International Pharmaceuticals vs Union Of India
1998 Latest Caselaw 423 Del

ORDER

Vijender Jain, J.

1. This petition has been filed by the petitioner under Sections 10 and 11(5) of the Arbitration and Conciliation Act, 1996 read with Clauses 2 and 3 of the Scheme, 1996 framed by Delhi High Court, for appointment of Arbitrators.

2. A Contract was awarded to the petitioner for procurement of anti-Leprosy drugs for Rs.27.45 crores vide Agreement dated 29.3.1995 and the general conditions and terms contained in the bidding documents for procurement of these drugs under National Leprosy Eradication Programme (in short 'NLEP' ). The entire quantity of drugs under the contract were supplied by the petitioner. Subsequently, another offer was made for supply of additional quantity of same drugs valuing Rs.13.722 crores on the same terms and conditions as applicable to the earlier contract. The offer was accepted and a contract was executed dated 15.3.996. In the meanwhile, respondent cancelled the said agreement dated 15.3.1996 vide letter dated 10.7.1996 on the ground that adequate stock of such drugs were available with the Government. The petitioner aggrieved by the cancellation of the said contract approached the respondent-Union of India in terms of Clause 26.2(a) of the General Conditions of the contract. Clause 26 of the General Conditions of contract is as follows |-

26. Resolution of Disputes :26.1 The Purchaser and the Supplied shall make every effort to resolve amicably by direct informal negotiation any disagreement or dispute arising between them under or in connection with the Contract.

26.2. If, after thirty (30) days from the commencement of such informal negotiations, the Purchaser and the Supplied have been unable to resolve amicably a contract dispute, either party may require that the dispute be referred for resolution to the formal mechanisms specified below :a) in case of a dispute between the purchaser and a Supplied which is a national of the Purchaser's country, the dispute shall be referred to adjudication/arbitration in accordance with the laws of the Purchaser's country; andb) in the case of a dispute between the Purchaser and a foreign Supplier, the dispute shall be settled by arbitration in accordance with the provisions of the UNICITRAL Arbitration Rules.

3. The petitioner nominated Mr. Justice H R Khanna, a former Judge of the Supreme Court of India as the sole Arbitrator to resolve the disputes and differences. Petitioner, inter alia, requested the respondent to concur to the said appointment and when nothing was heard from the side of the respondent, the petitioner filed the present petition for appointment of Arbitrator by this Court to settle the disputes arisen between the petitioner and the respondents under the contract dated 15.3.1996. Respondent Union of India, inter alia, admitted in para-2 of their written statement that a repeat order for supply of anti-leprosy drugs worth Rs.13.72 crores was given to the petitioner on 7.5.1996 on the same terms and conditions as the previous contract for Rs.27.44 crores. Mr.K C Mittal, learned counsel appearing for the respondent-Union of India, argued that the repeat order was signed by the then Additional Director General with one witness and the same does not indicate the clause of the bid document under which the repeat order has been made. The whole tenor of the written statement was that the drug position was found to have large stock of drugs and additional order was not at all required. Another leg of the argument of the respondent was that the arbitration clause is not applicable as the contract itself is void and unenforceable. This was also stated by the respondent that the petitioner has obtained the order by misrepresentation and in connivance of the officials and the matter is already being nvestigated by of the Central Bureau of Investigation (for short 'CBI') and, there fore, the petitioner has no right to enforce the contract through Court of law. It was further contended that the order for supply of drugs can be cancelled under the provisions of Clause 25.1 of General Conditions of Contract as contained in the bidding document at the convenience of the purchaser. The whole thrust of the arguments of the learned counsel for the respondent was that the said clause was applicable only to the original contract and not on any subsequent repeat order/contract.

4. It was contended that since the order for repeat was void abilities, therefore, provision relating to appointment of Arbitrator does not arise. In support of his contentions, Mr. Mittal has cited The Bihar Eastern Gangetic Fishermen Cooperative Society Ltd. Vs. Sipahi Singh & Others in which it was held that the provisions of Article 299 of the Constitution of India are mandatory in character and if the conditions are not fulfillled then failure to comply with these conditions nullifies the contract and renders it void and unenforceable and there is no question of estoppel or ratification in a case where there is contravention of the provisions of Article 299(1) of the Constitution. He has also cited the case of State of Punjab and Others Vs. M/s Om Parkash Baldev Krishan .

