By Khushi Mishra and Rajeev Dadhich, Students at Institute of Law, Nirma University
Since the enactment of the Micro, Small and Medium Enterprise Development Act, 2006 (The “MSME Act”) a major dispute is between the institutional arbitration under Section 18 of the MSME Act and a sole arbitration as per Arbitration agreement (“AA”) constituted between the parties. As per Section 18 of the MSME Act which is the non- obstante clause, the Micro, Small and Medium Enterprises Facilitation Council shall either itself take up the dispute for arbitration or refer it to any institution to conduct arbitration. However, in the event of AA constituted between the parties, the parties are at the liberty to appoint a sole arbitrator to adjudicate their disputes. Therefore, the debated dispute ongoing is that what will prevail between institutional arbitration under section 18 and sole arbitration as per AA.
However, recently Delhi High Court (“High Court”) in AVR Enterprises v. Union of India addressed the ongoing tussle between MSME Act and the Arbitration and Conciliation Act, 1996 (The “Arbitration Act”). The issue in the case was whether the provisions of the MSME Act will be applicable to parties if the arbitration is conducted through AA.
Against the backdrop, this article provides the ratio of High Court in AVR Enterprises case. Furthering, this article highlights the judicial interpretation set out by M/S Steel Authority of India & Anr. v. MSFEC (“M/S Steel Authority”)on the above issue, followed by the judicial trend on the same. Authors have critically analyzed the benefits of prevailing institutional arbitration under Section 18 of the MSME Act, and have enclosed article by providing concluding remarks.
The Invocation of the Arbitration Clause in AVR Enterprises case
In the present case, dispute arose between the parties regarding supplies made by the petitioner. As a result, respondent imposed costs in the form of liquidated damages. Aggrieved by the action of the respondent, the petitioner invoked arbitration proceedings. Aggrieved by the award, the respondent filed petition under Section 34 of the Arbitration Act before the Trial Court. The trial court rejected the petitioner’s challenge and held that provisions of MSME Act will not be applicable since the arbitration was held under the AA and not under the statutory provision as provided under the MSME Act. Aggrieved by the decision, the petitioner filed an appeal before the High Court.
Judgment of AVR Enterprises case
The Hon’ble High Court held that the petitioner cannot seek any benefit under Section 19 of the MSME Act. The ratio of the court was based upon a fact that the petitioner did not invoke jurisdiction of the MSME Facilitation council under Section 18 of the MSME Act rather appointed a sole arbitrator through an AA. The Court placed its heavy reliance on Bharat Heavy Electricals Limited v The Micro and Small Enterprises Facilitation Centre wherein it held that the benefit of the MSME Act is not available in case of arbitration conducted through AA.
It is key to note that this decision in AVR Enterprises deviates from the usual trend of MSME invoking Arbitration under Section 18 of the MSME Act since in the case at hand MSME itself invoked the arbitration clause and later sought benefits under the MSME Act.
Landmark ruling by Bombay High Court in M/S Steel Authority
M/s Steel Authority of India and Anr. v. MSEFC is the first significant case on the tussle between arbitration conducted through arbitration agreement and arbitration through MSME Council under the MSME Act. Bombay High Court observed that under Section 18(2) of MSME Act, dispute must mandatorily be referred to conciliation as per section 65 to 81 of the Arbitration and Conciliation Act, 2015. In the presence of non- obstante clause, it cannot be affirmed that independent arbitration agreement will cease to have an effect. The non- obstante clause under Section 18 of the MSME Act only overrides things inconsistent therewith. However, High Court held that there is no inconsistency between an arbitration conducted by the Council under Section 18 and arbitration conducted under an arbitration agreement since both are governed by the provision of the Arbitration Act. Over the time, this judgment is weakened by inconsistent judgments given by various High Courts.
Judicial Trend Post Steel Authority of India Judgement case
Subsequently, in Hindustan Wires ltd v. R Suresh, 2013, Bombay High Court upheld its previous decision in M/S Steel Authority and held that the proceedings in lieu of arbitration clause between the parties doesn’t get affected by the MSME Act and therefore parties would continue to be governed by Arbitration Agreement.
Similarly, time over effect Bombay High Court in Microvision Technologies Pvt. Ltd. v. Union of India, 2020 placed its heavy reliance on M/S Steel Authority and held that Arbitration agreement between parties shall not halt its impact regardless of the provisions enacted under the MSME Act.
Judicial Trend contrary to Steel Authority of India
The decision of Bombay High Court in M/S Steel Authority of India has been diluted from time to time in several decisions passed by different High Courts. For instance, Allahabad High Court in Bharat Heavy Electricals Limited v State of UP, 2014 took a contrary stance to Bombay High Court and held that if the conciliation is failed then council necessarily have to act in accordance with Section 18 of MSME Act. Although there may be an independent arbitration agreement between the parties, but the non- obstante clause imbibed under Section 18of MSME Act will have supremacy over the Arbitration Agreement.
