Allowed

M/S Flora-O-Foods v. Director Integrated Child DEVELOPMENTandOR

Rajasthan HC8 Dec 2017ARBAP/104/2017

Case brief

AI extract

What is this about?

The Hon'ble High Court of Rajasthan appointed an independent sole arbitrator to resolve a commercial dispute over outstanding payments and quality allegations between a supply petitioner and the State Department, holding that a disqualified official cannot nominate a successor.

What did the court decide?

Appointment of Hon'ble Mr. Justice Panachand Jain as an independent sole arbitrator to resolve the disputes between the petitioner and the respondents.

M/S Flora-O-Foods Vs Director Integrated Child DEVELOPMENTandOR — Arbitration | Rajasthan HC (2017)

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HIGH COURT OF JUDICATURE FOR RAJASTHAN

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BENCH AT JAIPUR

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S.B. Arbitration Application No. 104/2017

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M/s Flora-O-Foods, G-222-224, RIICO Industrial Area, Sitapura, Jaipur.

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----Petitioner

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Versus

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Director, Integrated Child Development Services, Government Of Rajasthan, 2, Jalpath, Gandhi Nagar, Jaipur.

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State Of Rajasthan, Through Principal Secretary, Women And Child Development Department, Secretariat, Jaipur.

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State Of Rajasthan Through Its Chief Secretary, Secretariat, Jaipur.

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----Respondents

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For Petitioner(s) : Mr. N.K. Maloo, Senior Counsel, assisted by Mr. Ajit Maloo For Respondent(s) : Mr. Varun Choudhary for Mr. D.V. Tholia, Additional Advocate General

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HON'BLE MR. JUSTICE MOHAMMAD RAFIQ

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Judgment

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08/12/2017

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This application under Section 11 of the Arbitration and Conciliation Act, 1996, has been filed by petitioner M/s Flora-o-Foods praying for appointment of independent sole Arbitrator for adjudication/resolution of the disputes between the petitioner and the respondents.

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Facts, in brief, of the case are that petitioner is the sole proprietorship concern of Ms. Shikha Jain and Mr. Vivek Jain is her constituted attorney. A tender No.33105 dated 06.05.2010, which was amended by tender no.41833 dated 10.06.2010, was floated by the Director-cum-Deputy Secretary to the Government (respondent

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no.1) for supply of ‘panjiri’ (‘sattu’), ‘halwa premix’ (‘deshi mithai’) and ‘upma premix’ (‘namkeen’) for integrated child development services of the State of Rajasthan for ultimate consumption by women and children. The petitioner, on being found suitable, was awarded contract for supply of the aforesaid material for Zone G Bharatpur and as per need for Zone A Jaipur, Zone B Udaipur and Zone C Jodhpur (District Pali and Jodhpur). An agreement dated 20.10.2010 was executed between the parties, which is on record as Annexure-1.

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Mr. N.K. Maloo, learned senior counsel for petitioner, submitted that the petitioner has been supplying the required material to the department for last about 15 years without any complaint. Under the agreement dated 20.10.2010 the petitioner made supplies during the period from October, 2010 to March, 2015 as per ‘delivery instructions’ issued by the department from time to time. The respondent no.1 issued order dated 04.01.2016 in which it was alleged that some samples from the material supplied by the petitioner during January, 2014 to January, 2015 were taken by Mahila & Bal Vikas Mantralay, Government of India, New Delhi, and were got tested from M/s FICCI Research and Analysis Centre, New Delhi, which have not been found as per the standards/specifications. The petitioner was asked to explain it. The petitioner submitted its reply vide its letter dated 23.01.2016 stating that the material is manufactured in supervision of the departmental representative and that is tested in in-house lab of the petitioner. After production, the material is got tested from NABL Accredited Laboratory and the test reports are supplied to the department along-with the Bills. After accepting the material, the department

