In the era of globalisation, several commercial transactions are often settled through arbitration giving parties autonomy over the dispute resolution process. Arbitration has been formally recognised under the Arbitration and Conciliation Act, 1996 (Arbitration Act) and subsequently, it has also been recognised and incorporated under the Micro, Small and Medium Enterprises Development Act 2006 (MSME Act).
The conflict arises between the applicability of provisions of the MSMED Act and the Arbitration Act because the contesting parties invariably have an agreement that has an arbitration clause. This is a peculiar situation where a special statute has been enacted by incorporating certain aspects of another statute. Whereas, the conflict arrises where the former also seeks to override the very Act and the provisions of which it is relies upon.
Section 18(1) of the MSMED Act provides that in case of a default in payment, either of the parties may make a reference to the Micro and Small Enterprise Facilitation Council (Council). Further, the council may itself could take up the dispute for conciliation or arbitration and act as an conciliator or arbitrator, under sub-section (2) and sub-section (3), respectively.
It is pertinent to note that the above provision starts with a non-obstante clause. Thus, resulting in the conflict between the two Acts. This conflict in the position of law has been long drawn. Various Indian High Courts had adopted divergent views which further led to the contested issue of maintainability of an arbitration clause as against the MSMED Act.
Whereas, the Hon'ble Supreme Court had recently dealt with what appears to be a burning question of law in M/s. Silpi Industries, etc. v. Kerala State Road Transport Corporation[1], where the Hon'ble Court opined that the MSME Act will have an over riding effect. Further, in the case of Gujarat State Civil Supplies Corporation Limited V Mahakali Foods Private Limited[2], the Hon'ble Court dealt with situations where there is an arbitration agreement in the agreement between an MSME entity and a non-MSME entity for supply of goods and/or services. Where the Hon'ble Court Concluded as follows:
Chapter-V of the MSMED Act, 2006 would override the provisions of the Arbitration Act, 1996.
No party to a dispute with regard to any amount due under Section 17 of the MSMED Act, 2006 would be precluded from making a reference to the Micro and Small Enterprises Facilitation Council, though an independent arbitration agreement exists between the parties.
The Facilitation Council, which had initiated the Conciliation proceedings under Section 18(2) of the MSMED Act, 2006 would be entitled to act as an arbitrator despite the bar contained in Section 80 of the Arbitration Act.
The proceedings before the Facilitation Council/institute/centre acting as an arbitrator/arbitration tribunal under Section 18(3) of MSMED Act, 2006 would be governed by the Arbitration Act, 1996.
The Facilitation Council/institute/centre acting as an arbitral tribunal by virtue of Section 18(3) of the MSMED Act, 2006 would be competent to rule on its own jurisdiction as also the other issues in view of Section 16 of the Arbitration Act, 1996.
A party who was not the ‘supplier’ as per the definition contained in Section 2(n) of the MSMED Act, 2006 on the date of entering into contract cannot seek any benefit as the ‘supplier’ under the MSMED Act, 2006. If any registration is obtained subsequently the same would have an effect prospectively and would apply to the supply of goods and rendering services subsequent to the registration.
Our Analysis
The above judgments of the Hon'ble Supreme Court in Silpi Industries and Gujarat State Civil Supplies Corporation Limited have settled the position the conflict between the MSMED Act and Arbitration Act. It is pertinent to Note that the judgments of the Hon'ble Supreme Court covers instances where reference of a dispute to the Council is made before invoking the Arbitration Clause of the Agreement.
However, the legal position in Porwal Sales v. Flame Control Industries[3] shall prevail in the event where an arbitration clause of the agreement has been invoked prior to the reference to the Council, the former shall supersede.
Finally, it appears that the reason underlying section 80 of the Arbitration Act is to avoid even the appearance of bias by prohibiting a conciliator from serving as an arbitrator in the same case. The effect of raising such a standard for the Council, however, remains to be open.
[1] M/s. Silpi Industries, etc. v. Kerala State Road Transport Corporation, (2021) SCC OnLine SC 439 [2] Gujarat State Civil Supplies Corporation Limited V Mahakali Foods Private Limited, (2022 SCC Online SC 1492) [3] Porwal Sales v. Flame Control Industries, 2019 SCC OnLine Bom 1628
Our Experience
Our office had recently represented our Client before the MSME Council, Kanpur for recovery of amount due from the buyer. The parties had entered into an agreement for supply of services. Further, it must be noted that the agreement also contained an independent arbitration clause with the seat of arbitration located at Bengaluru, Karnataka.
The buyer had denied to make payment against some remainder of invoices alleging that there was a deficiency in service. Accordingly, we had issued a notice to the Buyer seeking recovery and later approached the MSME Facilitation Council under Section 18(1) of the MSMED Act. Whereas, the buyer also subsequently issued a notice and raised a counter claim for dues owing the alleged deficiency in service and invoked the arbitration clause of the agreement(s). However, since the Facilitation Council had issued notice for appearance, the buyer had made also made submissions (including their counter claim). The council after considering both oral and written submissions directed the buyer to pay the dues to our Client.
In the above regard, the buyer also approached the Hon'ble High Court of Karnataka vide CMP under sub-section (5) and (6) of Section 11 of the Arbitration Act, seeking the appointment of Arbitrator as per the Arbitration clause of the agreement entered into by the Parties. Accordingly, our office had submitted objections against the CMP filed by the Buyer/Petitioner before the Hon'ble High Court and successfully argued the same.
Apropos to the above, the Hon'ble High Court had dismissed the CMP in light of the overriding effect of the MSMED Act over the Arbitration Act in line of the now settled position laid down by the Hon'ble Supreme Court. The order copy as attached.
The team of Advocates representing the matter before the Hon'ble High Court of Karnataka consisted of Mr. Aditya Vijayaraghavan, Mr. Kiran Kumar and Mr. Kunal Jain (Managing Partner, PKJ & Associates, Delhi) who briefed us on the matter.
Disclaimer:
This material has been prepared for general informational and educational purposes only and is not intended for the purposes of solicitation or to be relied upon as professional or legal advice. Please refer to your advisors for specific advice. Aditya Vijayraghavan & Associates and their employees or their affiliates will not be liable for any loss resulting from the use of any material or information contained herein.
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