Dynamic global trade, cross-border transactions and economic volatility necessitates the expeditious disposal of commercial dispute and paves the way for 'alternative dispute resolution' (hereinafter, 'ADR'), mechanisms. 'Arbitration' is the most prominent, favoured ADR, and is increasingly adopted for effective, flexible, cost-efficient, and swift resolution of justice. 'Arbitration' is driven by the principle of party autonomy i.e. 'parties at will', and is well-recognized by the different International conventions1. 'The Arbitration and Conciliation Act, 1996', (hereinafter, 'the A&C Act'), is the cardinal law for Indian arbitration and the essence of 'party autonomy' has been integrated into the Act. 'Party autonomy' is the cornerstone of arbitration2 and is apparent in arbitration procedures since the agreement of parties to refer their disputes to arbitration. Without the existence of a valid arbitration agreement, a dispute can't be resolved through arbitration3.
Time and again the A&C Act remains at loggerheads with other statutes. Recently, the Hon'ble Supreme Court in 'Gujarat State Civil Supplies Corporation Ltd. vs. Mahakali Food Private Limited'4, dealt with and attempted to settle the conflict arising out of the overlap between the A&C Act, 1996 and 'the Micro, Small and Medium Enterprises Development Act, 2006' (hereinafter, 'the MSMED Act'). In this case, the apex court has dealt with seven appeals arising out of different High Courts, which are factually different but involve the same question of law as their primary issues. This Article analyses the Apex Court's decision. Prior to that, it is necessary to understand the overlap/conflict between the A&C Act and the MSMED Act.
OVERLAP BETWEEN THE A&C ACT AND THE MSMED ACT
The MSMED Act was passed with the objective of the development and promotion of micro, small and medium enterprises. The MSMED Act provides the mechanism for recovery of "delayed payments" to the suppliers, who are "micro" and "small" enterprises under the Chapter V of the MSMED Act. The buyer (also known as non-MSME entities) has the liability to pay for the goods supplied or services rendered by a micro and small enterprise.
Section 15 to 25 of the MSMED Act provides protection to the MSME entities against delayed payment by non-MSME entities. In case of delay, non-MSME entities will have to pay three times the compound interest of the bank rate as notified by the RBI.5 If there is any dispute related to delayed payment, reference can be made to the Micro and Small Enterprises Facilitation Council (hereinafter, 'Facilitation Council') for dispute resolution.6 On such reference, the Facilitation Council shall conduct the conciliation proceedings either by itself or by seeking the required assistance of any institution or centre providing the services for dispute resolution by conciliation as per the A&C Act.7 If the conciliation is unsuccessful then the Facilitation Council, either by itself or by any institution or centre providing the services for dispute resolution will attempt to settle the dispute by arbitration as per the A&C Act.8 Section 18(4) of the MSMED Act provides a nonobstante clause to the jurisdiction of Facilitation council as an arbitrator and conciliator. Furthermore, it has been provided in the said act that the provisions contained under Section 15 to Section 23, will have an overriding effect on any law which is in contravention of the same.9
MSMED Act grants the facilitation council the status of the Arbitral tribunal which conducts arbitration as per the A&C Act. However, there are some fundamental differences between arbitration under both Acts. First, MSMED Act requires mandatory conciliation prior to Arbitration.
Second, the Facilitation council can also act as an arbitral tribunal if its role as conciliator ceased, which is against Section 80 of the A&C Act. Third, 75% of the award amount to be deposited before challenging it under MSMED Act which is not required under the A&C Act. Fourth, no need for an arbitration agreement if the supplier is MSME entity. Therefore, if there exists an arbitration agreement/clause in the supply order or contract between the parties to the dispute, the buyers prefer to invoke the arbitration clause under the A&C Act instead of the MSMED Act.
