Arbitration In IndiaUncategorizedArbitral Proceedings conducted by Facilitation Council will still be governed by the A&C Act

The Jharkhand High Court, in Union of India v. Ekta Telecommunications Systems, [LPA No. 644 of 2022, decided on 16.08.2023] held that though the MSMED Act would have an overriding effect over the A&C Act, the procedural aspects of the arbitral proceedings conducted by Facilitation Council would be governed by the A&C Act.

FACTS

In 2008, the Railway Department, represented through Union of India (hereinafter referred to as the “Appellant”) published a tender for the supply of battery backup online UPS with isolated transformer (hereinafter referred to as the “goods”). The Respondent was selected to supply 304 units of the goods, wherein, the Respondent failed to install 22 units and further, deficiency of services was alleged on the part of the Respondent.

The Appellant invoked the Arbitration Clause to resolve the disputes between the parties. The Respondent approached the Facilitation Council, Jharkhand (hereinafter referred to as the “Facilitation Council”) vide Case No. JHSEFC-07/11 under the Micro Small and Medium Enterprises Development Act, 2006 (hereinafter referred to as the “MSMED Act”) claiming an amount of Rs. 39,34,112/- (Rupees Thirty-Nine Lakhs Thirty-Four Thousand One Hundred and Twelve Only) towards delayed payment, including interest. Additionally, an amount of Rs. 8,83,861/- (Rupees Eight Lakhs Eighty Three Thousand Eight Hundred Sixty-One Only) towards non-payment of 22 units of goods.

The Facilitation Council passed an Arbitral Award on 18.05.2012 (hereinafter referred to as the “Arbitral Award”) entitling the Respondent to a claim of Rs. 8,83,861/- (Rupees Eight Lakhs Eighty-Three Thousand Eight Hundred Sixty-One Only) along with compound interest on delayed payment at three times the bank rate as per the provisions of the MSMED Act.

After the expiry of the limitation period to challenge the Arbitral Award, on 07.11.2012, the Appellant filed a writ petition under Article 226 of the Constitution of India, 1949 vide WPC No. 6876/2012 alleging violation of principles of natural justice before the present Court. The writ petition was dismissed vide order dated 29.04.2013 on the ground that the Appellant failed to establish that an opportunity of being heard was not extended by the Facilitation Council.

The Appellant further preferred a Letter Patents Appeal vide LPA No. 200/2013 against the order dated 29.04.2013, which was also dismissed on 25.03.2014, with liberty to conduct further proceedings in accordance with Section 34 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as the “A&C Act”) read with Section 19 of MSMED Act.

The Appellant further filed an application under Section 34 of the A&C Act before the Sub-Judge I, Ranchi vide Misc. Case No. 11 of 2014 for setting aside the Arbitral Award passed by the Facilitation Council. This application was transferred to Commercial Court, Ranchi and was registered as Commercial Revocation (Arbitration) Case No. 04/2019 (hereinafter referred to as the “Application under Section 34 of A&C Act”).

The objection on limitation raised by Respondent was dismissed by the Commercial Court vide order dated 25.07.2015.  The Respondent filed a writ petition before this Court vide WPC No. 5988 of 2015 against the order dated 25.07.2015; which was dismissed vide order dated 06.12.2018. The Respondent further preferred LPA vide L.P.A. No. 124 of 2019 against the order dated 06.12.2018, which was allowed, and hence, the Application under Section 34 of the A&C Act was dismissed on the ground of limitation vide order dated 31.01.2020.

The Appellant further filed another writ petition vide WPC no. 2638/2020 challenging the order dated 31.01.2020. Further, an interim application vide IA No. 8887 of 2022 was filed challenging the Arbitral Award on the ground that it was passed by a panel of 9 Arbitrators, which is contrary to Section 21 of the MSMED Act. The writ petition along with interim applications were dismissed vide order dated 30.11.2022 (hereinafter referred to as the “Impugned Order”). Hence, the Appellant has filed the present LPA, challenging the impugned order.

ISSUES BEFORE THE SUPREME COURT

1. Whether provisions of Section 16 of the A&C Act are applicable to the arbitral proceedings before the Facilitation Council constituted under the MSMED Act?

2. Whether the Arbitral Award was in conflict with the provision of Section 21 of the MSMED Act?

CONTENTIONS OF THE PARTIES

The Appellant contended that the Arbitral Award was a nullity, as it was in conflict with Section 21 of the MSMED Act, as the Arbitral Tribunal shall consist of minimum 3 Arbitrators and maximum 5 Arbitrators.

It was submitted that the Arbitral Award as well as the order dated 31.01.2020 were challenged under the writ petition.

It was argued that provision of Section 16 of the A&C Act does not have applicability on the arbitral proceedings of the Facilitation Council, as MSMED Act being a special act, overrides A&C Act.

The Respondent contended that the Arbitral Tribunal including Facilitation Council under Section 16 of the A&C Act has the competence to decide its jurisdiction. Furthermore, the Facilitation Council was commenced as per the provisions of Section 7(1) read with Section 16 of the A&C Act.

It was further argued that as the Appellant had participated in the arbitral proceedings deemed to waive off its right to challenge the Arbitral Tribunal and hence, the same cannot be contested even under the Application filed under Section 34 of A&C Act.

DECISION AND FINDINGS

The Jharkhand High Court relied on Indian Farmers Fertilizer Cooperative Limited versus Bhadra Projects (2018) 2 SCC 534 and Gujarat State Civil Supplies Corporation Limited v. Mahakali Foods Private Limited & Anr, (2023) 6 SCC 401, and observed that irrespective of the specific law, as the MSMED Act has been enacted after the A&C Act, the provisions of the MSMED Act would prevail over the provisions of the A&C Act. However, Section 16 of the A&C Act would have applicability on the arbitral proceedings conducted by the Facilitation Council.

The High Court further relied upon Narayan Prasad Lohia v. Nikunj Kumar Lohia and others (2002) 3 SCC 572, and held that Section 16 of the A&C Act is derogable in nature and the objection is deemed to be waived while challenging the Arbitral Award under Section 34 of the A&C Act. It was further observed that the limitation period was over, even when the WPC No. 6876/2012 was filed by the Appellant.

The High Court held that the writ petition filed by the Appellant did not challenge the Arbitral Award as challenged under Section 34 of the A&C Act and the same was barred by limitation. Moreover, mere liberty to file an application under Section 34 of the A&C Act, does not condone the delay caused in filing of the application.

It was further observed that the arbitral proceedings are strictly to be conditioned in time bound manner and the “principle of unbreakability” of the limitation period would apply in case judicial interference was required. Thus, the appeal was dismissed.

AMLEGALS REMARKS

The case highlights an unclear interaction between the MSMED Act and the A&C Act, specifically regarding the applicability of Section 16 of the A&C Act. The Facilitation Council has the competence to decide its jurisdiction. In case, the jurisdiction is not disputed during the arbitral proceedings, it will be considered to be a deemed waiver of the same. Moreover, when the Arbitral Award is not challenged within its limitation period, it attains finality.

Hence, though the MSMED Act would override the A&C Act, the procedural aspects for conducting arbitral proceedings would be governed by A&C Act itself. Moreover, the “principle of unbreakability” of limitation was introduced for the interference of courts in arbitral proceedings. Hence, the High Court has upheld the legislative intent of speedy resolution of disputes of the A&C Act in the present case.

-Team AMLEGALS, assisted by Mr. Atulit Raj (Intern)

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