Law on issues surrounding the overlap of Arbitraton and MSMED Act is still evolving and the Supreme Court is yet to clarify its legal position on many related aspects.
Arbitration as a mode of Alternate Dispute Resolution has been around for a long time now. The jurisprudence around arbitration has been evolving systematically and, with vigour. However, apart from being formally recognised under the Arbitration and Conciliation Act, 1940 and subsequently under the Arbitration and Conciliation Act, 1996 (hereinafter referred to as 'the Arbitration Act'), arbitration has been incorporated as a mode of dispute resolution under the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act).
The MSMED Act was notified in 2006 to address policy issues affecting MSMEs as well as the coverage and investment ceiling of the sector. The MSMED Act seeks to facilitate the development of these enterprises and also enhance their competitiveness. It provides the first-ever legal framework for recognition of the concept of "enterprise" which comprises both manufacturing and service entities.1
The MSMED Act has provisions that favour the supplier / MSME entity, in order to help it sustain itself in situations of non-payment of dues by the buyers. For instance, under this Act, the territorial jurisdiction of the proceedings is the place where the MSME is situated. Further, there is a mandatory provision of pre-deposit of 75% of the amount awarded to the MSME in case the buyer/ non-MSME seeks to challenge it. Further, the condition of pre-deposit is not imposed on the MSME in the event the MSME seeks to challenge an adverse order.
Conflict often 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 could be either a formal arbitration agreement or even an arbitration clause in a Purchase Order placed by the buyer/non-MSME. If one of the parties fall within the definitions of a MSME, then, in case of a dispute, the more convenient option for the MSME entity is to initiate proceedings under the MSMED Act.
Interestingly, this is different from the cases where the distinction is clearly between availing a statutory remedy under an independent special Act or, invoking the arbitration clause. For instance, in a dispute between the consumer and a builder, the Builder Buyer Agreement often has an arbitration clause. However the courts, while deciding on the maintainability of an application under S.8 of the Arbitration Act in such cases, have held that the Consumer Protection Act, 1986 prevails over the arbitration clause in case a dispute arises with respect to the subjects covered under the Consumer Protection Act. Thus, in Aftab Singh and Others vs. Emaar MGF Land Limited and Another the National Consumer Disputes Redressal Commission (NCDRC) held that an arbitration clause in agreements between builders and buyers cannot circumscribe the jurisdiction of the consumer forum, notwithstanding the amendments made to Section 8 of the Arbitration Act.2 The Court recognised the core objective of the Consumer Protection Act as being one to protect the interests of the consumer and held that disputes governed by statutory enactments established to serve a particular public policy are not arbitrable.
However, the issues of conflict between the provisions of the MSMED Act and the Arbitration Act are different from the abovementioned example where the dispute either falls within the jurisdiction of the Consumer Protection Act or the Arbitration Act. The procedure under the two statutes is distinct and there is no overlapping once the matter proceeds under either of the two Acts. Interestingly, the MSMED Act itself provides for arbitration proceedings in terms of the Arbitration Act. This is a peculiar situation where a special statute has been enacted by incorporating certain procedural aspects of another special statute, yet, it also seeks to override that very Act, the provisions of which it is relying upon.3
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. Section 18 (2) of the Act provides for an opportunity of conciliation which the Council may conduct itself or by referring it to any institution providing alternate dispute resolution.
However, the MSMED Act has not provided for a separate method of conducting conciliation and under Section 18(2), provisions of Sections 65 to 81 of the Arbitration Act are to apply to the dispute "as if the conciliation was initiated under Part III of that Act". Further under Section 18(3) of the MSMED Act, when the dispute fails to settle through conciliation, then the Council shall either take up the dispute itself for arbitration or refer it to an institution for such arbitration and "..the provisions of the Arbitration and Conciliation Act,1996 shall then apply to the dispute as if the arbitration was in pursuance of an arbitration agreement referred to in sub-section (1) of section 7 of that Act...".
Thus, Section 18 of the MSMED Act introduces an interplay between the MSMED and the Arbitration Acts. However, since this section starts with a non obstante clause, it also gives rise to conflicts between the applicability of the two Acts.