5. I have perused the record of the case. The note written by the Additional Secretary on 27.6.1998 gives a very interesting reading |-The position of stocks of drugs given by ADG(L) at prepare is quite in contrast to the one furnished by the Leprosy Division earlier. I have obtained the file No.T.11018/24/95-Lep (Coordn.) which is placed below. Not once but twice on this file, DDG(L) of the Purchase Committee on 20.11.95 maybe seen where it was said that "the current supplies are hardly adequate up to June, 1996. He (Dr.Mittal) further explained that due to pending suit in the High Court on the subject, fresh international tenders may not be floated." Based on the position, the Purchase Committee decided that anti leprosy drugs to the extent of 25% of the cost earlier ordered from M/s International Pharmaceuticals Ltd., Ahmedabad as per DGS&D norms and at the same terms and conditions should be purchased. At page 7 of the same file, it was mentioned that "position with regard to likely case load and the availability of anti leprosy drugs to treat these cases was reviewed in October, 1995. As a result thereof it was found that by March, 1996, the programme would have 0.7 to 0.9 million cases (both old and newly detected cases) to treat during the year 1996-97 and the programme would immediately need additional quantity of anti leprosy drugs for treating these cases and maintaining uninterrupted supply of drugs to the patients."

This note was approved by the then DG and the AS(H). The then HFM ordered that instead of 25% of the drugs, 50% of the already placed order of drugs should be purchased. This was also seen by Secretary(H), JS(FA) and DG. A note was then put up to me in April, 1996 for implementation of the order of HFM. In this note also Additional DG(Leprosy) pointed out that "while reviewing the position in October, 1995 with regard to availability of anti leprosy drugs from the programme it was found that drugs for which orders were placed on M/s International Pharmaceuticals Ltd., Ahmedabad would not be sufficient to meet the immediate needs of the programme." Thereafter, the order for supply of drugs was placed in May, 1996. In view of the contradictory position now taken by the Leprosy Division it is necessary that an accurate estimate of the drugs in stock and expected to be received from all sources is made. DG may kindly arrange to have this assessment done. If it is found that the drugs for which order had been placed in May would be in excess of the requirement and as pointed out by ADG(L) will be in excess of even the buffer stock required to be maintained, then obviously the order placed in May, 1996 should be cancelled. Since this may have legal implications the decision should be taken quickly and on a factual report. ADG(L) should also ensure that there are no other papers in DGHS pertaining to this order.

(P.S. Bhatnagar) AS(B) 27.6.96

Even in the written statement, it has been mentioned by the respondent that order for additional supplies were approved by the then Minister for Health and Family Welfare, who ordered that instead of 25% of the drugs, 50% of the drugs should be purchased. On 1.2.1995 a note was put up by the Additional Director General for the approval of Minister for Health and Family Welfare for procurement of additional quantity of anti leprosy drugs from petitioner to the tune of 25% of original order on the existing rates, terms and conditions. The file was routed through Additional Secretary(B), then Director General, and then Additional Secretary (Health) and thereafter same was put up before Minister for Health and Family Welfare, who recorded the note as follows |-

"After going through A,B,C, and D as also F at pp.5 and 6 (esp.when it is being treated only "as enhancement of the earlier order, at the same rates, terms and conditions" at at "G" above _ at p.5 _ the helplessness displayed at "Z" above _ right margin above _ seems under duress, if not under duress, surely as submission illogically to the decision of Purchase Committee ) any one would infer that the right course is to place order of 50% of (already placed order to the tune of 27.444 crores, satisfactorily) that amount viz.27.444.I think that rather than giving into an uncertainty as indicated above and inordinate delay as we are getting for the same terms and conditions 50% as stated at "Y" above is approved."

