Gauhati High Court Allows Writ Despite Arbitration Clause After Finding ESIC's Action In GeM Contract Arbitrary

The Gauhati High Court has recently allowed a writ petition against ESIC authorities over non-payment of dues under a government procurement contract, despite the existence of an arbitration clause, after finding the state authority's conduct arbitrary.

The observation came in a case arising out of a Government e-Marketplace procurement in which an ESIC hospital withheld payment even after issuing an acceptance certificate for medical equipment supplied under the contract.

The court directed the ESIC Model Hospital in Guwahati to release Rs 32.25 lakh to the supplier.

Justice Rajesh Mazumdar noted that the hospital had acknowledged receipt and acceptance of the equipment by issuing a Consignee Receipt and Acceptance Certificate. Even so, the payment due under the contract was not released within the stipulated period.

The court observed, "In such facts and circumstances, this Court has no hesitation in holding that the refusal of the respondent No.3 to make payments is an arbitrary and unreasonable attempt, violating the protection guaranteed by Article 14 of the Constitution of India.There is no impediment to adjudicate the grievance of the petitioner in this writ petition only because of a clause in the General Terms and Condition of the GeM which requires referral of disputes arising out of the contract to arbitration. This Court has noticed that there is no clause in the contract or the GTC which allows withholding of payments beyond 10(ten) days after issuing the CRAC. Therefore, the respondent No.3 remains liable to release the contracted amount to the petitioner forthwith”

The petition was filed by Dhanjit Sarma, proprietor of Arrow Medical Solutions, a firm engaged in manufacturing and supplying medical and dental equipment. The ESIC Model Hospital had floated a tender on the Government e-Marketplace portal for the supply of a C-ARM Fluoroscope X-ray machine. Sarma's firm secured the contract and delivered the equipment on July 16, 2021. The machine was installed on July 20, 2021 by the original equipment manufacturer.

On August 21, 2021, the hospital uploaded a Consignee Receipt and Acceptance Certificate on the GeM portal, confirming that the equipment had been received and accepted. The terms governing GeM procurements required the buyer to release full payment within ten days of the certificate being issued.

Sarma raised an invoice for Rs 32.25 lakh. The payment did not come through. Weeks later, the hospital began raising objections, claiming the machine was defective and asking for it to be replaced.

Sarma moved the High Court seeking a direction to the ESIC authorities to clear the dues.

The ESIC authorities contested the petition. They maintained that the machine supplied was defective and said the dispute ought to be referred to arbitration under the GeM contract. In their view, payment could not be made unless the defects were rectified or the equipment was replaced.

Looking at the sequence of events, the court noted that the equipment had been delivered in July 2021, while the acceptance certificate confirming receipt and approval was issued on August 21, 2021. The hospital raised its first objections only in October.

Justice Mazumdar noted that the contract allowed the buyer to inspect and reject goods within a limited period after delivery. Once the acceptance certificate was issued, however, the contract required payment to be made within ten days. The terms did not permit the buyer to withhold payment after acknowledging acceptance of the equipment.

The court said questions about whether the equipment was defective, whether defects arose after installation, and whether the hospital would be entitled to replacement or other relief involved disputed facts that could require evidence. Those issues could be pursued through remedies available under the contract.

But the obligation to release payment after issuance of the acceptance certificate was clear. Withholding payment in these circumstances amounted to arbitrary action by a state authority.

Allowing the petition, the court directed the ESIC Model Hospital to release Rs 32.25 lakh to Sarma within ten days of receiving a certified copy of the order. It clarified that the authorities remain free to pursue remedies available under the contract if they wish to raise claims regarding the performance or condition of the equipment

For petitioner (Dhanjit Sarma): Advocates B.K. Das, A. Saikia, T.T. Moni, J. Islam, A.S. Ali, N.K. Das and T. Kalita.

For respondents (Union of India & Ors./ESIC): Assistant Solicitor General of India; Advocates S. Chauhan and B. Pushilal for Respondent No.4; and K. Gogoi, Standing Counsel for ESIC (for Respondent No.1).