Authored by: Milind Anand
The Micro, Small and Medium Enterprises (“MSME”) has played a vital role in enhancing the economy of our nation through the supply of goods. This sector also creates massive employment opportunities for the nationals of India. Thus, to prevent the MSME Sector and address the policy issues affecting the sector, the Government had enacted the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006. The primary objective of the Micro Small and Medium Enterprises Development Act, 2006 (“MSME Act”) is to “provide for facilitating the promotion and development and enhancing the competitiveness” of micro, small and medium enterprises. To serve this objective there are several provisions embodied in the statute for the resolution of dispute regarding the recovery of dues.
Section 18 of the MSME Act provides that wherein a dispute arises between the parties regarding the amount due to a Supplier, any of the party may make a reference to the MSME Facilitation Council (“Council”) for conciliation. However, if the conciliation process turns out to be unsuccessful, then the Facilitation Council may either step into the shoes of an arbitrator or refer the parties to an arbitral institution. Moreover, under Section 18(4), the Council or center providing the alternative dispute resolution services shall have the jurisdiction to act as an arbitrator or conciliator in a dispute between the Supplier located within its jurisdiction and a buyer i.e. anyone who buys goods or receives services from a supplier located anywhere in India.
Tussle between Arbitration act and MSME act
In present times, Arbitration is considered as one of the most preferred method for the resolution of a dispute. This is evident from the fact that most of the commercial contracts amongst business entities contain an arbitration clause for the resolution of disputes that may arise in the future. The idea of arbitration is fundamentally based on the principle of ‘independence of the parties’ as it leaves it on the free will of the party. On the other hand, MSME Act also contains provisions for the resolution of certain disputes. Thus, arises a conflict between the Arbitration Act and the MSME Act on the issue of whether the arbitration agreement will have a superseding effect on the statutory arbitration provision under the MSMED Act or vice-versa?
It is a well-established principle of law that if an ambiguity exists over a particular subject matter, a special statute on that particular subject will have an overriding effect on the general statute. Thus, on a bare reading of the provision we will get an idea that referral of a dispute to the facilitation council is a statutory instrument that will have superiority over all other agreements and contracts. However, an argument can be presented by quoting Section 24 of the MSME Act which provides that in the event of incompatibility with Section 15 to 23, the latter will have a preponderant effect. But the mere existence of an arbitration agreement by itself does not vitiates the very basic idea provided under Section 18.
Judicial Trend On The Debate
Section 18 of the MSME Act became antagonistic when multiple cases arose in which a party involved in a dispute with a supplier filed a proceeding in court challenging its applicability to their dispute in light of the arbitration agreement concluded between the parties. This issue of overlap between the MSME Act and the arbitration law has created an ongoing struggle for interpretation by high courts across the country.
The Bombay High Court in the matter of Bharat Sanchar Nigam Limited v. Maharashtra Micro and Small Enterprises, held that there is no provision in the MSMED Act, which negates or renders an arbitration agreement entered into between the parties as ineffective. It cannot be said that because Section 18 provides for a forum of arbitration, an independent arbitration agreement entered into between the parties will cease to have effect. The court provided the reasoning that there is no question of an independent arbitration agreement ceasing to have any effect because the overriding clause only overrides provisions of law that are 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 provisions of the Arbitration Act. A similar reasoning was put forward by the Bombay High Court in the matter of Steel Authority of India v. The Micro, Small Enterprise Facilitation Council wherein also the court held that provisions of the MSME Act do not have any negative or restrictive effect on the existence of the arbitration agreement.
However, the Gujarat High Court deviated from the wordings of Bombay High Court in the matter of Principal Chief Engineer v Manibhai and Brothers. The Court held that the facilitation council under Section 18 is legally empowered to act as an arbitrator or refer the parties to an arbitral institution. The Court held that Section 18 of the MSME Act will have a superseding effect, and thus independent arbitration proceedings cannot be allowed. Similar view was taken by the Delhi High Court in the case of GET & D India Limited v. Reliable Engineering, wherein the court held that no arbitration agreement, nor any contractual provisions can override the statutory mandate, especially when the statutory mandate emanates from a special statute providing special dispute resolution mechanism for the advantage of MSMEs.
At this juncture it is important to note that in all the above cases the suppliers had initiated the proceedings, but there was no answer to the query on whether the same rule will apply if the buyer initiates the proceedings and invokes the arbitration first. The answer to this query was provided by the Bombay High Court in the matter of M/s. Porwal Sales Vs. M/s. Flame Control Industries, wherein the court affirmed that if the buyer invokes arbitration first under the contract between the parties, the provisions of the MSME Act may not be
applicable to such arbitration proceedings. This clearly mentions that if the buyer wants to avoid arbitration under the MSME Act, the only thing he needs to do is invoke the arbitration under the agreement before the supplier invokes the jurisdiction of the council.
The statutory framework on MSMEs is a special statute and should be given due weight, as it more specifically addresses the special needs of an MSME which in most cases does not have the resources to opt financially for ad hoc arbitrations. However, this must be tested against established principles such as party autonomy, which is a fundamental characteristic of arbitration. Therefore, the need of the hour is to strike a balance between these divergent views to effectively respond to the stakeholders in question. Hence owing to the dissenting opinions and divergent views of several High Courts, it is now high time for the apex court of India to settle this debate by providing a final authority on this issue, thus paving a smooth road ahead.
The author is an undergraduate student at the National University of Study and Research in Law, Ranchi.