Arbitration In IndiaMicro Small Enterprise Facilitation Council can Arbitrate the Disputes in spite of Existence of an Independent Arbitration Agreement

The Hon’ble Supreme Court in the case of Gujarat State Civil Supplies Corporation Ltd. v. Mahakali Foods Pvt. Ltd [(Civil Appeal No. 8008/2022) decided on 31.10.2022] held that the provisions of the Micro Small and Medium Enterprises Development Act, 2009 would override the provisions of the Arbitration and Conciliation Act, 1996 and the Micro Small Enterprise Facilitation Council can arbitrate the dispute even though a valid Independent Arbitration Agreement exists between the parties.

FACTS

The seven appeals from various High Courts having differing opinions on the application of provisions of the Micro Small and Medium Enterprises Development Act, 2009 (hereinafter referred to as the “MSMED Act”)  were clubbed and heard together. The High Courts had different opinions regarding the involvement of the Facilitation Council in a dispute between the buyers and sellers and if it had an overriding effect on an Independent Arbitration Agreement between the parties and the provisions of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as the “A&C Act”).

Due to the common questions of law involved, the appeals were clubbed and heard together. The Appeals were preferred by either the Buyers or the Sellers, and hence, the parties shall be addressed as Buyers and Sellers instead of Appellants and Respondents.

ISSUES

• Whether the provisions of Chapter V of the MSMED Act have an overriding effect on the provisions of the A&C Act?
• Whether any party to a dispute regarding the amount due under Section 17 of the MSMED Act would be precluded from making a reference to the Micro and Small Enterprises Facilitation Council under Section 18(1) of the MSMED Act if an independent Arbitration Agreement existed between as under Section 7 of the A&C Act?
• Whether the Micro and Small Enterprises Facilitation Council, itself can take up the dispute for Arbitration and act as an Arbitrator, in accordance with the bar contained in Section 80 of the A&C Act, when the conciliation proceedings were conducted by the Council under Section 18(2) of the MSMED Act?

CONTENTIONS  OF THE PARTIES

The Buyers contended that the non-obstante portion under Section 18 of the MSMED Act does not expressly include agreement as contrary to Section 16 of the MSMED Act, and hence, Section 18 of the MSMED Act cannot override the Arbitration Agreement between the parties.

The Buyers submitted that Section 18 of the MSMED Act uses the word “may”, which indicates that the intention of the legislation is not to override the A&C Act. The Buyers argued that Section 18(1) of the MSMED Act only provides an option and does not compel the party to refer the dispute to Facilitation Council and Section 18(4) confers jurisdiction to the Council to act as Conciliator.

The Buyers also contended that it was a settled principle of law, that omission of the statute cannot be supplied by construction by the Court. It was further argued that Section 18 of the MSMED Act is a mere procedural/mechanical provision regarding Facilitation Council and hence, the remedy is only available in absence of an Arbitration Agreement between the parties. It was also submitted that Section 15,16,17 were substantive in nature whereas, Section 18 of the MSMED Act was procedural in nature providing an option to opt for Facilitation Council.

The Buyers further submitted that the commercial contracts should be construed with care because it not only affects the party autonomy but affects the economy as a whole and the parties have the autonomy to decide the procedural as well as substantive law to be followed in the Arbitration Agreement.  Further, the courts can only interpret an Agreement and not rewrite or create a new one.  A party cannot take advantage of one part with rejecting the rest and hence, the doctrine of election is inbuilt in the concept of approbate and reprobate.

It was further argued by the Buyers that the MSMED Act and A&C Act are special laws and operate in different fields, so if there is no Arbitration Agreement between the parties then the recourse is under Section 18 of the MSMED Act, but when an Arbitration Agreement exists, then the disputes will be resolved in accordance to A&C Act. Moreover, a Facilitation Council cannot act as a Conciliator as well as an Arbitrator for the same dispute due to the bar contained in Section 80 of the A&C Act.

Lastly, it was submitted that Section 18 of the MSMED Act does not override the Arbitration Agreement and the dispute shall be referred under the A&C Act.

The Sellers contended that the object of Section 18 of the MSMED Act is to create a cost-effective and expeditious dispute resolution mechanism, and hence, is not subject to an Agreement between the parties. It gives right to the parties to refer the disputes to the Facilitation Council, even when a valid Arbitration Agreement exists between the parties.