There is a mingling of the two Acts where one takes over from the other after a point. However conflict arises because despite relying on the procedural provisions of the Arbitration Act, the MSMED Act still seeks to override the Arbitration Act by providing for certain special incentives to the MSMEs alone. As already mentioned above, the requirement of a pre-deposit of 75% is only on the buyer/ non-MSME. This is an onerous condition and is one of the biggest factors that discourage the buyer/ non-MSME from submitting to the jurisdiction of the MSMED Act. The next factor is the territorial jurisdiction, that renders the seat of arbitration, as envisaged in the arbitration clause, as inoperable and useless because Section 18(4) of the MSMED Act lays that the jurisdiction will be decided on the basis of where the supplier/MSME is located. Therefore, a lot of legal tussles between the MSME and the non-MSME entities are premised on whether the dispute should be decided under the Arbitration Act or under the MSMED Act. Proceeding under the Arbitration Act is beneficial to the buyer/non-MSME as the matter then proceeds purely under the Arbitration Act without conferring any special benefits and rights to the MSME entity. A lot of disputes around this issue have been dealt with and resolved definitively by the courts, however there are still a lot of areas where there is a constant tussle between the provisions and applicability of the two Acts.
Maintainability of an arbitration petition initiated by a buyer/non-MSME against a MSME which approaches the Facilitation Council after the buyer invokes the arbitration clause.
As already mentioned, Section 18 of the MSMED Act provides for reference of a dispute to the Facilitation Council.
"18. Reference to Micro and Small Enterprises Facilitation Council.—
(1) Notwithstanding anything contained in any other law for the time being in force, any party to a dispute may, with regard to any amount due under section 17, make a reference to the Micro and Small Enterprises Facilitation Council........"
This section has been a subject matter of dispute in various cases where a buyer/ non-MSME party involved in a dispute with a supplier/ MSME filed proceedings in court challenging the applicability of the said section to their dispute in light of the arbitration agreement entered between the parties.
This issue has been dealt with by various High Courts. Though it has been ultimately agreed upon that the MSMED Act is a special statute which would override any agreement between the parties, the following cases leading up to the current legal trend must be considered to understand that there is still certain ambiguity surrounding this aspect:
M/s Steel Authority of India and Anr. v. MSEFC4, was the first significant case on the issue of maintainability of an arbitration clause against the MSMED Act. The Court held that by virtue of the non-obstante clause in Section 18 of the MSMED Act, it cannot be said that an independent arbitration agreement between the parties will cease to have effect. The Court opined that the overriding clause only overrides things inconsistent therewith and there is no inconsistency between an arbitration conducted by the Council under Section 18 and arbitration conducted under an individual clause since both are governed by the provision of the Arbitration Act. It was further held that that since the parties had entered into an independent arbitration agreement, the Council could not proceed with the arbitration itself. However, subsequently, there was a change in the judicial trend and effects of this judgment weakened.
In Bharat Heavy Electricals Limited v State of UP5, the Allahabad High Court diverged from the Bombay High Court in Steel Authority of India by holding that: "...The proceedings had been entertained by the Council in pursuance of the provisions of the Act. Though there may be an arbitration agreement between the parties, the provisions of Section 18(4) specifically contain a non-obstante clause empowering the Facilitation Council to act as an Arbitrator. Moreover, Section 24 of the Act states that Sections 15 to 23 shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force..."
The principle set out in Steel Authority of India was further diluted by the Punjab and Haryana High Court in The Chief Administrator Officer, COFMOW v MSEFC of Haryana 6, wherein it was contended that the pre-existing independent arbitration agreement between the parties specifically provided for a procedure to appoint the arbitrator and that this should be upheld. However, the court eventually held that: "...It must be taken only as an additional method of appointment of an arbitrator and cannot exclude the application of the provisions of this Act... A contract that provides for appointment of an arbitrator must be seen as a contract as recognized by law and that provision will stand eclipsed by the non-obstante clause that Section 18 provides for..."
In the Principal Chief Engineer v. M/s Manibhai and Brothers (Sleepers)7 before the Gujarat HC, the Court rejected the view of the Bombay High Court in M/s. Steel Authority of India Ltd. and held that the provisions of the MSMED Act shall prevail over the Arbitration clause.