ISSUES FRAMED BY THE APEX COURT
In the 'Gujarat State Civil Supplies Corporation Ltd. vs. Mahakali Food Private Limited'10, the following issues were dealt with by the apex court;
i. Whether Chapter V of the MSMED Act will have an overriding effect over the provisions of the A&C Act?
ii. Whether the party could be precluded from making reference to the Facilitation Council if there exists an independent arbitration agreement?
iii. Whether the Facilitation Council which has conducted the Conciliation proceeding can subsequently act as arbitrator in violation of Section 80 of the A&C Act?
iv. Whether the party who was not a 'supplier' on the date of entering into the contract for the supply of goods/services, can make a reference to the Facilitation Council?
ARGUMENTS OF THE BUYERS (NON-MSME ENTITIES)
- The non-obstante provision of Section 18(4) of the MSMED Act will not override the arbitration agreement existing between the The intention of the legislature ascertains the same by the use of word "may" in Section 18 instead of the word "shall".
- The Courts can't supply casus omissus i.e. omission in the Statute cannot be supplied by the way of Construction.11
- The dispute resolution mechanism under Section 18 of the MSMED Act will be available only when no dispute resolution clause exists in the contract between the
- The parties to an arbitration agreement are free to decide upon the procedural as well as substantive law, which will govern the arbitral proceeding.12
- The court cannot rewrite the terms of the Contract in the guise of construction of the contractual terms.13
- The Facilitation Council cannot act as a conciliator and then as an arbitrator in the same dispute in violation of Section 80 of the A&C Act.
ARGUMENTS OF THE SUPPLIERS
- Section 18 of the MSMED Act provides the parties right to resolve the dispute by the Facilitation Council irrespective of specific dispute resolution clauses in the contract between the parties.
- In M/s. Silpi Industries14, the Supreme Court observed that MSMED Act is special legislation to protect the MSME entities against delayed payment by non-MSME Therefore, MSMED Act will override the general statute i.e. the A&C Act.15
- Section 24 of the MSMED Act provides that Section 15 to 23 of the MSMED Act will prevail over any other law which is inconsistent with it.
- Section 18 of the MSMED Act grants the statutory right to MSME entities to approach the Facilitation Council to get their disputes resolved, which cannot be curtailed due to the existence of a separate dispute resolution mechanism in the contract between the parties.
- The procedure under Section 18(3) of the MSMED Act is in consonance with Section 2(4) of the A&C Act. Once the mechanism under Section 18 is initiated by the nondefaulting party, it will override any agreement between the parties related to the resolution of the dispute.16
- MSMED Act falls under the category of the welfare statutes and the same should be construed liberally and not strictly the interpretation should benefit the class for which the Act was enforced and the same should prevail.17
OBSERVATION OF THE APEX COURT
- MSMED Act is a special law and the purpose behind its enactment was to "provide for facilitating the promotion and development and enhancing the competitiveness of the MSME entities".18 To ascertain the same, a detailed mechanism has been provided by the statute. Whereas, the A&C Act is a general law that was enacted to consolidate the law pertaining to arbitration and conciliation. The MSMEs Act being a special Act to protect the interest of MSMEs (specific class) will override the general statute i.e. the A&C Act.
- The non-obstante clause as contained under Section 18 of the MSMED Act indicates that the same will supersede any other law which is in contravention to the same.
- Even if the A&C Act is considered a special law, it was enacted prior to the MSMED Act. Therefore, MSME Act will supersede "any other law which came into effect prior to its enactment".
- The private agreement existing between the parties will not devoid the party to exercise their statutory right which has been expressly provided by the legislature under Section 18 of the MSMED Act.
- The embargo provided under Section 80 of the A&C Act will be overshadowed by the provision under Chapter V of the MSMED Therefore, the Facilitation Council can act as an arbitrator when the conciliation process has not been successful.
- The party who is not a "supplier' on the date of entering into the contract cannot avail of the benefit under the MSMED Act.
ANALYSIS AND CONCLUSION
The Hon'ble Supreme Court clarified the overlapping law between the MSMED Act and the A&C Act. The apex Court's opinion is a reiteration of settled law that law providing statutory benefit to a specific class of persons should supersede the general statutes.