It was further submitted that MSMED Act being special legislation, would override the A&C Act because Section 18(3) of the MSMED Act deems the reference to statutory authority as an Arbitration Agreement under Section 7 of the A&C Act. Moreover, Section 18 of the MSMED Act provides a statutory right to approach the Facilitation Council, and hence, it would supersede an Arbitration Agreement.

The Sellers relied on the case of Secur Industries Ltd. v. Ram Lal & Ors. [ (2005) 2 SCC 638] and contended that Section 18(3) of the MSMED Act is consistent with Section 2(4) of the A&C Act which states that in case the Conciliation is not successful the parties can proceed for Arbitration as under Section 7 of the A&C Act. Thus, once the mechanism under Section 18 of the MSMED Act has begun, it would override any Arbitration Agreement. Furthermore, MSMED Act being a special statute shall prevail over A&C Act as it is a general statute.

The MSE Facilitation Council have contended in support of the Suppliers and submitted that Section 15 to 19 of the MSMED Act are dependent on each other, hence, when read together, it would override the A&C Act. It was also argued that Section 18 of the MSMED Act was a substantive law and not a procedural law. Moreover, a beneficial statute shall be given liberal interpretation, if two constructions are available, the interpretation which is in consonance to the Act and more beneficial to the target audience shall be upheld.

DECISION AND FINDINGS

The Supreme Court observed the legislative history, objectives, and provisions of the MSMED Act and A&C Act. The Court opined that Special statute would prevail over general statute and examined that Section 15 to 23 of the MSMED Act regarding the delayed payments and Section 18 of the MSMED Act starts with a non-obstante clause. Moreover, Section 24 of the MSMED Act provides that the provisions of Section 15 to Section 23 would prevail over any law.

The Court further explained that the A&C Act is general legislation that governs the Arbitration Agreement between the parties. The Court relied upon the case of Silpi Industries etc. v. Kerala State Transport Corporation and Anr. [2021 SCC Online SC 439] and held that MSMED Act is a special legislation that protects statutory mechanism for the payment of interest of the delayed payments and hence, it would override the provisions of the A&C Act

The Court observed that the bar under Section 80 of the A&C Act for the Conciliator to act as an Arbitrator is superseded by the provisions of the MSMED Act, while reading Section 18 and Section 24 of the MSMED Act together. The Court further substantiated that when the Facilitation Council acts as an Arbitrator, it would have all powers to decide disputes pursuant to Section 7 of the A&C Act.

The Court also held that the party who was not a “supplier” as per Section 2(n) of the MSMED Act on the date of entering into a contract, cannot seek the remedy under the MSMED Act. If the registration is done subsequently, the remedy cannot be invoked subsequently and the Facilitation Council has the jurisdiction to address such issue.

Thus, the Court held that MSMED Act being special legislation would have an overriding effect over the A&C Act. The dispute of an amount due under Section 17 of the MSMED Act, would not be excluded from making a reference to the Facilitation Council under Section 18 of the MSMED Act because of the existence of an independent Arbitration Agreement. The Facilitation Council would have the power to act as an Arbitrator and the Arbitration proceedings would be governed by the A&C Act.

AMLEGALS REMARKS

The Supreme Court has upheld that a specific law would prevail over general law and MSMED Act being specific legislation, would override the provisions of the A&C Act. The parties falling under the MSMED Act have to compulsorily seek the remedy from the Facilitation Council even when a valid Arbitration Agreement exists.

The MSMED Act provides that the Facilitation Council in case fails to conciliate the dispute between the parties can arbitrate the dispute in accordance to the provisions of the A&C Act. This may negate the idea of party autonomy which is engraved in the concept of Arbitration. Moreover, the parties would be dissatisfied by the Arbitration would result in a multiplicity of cases.

Thus, though the objective of the MSMED Act is for the speedy redressal of disputes regarding delayed payments, but if the parties are not satisfied with the redressal, the objective becomes infructuous. The MSMED Act enables speedy resolution of disputes regarding delayed payments and hence the Micro Small and Medium Enterprises have the advantage to refer the disputes to the Facilitation Council for Arbitration even when an independent Arbitration Agreement exists between the parties.

– Team AMLEGALS assisted by Mr. Niloy Ghosh (Intern)