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makes payment of 95% of the bill amount. The department then again gets the material tested at its own level from some NABL approved laboratory. After the material is found up to specifications, and being satisfied with it, the department makes payment of remaining 5% of the bill amount. It was also stated in the reply that the material in question was supplied during the period from January, 2014 to January, 2015 and that the life of the material is four months from the date of manufacture and three months from the date of supply, which has expired long back. The last supply of alleged defective material was made in August, 2014 and therefore the alleged test has got no value. The entire material has been consumed by the department and it was never rejected nor returned to the petitioner. The Government of India has no authority and jurisdiction to take samples and get them tested. The samples were not taken in accordance with the Rules and lawful procedure and that they were not taken in presence of the petitioner and as per the procedure contained in the General Finance and Accounts Rules of the Government of Rajasthan, more particularly Rule 68(21) nor as per the Food Safety and therefore the samples taken behind the back of the petitioner and the alleged test reports have no legal value at all. It was also submitted that if the material was rejected by the department, the supplier should be asked to replace the material. Even otherwise, the petitioner was never informed about rejection of any material and was never asked to replace it rather it was consumed.

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Learned senior counsel for petitioner submitted that Clause 10(iii) provides that if the material is not found fit on the basis of samples taken by the department and got tested by it, action may be

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taken against the supplier. The material in question was got tested twice, which was found satisfactory and the material was accepted. 95% payment of 22 out of 23 relevant bills was made and in respect of one bill, no payment was made due to undisclosed reasons.

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It is submitted on behalf of the petitioner that by letter dated 26.02.2016, the department informed the petitioner that guidance has been sought from Woman and Child Development Ministry, Government of India and the outstanding payment of the bills will be made after receiving the required guidance. The petitioner sent reminders on 25.04.2015 and 25.04.2017 but neither payment nor any communication has been received by the petitioner. It is submitted that an amount of Rs.3,29,47,656.15 is outstanding against respondents besides interest thereon, which includes a sum of Rs.1,24,91,214/- paid by the petitioner to Food Corporation of India on behalf of the respondents against supply of wheat between 20^th to 22^nd December, 2014. The petitioner is entitled to get payment of the outstanding amount of the bills besides interest and penalty as per the provisions of the Micro, Small and Medium Enterprises Development Act, 2006, as petitioner is a small scale industry. When payment was not made for a long time, the petitioner served a legal notice on 13.01.2017 through Advocate calling upon the respondents to make payment of the outstanding amount. The petitioner neither received any reply to the legal notice dated 13.01.2017 nor payment of the outstanding amount. The petitioner served another notice dated 26.05.2017 upon the respondents by registered post under Section 11 of the Arbitration and Conciliation Act, 1996 through advocate. It was mentioned therein that the Director of the Department or his nominee is disqualified from acting

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as Arbitrator or appointing some other officer as Arbitrator. Reference was made to Section 12 and 5^th Schedule of the Arbitration and Conciliation Act, 1996 and it was stated that in view of the facts and circumstances it is necessary to appoint an independent and impartial Arbitrator for adjudication of the disputes. In the said notice, the petitioner suggested names of three retired Hon’ble Judges of this Court and requested the respondents to agree for appointment of any one of the three suggested names. It was also conveyed that if consent of the respondents is not received, application under Section 11 of the Arbitration and Conciliation Act, 1996 would be filed for appointment of an independent Arbitrator. The respondents have not made payment of the outstanding dues of the petitioner along with interest and penalty etc, nor they have consented for any one of the three suggested names for being appointed as Arbitrator by consent, hence this application.

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Mr. Varun Choudhary, on behalf of Mr. D.V. Tholia, learned Additional Advocate General for respondents, opposed the application by filing reply thereto and submitted that the samples of the goods supplied by the petitioner were collected by the Central Government as per Clause 2(xv) of the agreement and sent to M/s FICCI Research nad Analysis Centre, New Delhi, for testing. The samples of the goods supplied by the petitioner firm were not found suitable according to quality standards. A letter dated 04.01.2016 was written by the respondent Department to the petitioner firm for their explanation regarding samples, which were below standard. The respondents received reply on 23.01.2016, where objections were raised by the petitioner firm regarding samples, which were taken by the concerned department. The respondents forwarded all the

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objections to the Central Government for their guidance required in the present matter and outstanding payment of bills will be made after receiving the required guidance/recommendations, however, till date the respondents have not received any further orders/recommendations from the Central Government Department. It is submitted that 50% payment is made by the Central Government and remaining payment is made by the State Government.