6. In view of the aforesaid note of the Minister for Health and Family Welfare, the stand of the respondent-Union of India that there was no sanction under Article 299 of the Constitution or that the contract is void abilities and not enforceable, cannot stand the scrutiny of law. In terms of the original agreement, the supplies worth Rs.27.44 crores was made by the petitioner to the respondent and the respondent themselves has treated enhancement of earlier order at the same rates, terms and conditions, then now to take a stand that the Agreement dated 15.3.1996 is void and unenforceable, is without any basis.

Even otherwise, there is no force in the arguments of the respondent that CBI enquiry is being conducted by the Union of India and, therefore, the petitioner has no right to take recourse to arbitration. Whether enquiry has been conducted against the officers or not, that is not within the domain of this Court in this petition but how an enquiry conducted by CBI can nullify the effect of a clause in the contract pertaining to arbitration? There is a note on the file of the respondent by the Minister for Health and Family Welfare to order 50% of the Drugs on the petitioner, therefore, to argue that the contract did not have the requisites of Article 299 of the Constitution of India and, therefore, void abilities and unenforceable is neither here nor there. I also do not find any force in the arguments of the respondent that there is no clause either in the General Conditions or in the instructions to the bidder which authorises the purchaser to give repeat order. The respondent consciously after due deliberation in the Ministry gave a repeat order treating as enhancement of the earlier order and even otherwise this plea was not taken as a reason for cancelling the agreement in the letter dated 10.7.1996. As a matter of fact, the General Conditions of the contract got incorporated in the second contract and formed part of the same in view of the specific clause in the later contract that the contract was on the same terms and conditions asper the contract dated 29.3.1995. As a matter of fact, on 9.2.1996 when offer was given by the respondent for procurement of additional quantities, it was specifically mentioned in the following terms |-

T.11018/24/95.Lep(Coordn.)/D DIRECTORATE GENERAL OF HEALTH SERVICES (LEPROSY DIVISION) NIRMAN BHAWAN, NEW DELHI - 110011.

 To                                      Dated  the 9th  February, 
1996. 
M/s International Pharmaceuticals 
2nd Floor, Chunabhai Centre 
Ashram Road 
Ahmedabad - 380049

 

 Subject : NLEP - Award of contract for procurement of additional quantities of anti-leprosy drugs. 

 

 Sir, 

 

I am directed to say that the Ministry of Health and Family Welfare desires to purchase additional quantities of anti-leprosy drugs viz.Rifampicin, Clofazamine and Dapsone in blister calender packs (52.50 million packs) on the same rates, terms and conditions at which contract has already been signed with you on the 29th March, 1995 for the supply of anti-leprosy drugs in blister calender packs (105 million packs), treating the purchase of additional quantities of anti-leprosy drugs as extension of earlier order. The additional uantities of anti-leprosy drugs which the Ministry of Health & F.W. desire to purchase from you, will cost Rs.13,72,20,000/- at the existing rates (Rupees thirteen crores, seventy two lakhs and twenty thousand only) as per details annexed. You are kindly requested to convey your agreement to the supply of additional quantities of anti-leprosy drugs as annexed to this letter, on the same rates, terms and conditions on which you are already supplying anti-leprosy drugs to the Ministry of Health and F.W., under the agreement already entered into with you on 29th arch, 1995 within 30 days from the issue of this letter and in token thereof sign and enclosed contract and return the same to this Directorate. You are also requested to furnish the performance security in the form of bank guarantee for a sum of Rs.1,13,20,000/- in the enclosed proforma for supply of additional quantities of anti-leprosy drugs.

Yours faithfully, (Dr. B.N. MITTAL) ADDITIONAL DIRECTOR GENERAL"

The contract form dated 5.3.1996 between the respondent and the petitioner again took into account that both the parties have adopted the terms and conditions, rates as per agreement signed earlier dated 29.3.1995 between the purchaser and the suppliers for supply of anti-leprosy drugs. The petitioner accepted the offer on 19th March, 1996 vide its letter addressed to the respondent. The following para is important |-

"We hereby give our consent to supply of additional quantities of anti-leprosy drugs as annexed in your letter on the same rates and terms & conditions at which we have already made supplies. We are enclosing herewith the contract form in duplicate as a token of our acceptance."