Precedents set by the Delhi High Court
In Bharat Heavy Electricals Limited v The Micro and Small Enterprises Facilitation Centre8, the Delhi High Court held that it was "respectfully, unable to concur with the view of the Bombay High Court in M/s Steel Authority of India v. The Micro, Small Enterprise Facilitation Council (supra)". The Delhi High Court followed its earlier decision in Ge T&D India Limited v Reliable Engineering Projects9, wherein it was categorically held that the MSMED Act overrides the Arbitration Act to the extent that it provides for a special forum for the adjudication of disputes involving a supplier registered thereunder. The court stated that Section 18(3) of the MSME Act contemplates only institutional arbitration and not ad hoc arbitration. Accordingly, the Bombay High Court's view in Steel Authority of India, that independent arbitration agreements would not cease to exist despite providing for ad hoc arbitration, was held to be unsustainable. This case infact succinctly carves out a distinction between institutional or statutory arbitration on one hand versus an ad hoc arbitration initiated independently in terms of an agreement between the parties.
In Mangalore Refinery & Petrochemicals Ltd v Micro and Small Enterprises Facilitation Council 10, the Delhi High Court relied on Bharat Heavy Electricals Limited v. The Micro and Small Enterprises Facilitation Centre to hold as follows: "..Regarding the jurisdiction of the Council to refer the disputes to arbitration that are not covered under the arbitration agreement - the same is no longer res integra. This Court has, in a number of decisions now, held that the reference under Section 18 of the MSME Act is a statutory reference and is dehors any arbitration agreement between the parties.." (Emphasis supplied)
The Supreme Court clarified the law on this aspect in Principal Chief Engineer v. Manibhai And Bros (Sleeper)11 wherein it held that the MSME can invoke the provisions of the MSME Act and refer a dispute to the Facilitation Council, in spite of the existence of an arbitration clause. The Supreme Court upheld the Gujarat High Court's judgment on the interpretation of Section 18 of the MSMED Act. The High Court had held that since the Act is a special legislation and has an overriding effect, the parties governed by it are bound to follow the mechanism provided under Section 18 of the Act. Similar view has been taken by the High Courts in various other cases.
In yet another case where the facts varied from the usual trend of the MSME entity invoking the MSMED Act, the Delhi High Court in AVR Enterprises v. Union of India12, decided a matter wherein the MSME itself invoked the arbitration clause (instead of making a reference under Section 18 of the MSMED Act) and later sought to rely on certain beneficial provisions of the MSMED Act. It was noted that there was no reference made to Micro and Small Enterprises Facilitation Council by the petitioner, no proceedings were conducted by the Council under Section 18 of the MSMED Act, no reference was made by the Council to any Institution or Centre for conducting conciliation. The Council also did not take up any dispute for arbitration nor did it referring any dispute to any Institution or Centre providing alternate dispute resolution services for such arbitration. Arbitration in the this matter was not an Institutional Arbitration as contemplated under section 18 of the MSMED Act but was conducted under the Arbitration Act by an Arbitrator privately appointed by the Respondent. Therefore, the court held that even though the petitioner (MSME entity) may be covered under the MSMED Act, as it did not invoke its claim under Section 18 of the MSMED Act or seek reference thereunder, there was no question of it taking advantage of the benefit provided under the MSMED Act.
However, it is pertinent to note that most cases decided by the various courts are those where the Supplier/ MSME had initiated proceedings under Section 18 of the MSMED Act before the Buyer/non-MSME invoked arbitration under the agreement. The Bombay High Court in Porwal Sales v. Flame Control Industries13, dealt with a situation where the Buyer / non MSME Respondent invoked arbitration under the agreement between the parties first, i.e., where there was no reference of a dispute to the Council. The Court dealt with a situation where the issue before it was whether the power of the court to appoint an arbitral tribunal under Section 11 of the Arbitration Act was ousted even in a case where the MSME entity had not invoked the Council's jurisdiction under section 18 of the MSME Act.
In, Porwal Sales, the Buyer, filed an application under Section 11 of the Arbitration Act for appointment of an arbitral tribunal under an arbitration agreement between the parties. One of the objections raised by the Supplier/MSME was that since it was a supplier within the meaning of the MSME Act, and in light of section 18(4), the jurisdiction of the court to entertain an application under section 11 of the Arbitration Act would be ousted. The Court rejected the contentions of Supplier in question. It held that, if the intention of section 18(4) of the MSME Act was to create a legal bar on a party who has a contract with a Supplier under the MSME Act from invoking section 11 of the Arbitration Act, then the legislature would have expressly provided that the MSME Act overrides any arbitration agreement entered into with a Supplier under the MSME Act. It also observed that section 18(4) would come into play only in cases where a reference was made to the Council under section 18(1). The Court considered the use of the word "may" in section 18(1) and held that in light of the language used, it cannot be said to be mandatory for a Buyer to refer its dispute to the Council under section 18. Further, held, that since the jurisdiction of the Council had not yet been invoked, there was nothing barring the court from appointing an arbitrator in terms of the arbitration agreement between the parties. In previous cases however, Suppliers had already referred the dispute to the Council. The Court also held that Section 18(1) is attracted only when the dispute is with regard to an amount due under Section 17 of the MSMED Act which provides that a reference to the Council may be made with respect to any dispute regarding amount due to a Supplier for goods or services provided to a Buyer. The Court noted that in the present case, there were admittedly no claims of non-payment being raised by the Supplier against the Buyer.