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Learned counsel for the respondents submitted that in response to the letter dated 26.05.2017, a Committee has been formed on 27.07.2017. The notice dated 26.05.2017 is not proper and is against the arbitration agreement. The petitioner firm has wrongly taken a view that Director or his nominee cannot be appointed as an Arbitrator, he being party to the dispute. It is submitted that since the petitioner has signed the agreement containing that stipulation, the parties are bound by the arbitration agreement.

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I have given my anxious consideration to rival submissions and perused the material on record.

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Learned counsel for petitioner has cited judgment dated 14.05.2013 passed by this court in Murliwala Agrotech Pvt. Ltd. Vs. Director, Integrated Child Development Services and Others – S.B. Arbitration Application No.48/2012 and contended that in regard to a dispute arising out of similar agreement between the petitioner in that case and the respondents department, this court has taken the view that since the penalty orders have been passed either by the Director himself or his subordinate with the approval of the Director, there cannot be any independent decision taken by the Sole

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Arbitrator so appointed by him. This court therefore appointed an independent Arbitrator.

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Question that arises for decision is whether the Managing Director, who has been rendered ineligible to act as an Arbitrator in terms of Section 12(5) of the Act of 1996, can nominate any other person as Arbitrator, who may otherwise be eligible or respectable person. The Supreme Court in TRF Ltd. Vs. Energo Engineering Projects Ltd. - Civil Appeal No.5306/2017 (@ S.L.P. (C) No.22912/2016) , held that once the Arbitrator has become ineligible by operation of law, he cannot nominate any other person as Arbitrator. Such person becomes ineligible to act as an Arbitrator as per procedure contained in Section 12(5) of the Act of 1996. It is inconceivable in law that the person who is statutorily ineligible, can nominate another person as Arbitrator. Needless to say, once the infrastructure collapses, the superstructure is bound to collapse. Once the identity of the Managing Director as the sole arbitrator is lost, the power to nominate someone else as an arbitrator is obliterated, held the Supreme Court.

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In view of the above, not only that the Director, Integrated Child Development Services, Government Of Rajasthan, cannot act himself as Arbitrator, he also cannot appoint any other person as Arbitrator and therefore the contention raised on behalf of the respondents by placing reliance on the judgment of the Supreme Court in Indian Oil Corporation Ltd. & Ors. Vs. M/s. Raja Transport (P) Ltd. - 2009 (8) SCC 520 , that a party cannot claim the arbitration in view of the arbitration clause by ignoring the appointment procedure relating to the named arbitrator contained in the arbitration clause, cannot be countenanced.

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Having heard learned counsel for the parties and perused the record, this Court finds that there exists dispute between the parties. However, this Court cannot go into the other aspects of the claim and counter claim and is of the view that the parties have made out a case for reference of the dispute for arbitration. In view of above discussion, both the applications deserve to succeed and are allowed. Hon’ble Mr. Justice Panachand Jain (Retd.), Resident of 23, Mauji Colony, Malvya Nagar, Jaipur – 302 017, Mobile Number 9829252173 and Landline Number 0141-4030021, is hereby appointed as an independent sole arbitrator to resolve the disputes. Payment of the cost of arbitration proceedings and the arbitration fees shall be made as per the Fourth Schedule of the Arbitration and Conciliation (Amendment) Act, 2015 read with Manual of Procedure for Alternative Dispute Resolution, 2009 of this Court, as amended from time to time.

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A copy of this order be placed in the connected file and be also sent to Hon’ble Mr. Justice Panachand Jain (Retd.) for needful.

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(MOHAMMAD RAFIQ),J

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//Jaiman//21

M/S Flora-O-Foods v. Director Integrated Child DEVELOPMENTandOR

Case brief

What is this about?

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M/S Flora-O-Foods v. Director Integrated Child DEVELOPMENTandOR

Case brief

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