7. On 7.5.1996 the respondent agreed and returned the contract for procurement of additional quantity of drugs duly signed. In view of the correspondence exchanged, as shown above, can the plea be taken by the respondent that the contract was void or unenforceable and, therefore, they are not bound by the arbitration clause thereto. To my mind, that will be to allow the respondent to approbate and reprobate. I find force in the arguments of the learned counsel for the petitioner, Mr.Dhokalia, who argued that all this is an after-though as the cancellation letter dated 10.7.1996 nowhere states that the contract was void or there was no provisions for repeat order or the grounds, which have now been mentioned by the respondent. The letter dated 10.7.1996 only gives one reason for cancellation that adequate stock of drugs was available with the respondent. The letter dated 10.7.1996 read as under|-

T.11018/24/95.Lep(Coordn.)/D

DIRECTORATE GENERAL OF HEALTH SERVICES DEPARTMENT OF HEALTH NIRMAN BHAWAN, NEW DELHI - 110 011.

 To                                 Dated the 10th July 1996. 

 

 M/s International Pharmaceuticals  
 2nd Floor, Chunabhai Centre  
 Ashram Road  
 Ahmedabad - 380049

 

 Subject : NLEP - Award of contract for procurement of additional quantities of anti-leprosy drugs. 

 

 Sir, 

 

I am directed to refer to Directorate's award of contract for procurement of additional quantities of anti-leprosy drugs dated 7th May, 1996 and to state that the above award of anti-leprosy drugs placed on your firm of the value Rs.13.722 crores stands cancelled as adequate stock of such drugs are available with us. In spite of this cancellation any step taken to supply the drugs will be at your risk.

Yours faithfully,

(S.K. GADI) UNDER SECRETARY TO GOVERNMENT OF INDIA

I would not like to dwell much on the merits of the matter as that will be in the domain of the Arbitrator. However, before parting with, I must express that the intention of the Parliament in incorporating or in legislating the Arbitration and Conciliation Act, 1996 was to have the disputes between the parties adjudicated by arbitral forum expeditiously. The legislative intention is manifest in view of the enactment of Chapter-4 and Section 16 under the Arbitration and Conciliation Act, 1996.Section 16 is as follows -

16. Competent of arbitral tribunal to tulle on its jurisdiction. (1) The Arbitral tribunal may rule on its own jurisdiction, including ruling on any objections with respect to the existence or validity of the arbitration agreement, and for that purpose,-

(a) an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract; and

(b) a decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause.

(2) A plea that the arbitral tribunal does not have jurisdiction shall be raised not later than the submission of the statement of the statement of defense; however, a party shall not be precluded from raising such a plea merely because that he has appointed, or participated in the appointment of, an arbitrator.

(3) A plea that the arbitral tribunal is exceeding the scope of its authority shall be raised as soon as the matter alleged to be beyond the scope of its authority is raised during the arbitral proceedings.

(4) The arbitral tribunal may, in either of the cases referred to in sub-section (2) or sub-section (3), admit a later plea if it considers the delay justified.

(5) The arbitral tribunal shall decide on a plea referred to in sub-section (2) or sub-section (3) and, where the arbitral tribunal takes a decision rejecting the plea, continue with the arbitral proceedings and make an arbitral award.

(6) A party aggrieved by such an arbitral award may make an application for setting aside such an arbitral award in accordance with section 34.

Therefore, even if the respondent disputes the jurisdiction of the arbitration clause on any ground, they will have an opportunity to plead so before the Arbitrator.

8. Having agreed to place order for supply of drugs on the same terms and conditions as was agreed to on 29.3.1995 the least respondent could have done was to refer the disputes for arbitration in terms of the arbitration clause in the agreement so as to put an end to the litigation. I am of the considered opinion that the disputes have arisen between the parties to which subsisting and valid arbitration agreement applied and parties in terms of that agreement should refer the disputes for adjudication to the Arbitrator/Arbitrators.

9. Nothing said earlier would be construed as an expression of opinion on the merits of the case.

10. I direct parties to appoint their Arbitrators/Arbitrator in terms of the arbitration clause within a period of four weeks from the date of order so as to enable them to take further recourse for adjudication of the matter in terms of the arbitration agreement.

11. Petition is allowed accordingly.