However, this judgment doesn't speak against the parallel right of party to resolve the dispute through independent arbitration if the contracts for the supply of goods with an MSME entity have provisions of arbitration. It only deals with the instances where a reference of a dispute to the Facilitation Council is made before non-MSME entities invoke the arbitration agreement.
The Bombay high Court19 observed that if an arbitration agreement has been invoked prior to the reference to the Facilitation Council, the arbitration under the arbitration agreement shall proceed. The Apex Court in this judgment harmoniously construed the law and did not oppose this view and only comment on whether any existing arbitration agreement can restrict the statutory rights of parties to resolve the dispute. Therefore, this judgment also strengthens the party autonomy principle.
However, the apex court while observing that the embargo provided under Section 80 of the A&C Act will be overshadowed by the provision under Chapter V of the MSMED Act missed the rationale behind Section 80 of the A&C Act i.e. to avoid any kind of bias of arbitrator who already acted as an arbitrator in the same dispute. Therefore, the apex court should issue the caution that the same members of Facilitation Council cannot act both conciliator as well as arbitrator under the MSMED Act.
1 The Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958 and the UNCITRAL Model Law, 1985, incorporates the principle of party autonomy, which provides that parties are free to agree on the arbitration method to be followed by arbitral tribunals in conducting proceedings.
2 State Trading Corporation of India vs. Jindal Steel and Power Limited, (Civil Appeal No 2747 of 2020), decided on 10th September, 2020 by the Supreme Court of India
3 Smt. Manju Gupta & Ors. vs. Shri Vilas Gupta & Ors., (ARB.P. 331/2020), decided on 22nd January, 2022 by the Delhi High Court
4 Gujarat State Civil Supplies Corporation Ltd. vs. Mahakali Food Private Limited, Civil Appeal No. 127 of 2018, decided on 31st October, 2022 by the Supreme Court of India
5 Section 16, MSME Act, 2006.
6 Section 18(1), MSME Act, 2006.
7 Section 18(2), MSME Act, 2006.
8 Section 18(3), MSME Act, 2006.
9 Section 24, MSME Act, 2006.
10 Gujarat State Civil Supplies Corporation Ltd. vs. Mahakali Food Private Limited, Civil Appeal No. 127 of 2018, decided on 31st October, 2022 by the Supreme Court of India
11 Shiv Shakti Cooperative Housing Society, Nagpur vs. Swaraaj Developers and Others, (2003) 6 SCC 659.
12 Bharat Aluminum Company vs. Kaiser Aluminum Technical Services, (2012) 9 SCC 648; Antrix Corporaton Limited vs. Devas Multimedia Private Limited, (2014) 11 SCC 560; Amazon.com NV Investment Holdings LLC. vs. Future Retail Limited and others, (2022) 1 SCC 209.
13 Orissa State Financial Corporation vs. Narsingh ch. Nayak and Others, (2003) 10 SCC 261; Shin Satellite Public Co. Ltd. Vs. Jain Studios Ltd., 2006) 2 SCC 628.
14 Silpi Industries etc. vs. Kerala State Road Transport Corporation and Anr,., 2021 SCC Online SC 439
15 Solidaire India Ltd. vs. Fairgrowth Financial Services Ltd. & Ors., (2001) 3 SCC 71; Maruti Udyog Ltd. vs. Ram Lal & Ors., (2005) 2 SCC 638 .
16 Secur Industries Ltd. vs. Godrej & Boyce Mfg. Co. Ltd. And Anr, (2004) 3 SCC 447.
17 Union of India vs. Prabhakaran Vijaya Kumar and Ors., (2008) 9 SCC 517; Regional Provident Fund Commr. vs. Hoogly Mills Co. Ltd., (2012) 2 SCC 489.
18 Statement of Object, MSMED Act, 2006
19 Power Sales vs. Flame Control Industries, Arbitration Petition No. 77 of 2017, decided on 14th August 2019; and Microvision Technologies Private Limited v. Union of India, Commercial Arbitration Petition (L) NO. 855 OF 2018, decided on 15th May, 2020
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