In this article, Swati Garg, an Advocate and an LL.M. graduate from Gujarat National Law University discusses whether an arbitration clause overrides the MSME Facilitation Council’s jurisdiction.
The Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 (herein referred as ‘the act’) was enacted with an aim of facilitating the promotion and development and enhancement of competitiveness of micro, small and medium enterprises. Every micro, small and medium enterprises have to file a memorandum of the understanding with the District Industries Centre under this act.
With a view to protect micro and small enterprises, the act provides for a procedure to follow in case of delayed payments. One needs to remember that these provisions are limited to micro and small enterprises and does not cover medium enterprises as per the interpretation of the act. That implies the enterprises engaged in manufacturing and production where the investment in plant and machinery is less than five crores or the enterprises engaged in providing or rendering services where the investment in equipment is less than two crores, only for those enterprises, dispute resolution mechanism is given under Chapter V of the act.
Why the mechanism is required
Nowadays, small and micro enterprises have started playing a major role in the Indian economy both by supplying goods and by providing employment. There has been a plethora of cases where buyers do not end up paying the amount of the goods supplied by these small and micro enterprises on time which can create hardships for these enterprises. To protect them from such hardships, the MSMED friendly act was enacted also providing for a mechanism to make sure that these enterprises are getting paid. The act imposes the obligation on medium, large and government undertakings to pay for the goods within 45 days of the purchase otherwise a compound interest or three times bank rate as specified by RBI will be levied on the defaulters. Even after that no payment is made, micro and small enterprises can approach to Micro and Small Enterprises Facilitation Council (herein referred as Facilitation Council).
Mechanism under Section 18 of the MSMED Act
A specified dispute resolution under Section 18 is provided which can be explained as below:
- First, there should be an amount due between supplier and buyer.
- Any party can make a reference to the Micro and Small Enterprises Facilitation Council.
- The Facilitation council will first step up a conciliation (either by itself or can refer it to a conciliation centre).
- If the conciliation is successful, matter will be completed there as per the settlement between the parties.
- If the conciliation is not successful, then the facilitation council will initiate arbitration proceedings either by itself or it can refer the matter to an arbitration centre.
- The reference under this section has to be resolved within 90 days.
This section also highlights on the jurisdiction of the facilitation council. As per the section, the facilitation council can act only on those references where supplier is from its jurisdiction whereas buyer need not to be.
Validity of Section 18 of the MSMED Act
Section 18 ousts the jurisdiction of civil courts and provides for a specified dispute resolution mechanism. In the case of M/s Refex Energy Ltd. v. Union of India, the petitioner challenged the validity of Section 18 on the ground that it is violative of Article 14 as it does not permit a person to approach a court of his choice. However, the Madras high court observed that under Section 19 of the act, a person aggrieved by the award or decree can approach the court.
Can any existing arbitration agreement overrule Section 18 of the MSMED Act?
An issue arises when there is an arbitration agreement between the parties to resolve any dispute which may arise. Will the the arbitration agreement supersedes the statutory arbitration provision under the act?
Prima facie if we look at it, any statutory provision will have supremacy over any agreement or a contract. An argument can be presented by citing Section 24 of the act which provides that if there is anything inconsistent with section 15 to 23, in this case, section 18, section 15 to 23 will have overriding effect. But presence of an arbitration agreement in itself does not imply that it is inconsistent with the section 18.
Let’s take a look at various judgments which has tried to throw light on this conflict.
Bharat Sanchar Nigam Limited v. Maharashtra Micro and Small Enterprises – Section 18 merely provides for a forum which follows the same Arbitration and Conciliation Act, 1996.
In the Bharat Sanchar Nigam Limited v. Maharashtra Micro and Small Enterprises, there were two contracts between the parties where each contract had an arbitration clause stating that all the disputes between the parties will be resolved by Arbitration. The respondents invoked the arbitration clause but they withdrew it later on. Thereafter, they filed a reference at the Facilitation council. Against this, the petitioner approached Bombay high court. The court was of the view that there is no provision in the Act, which negates or renders an arbitration agreement entered into between the parties ineffective. Section 18 merely provides for a forum which follows the same Arbitration and Conciliation Act, 1996. In this case, parties already had an arbitration agreement but one of parties made a reference under Section 18(1) to the facilitation council. The court held that as a reference has been made, they have to undergo the conciliation proceedings as mentioned in Section 18(2) but afterwards they can invoke their own arbitration agreement.
GET & D India Limited v. Reliable Engineering – Any contractual clause cannot override the statutory provision.
In GET & D India Limited v. Reliable Engineering, petitioners hired the respondents to provide services for which respondents were not paid. Respondents approached facilitation council where ultimately an award was passed against the petitioners. Against the award, petitioners approached Delhi high court and challenged the validity of Section 18 when an arbitration agreement is already in existence. The court taking a contrary view than Bombay high court held that the contractual clause cannot override the statutory provision. Moreover, the act being a special one is for the benefit of the micro, small and medium enterprises.
Welspun Corp. Ltd. v. The Micro and Small Enterprises Facilitation Council, Punjab and others – One cannot mutually agree to oust the jurisdiction of the facilitation council.
In Welspun Corp. Ltd. v. The Micro and Small Enterprises Facilitation Council, Punjab and others, the petitioner who was a buyer claimed disputes breach of the terms of the contracts whereas supplier claimed that they are not paid for the goods supplied by them. Petitioner contended that there was an arbitration agreement between the parties hence facilitation council has no jurisdiction to refer the matter to arbitration. Punjab and Haryana high court held that in view of the special provision made for the promotion and development of the micro, small and medium enterprises, no two or more parties can mutually agree to oust the jurisdiction of the facilitation council.
Bharat Heavy Electrical Enterprises v. The Micro and Small Enterprises Facilitation Council and others – Section 18(3) of the MSMED Act does not permit non-institutional arbitration.
In Bharat Heavy Electrical Enterprises v. The Micro and Small Enterprises Facilitation Council and others, the contract between parties ended due to civil unrest in Syria, thereafter petitioner informed DRIPLEX that they would not be needing their services. Thereafter, the petitioners did not pay DRIPLEX. DRIPLEX filed a complaint with the facilitation council. Petitioners agreed with the authority of the facilitation council for conciliation but they contended against the Arbitration by the facilitation council. As per petitioners, the arbitration clause in their contract was not inconsistent with the act and they should be read in a harmonious manner. Delhi high court further discussing the same issue, interpreted Section 18 and clarified that provision of Section 18(3) does not permit non-institutional arbitration.
Though the Supreme Court of the land have still not settled the dispute but as per the majority of high courts of India, Section 18(3) will have supremacy over any arbitration agreement. But what one needs to keep in mind that the arbitration under Section 18 is only confined to to unpaid dues. For other disputes, arbitration agreement will prevail.