsel that other Secretaries of Health Department do not have any role over the matters in respect of the Corporation is unsustainable. In these circumstances, it cannot be said that appointment of Secretary to Government in Health Department can be allowed, in tune with the arbitration agreement. 15. Hence the Arbitation Request is allowed. 'Sri. Gracious Kuriakose, Senior Advocate, High Court of Kerala, R/A. Nambiaparambil, SRRA 132, Shenoy Road, Kaloor, Cochin-17' is appointed as Arbitrator to resolve the disputes between the parties. The petitioner shall obtain a disclosure statement from the Arbitrator as provided in Section 11(8) of the Arbitration and Conciliation Act, 1996, original of which shall be retained by the Registry. Certified copy of this order need be issued only on production of the disclosure statement. A copy of the same shall be appended to the certified copy of this order. WP(C).No.17149/18 In the light of the order in the Arbitration Request – A.R.No.94/2018, the Writ Petition is closed.