The decision of the Bombay High Court in Porwal Sales suggests that in case of a dispute between parties where one of the parties is a MSME and it invokes the jurisdiction of the Council first, then the provisions of the MSME Act would be applicable to the dispute. But if the Buyer/non-MSME invokes the arbitration clause in terms of the contract between the parties, the provisions of the MSME Act may not be applicable to such arbitration proceedings. This essentially implies that if the Buyer/non MSME wants to avoid being subjected to the MSMED Act, its best chance is to invoke the arbitration clause first, before the MSME invokes the jurisdiction of the Facilitation Council.
The Bombay High Court in Porwal Sales also noted that the fact that Section 18(1) of the MSME Act does not use mandatory language, it allows Buyers to invoke the arbitration agreement even in cases involving payment disputes, as long as a reference has not already been made to the Council.
Latest decision by the Bombay High Court
Recently, the Bombay High Court in the matter of Microvision Technologies Private Limited v. Union of India14, inter alia, held that an arbitration agreement between the parties shall not cease to have effect irrespective of the powers of Facilitation Council under Section 18(3) of the MSMED Act to act as an arbitrator or refer the dispute to arbitration. The High Court relied on the judgment of the Bombay High Court in Steel Authority of India Ltd.15, wherein it was inter alia held that merely because Section 18 provides for a forum of arbitration, an independent arbitration agreement entered into between the parties will not cease to have effect. In Steel Authority, the Bombay High Court had barred the Facilitation Council to proceed under the provisions of Section 18(3) of the MSME Act in view of independent arbitration agreement between the parties. The High Court also distinguished the judgements in the case of (i) Paper and Board Converters vs. U.P. State Micro & Small Enterprises Facilitation Council, Kanpur 2014 (5) AWC 4844, passed by the Allahabad High Court and (ii) Principal Chief Engineer vs. Manibhai & Brothers First Appeal No. 637 of 2016 decided on June 20, 2016, passed by the Gujarat High Court. The High Court accordingly held that while the Facilitation Council may still have jurisdiction to take up a dispute for arbitration or refer it to an institution or a centre for arbitration notwithstanding anything contained in an arbitration agreement between the parties, the arbitration agreement shall continue to be valid even in the face of the Facilitation Council's powers under Section 18 of the MSMED Act.
Therefore, though it is clear that the MSMED Act, being a special Act will override the Arbitration Act in case of an inconsistency. However, the arbitration clause, in such situations, has not been categorically declared to be redundant. Law on the issues surrounding the overlapping of the two Acts is still evolving and the Supreme Court is yet to clarify the legal position on many related aspects.
2. NCDRC - Consumer Case No. 701 of 2015. Upheld by the Supreme Court in M/s Emaar MGF Land Limited v Aftab Singh (Review Petition (C) Nos 2629-2630 of 2018 in Civil Appeal Nos 23512-23513 of 2017)
3. There are conflicting views on whether or not the Arbitration & Conciliation Act is a special statute. This is not being dwelt into in detail in the present discussion
4. Bombay HC WP 2145/2010 OR AIR 2012 Bom 178
5. (2014 (4) ALJ 52
6. CWP 277/2015 High Court of Punjab & Haryana
7. AIR 2016 Guj 151
8. 2017 SCC Online Del 10604
9. Delhi High Court, (OMP (Comm) 76/2016)
10. 2019 SCC Online DEL 6860
11. Order dated July 5, 2017 in Diary No(s).16845/2017
12. Delhi High Court , CM(M) 769/2018, Judgment dated 8th May 2020
13. Judgment dated August 14, 2019, Bombay HC, Arbitration Petition No. 77 Of 2017
14. Commercial Arbitration Petition (L) NO. 855 OF 2018, Order dated 15.05.2020, Bombay High Court
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