The decision of Bombay High Court in M/S Steel Authority was further tampered by Punjab & Haryana High Court in The Chief Administrator Officer, COFMOW v MSEFC, 2015 wherein the court held that although the arbitration agreement between the parties may provide the appointment method of an arbitrator but this method will only be seen as an alternative method to appoint an arbitrator. The court also held that the provision of appointment of an arbitrator in an arbitration agreement will stand eclipsed by the non- obstante clause under Section 18.
Similarly, Gujarat High Court in Principle Chief Engineer v. Manibhai& Brothers Sleepers held that MSME is a special act and according to Section 24 of the Act, provision under Section 15- 23 will have an overriding effect. Therefore, Section 18 of the MSME Act will prevail over Arbitration Act.
In Bharat Heavy Electricals Limited v. The Micro and Small Enterprises Facilitation Centre, the petitioner has filled this proceeding seeking the intervention of the court to quash all the proceeding filed before Micro, Small and Medium Facilitation Council and decide the case according to Arbitration Agreement between the parties. Delhi High Court held that there is inconsistency between arbitration agreement and Section 18(3). Section 18(3) contemplates only institutional arbitration and not the ad hoc arbitration. Therefore, the non- obstante clause under Section 24 of the MSME Act provides an overriding effect to Section 18(3) over the arbitration agreement. Accordingly, the view of Bombay High court in M/s steel was held to be unsustainable. The case becomes significant because it makes a distinction between statutory arbitration and ad hoc arbitration.
Moreover, in Mangalore Refinery & Petrochemicals Ltd v Micro and Small Enterprises Facilitation Council, Delhi High Court placed its heavy reliance on BHEL v. MSEFC and held that Section 18 of MSME Act is a statutory reference and is outside the scope of any arbitration agreement between the parties. The court also held that the jurisdiction of the Council to refer the disputes to arbitration that are not imbibed under the arbitration agreement should not be res integra.
It is a settled position of law that a special act prevails over a general act in the event of an ongoing tussle between them. This is because a special act provides a holistic solution to the issue. However, there remains an ambiguity whether this settled position is automatically applied in the context of arbitration. The Supreme Court attempted to resolve this ambiguity in Consolidated Engineering Enterprises v. The Principal Secretary, 2008 and held that Arbitration Act is special Act and it will prevail over all the general Acts.
Similarly, double Bench of Supreme Court in Gujarat Urja Vikash Nigam Ltd. Vs. Essar Power Limited, 2016 decided the issue whether the application under Section 11(6) of the Arbitration Act 1996 is maintainable in view of statutory provisions under Section 86(1) of Electricity Act, 2003. However, the Court differed from the decision of Consolidated Engineering and held that Section 86(1) is a special provision and will override the general provision in Section 11 of the Arbitration Act.
Thereafter, recently three Judge Bench of Supreme Court in the case of NHAI v. Sayedabad Tea Co. Ltd., 2019 upheld the decision of the Supreme Court in Gujarat Urja Vikash Nigam Ltd case and held that Highways Act is a Special and has an overriding effect on general act such as the Arbitration and Conciliation Act. MSME Act has attained the status of special Act which specifically governs the disputes arising between MSME and any other party.
Therefore, whenever an issue arises between the MSME Act and Arbitration Act then the specific provisions of the MSME act should prevail over the general provision of the Arbitration Act. This contention is based upon the judgment delivered by Calcutta High Court in NPCC Limited v. West Bengal State MSEFC in which the Calcutta High Court by relying on Section 2(4) of Arbitration Act observed that the first part of the Arbitration Act would not apply in the event there is a conflict between it and the provisions of the Act concerned which enforces statutory arbitration, in this case being the MSME Act.
In a nutshell, the judiciary has settled the preliminary position of law that conciliation under Section 18(2) of the MSME Act will be conducted first, and if conciliation failed only then the dispute can be referred to arbitration. However High Courts have often adopted an asymmetric approach with respect to inconsistency between Arbitration conducted through sole arbitrator appointed under Agreement and Institutional Arbitration conducted under Section 18 of the MSME Act. Though the Supreme Court has not settled the dispute but majority of the decision of High Court has given supremacy to the statute over any arbitration agreement.
In the current scenario, India has restricted its trade relation with China and has introduced Atma Nirbhar Bharat Scheme. Therefore, role of MSMEs has increased unprecedentedly. MSMEs can be a stakeholder in maximizing market power and compensate the market loss occurred due to restrictions imposed. If the dispute resolution is done in accordance with MSME Act then it will be MSME friendly which will ultimately strengthen MSME and help achieving Government’s objective of Atma Nirbhar Bharat Scheme. Default in payment has been a major issue for MSME which usually affect MSMEs to its core, hence proceedings under MSME Act will be a wise step to secure MSME.