Introduction

Vide judgment dated 27 March 2023 delivered in the case of Ircon International Limited vs Pioneer Fabricators Pvt. Ltd. (FAO (COMM) 200 of 2022) ("Ircon"), a Division Bench of the Delhi High Court comprising of HMJ V. Kameswar Rao and HMJ Anoop Kumar Mendiratta held that the arbitration proceedings undertaken before the Facilitation Council under Section 18 of the Micro, Small and Medium Enterprises Development Act, 2006 ("MSMED Act"), are undertaken at the 'venue' where the Facilitation Council is located. The place of the arbitration continues to be the place over which the court has exclusive jurisdiction, as agreed between the parties.

The Division Bench has dissented and overturned the decision of a Single Bench of the Delhi High Court dated 30 January 2023 rendered in Ozone Research & Applications (I) Pvt Ltd versus Ahluwalia Contracts (India) Ltd (O.M.P. (COMM) 343 of 2017) ("Ozone"). The decision of the Division Bench is central to ensuring that the terms of a commercial agreement are not rendered otiose when the arbitral proceedings are governed by the MSMED Act.

Analysis of the Judgement

The appeal in Ircon under Section 37 of the Arbitration and Conciliation Act, 1996 ("1996 Act") arose from an order of a District Court in Delhi rejecting a petition filed under Section 34 of the 1996 Act read with Section 19 of the MSMED Act on grounds of lack of territorial jurisdiction to entertain the petition. The District Court had observed that since the MSME Facilitation Council in Kanpur, Uttar Pradesh, had passed the award in question, the challenge to the award would also lie before the concerned court in Kanpur having jurisdiction.

Briefly, both the above decisions in Ircon and Ozone deal with a factual scenario where the agreements between the parties in question did not contain an arbitration clause but provided for an exclusive jurisdiction clause in case of any disputes arising under the respective agreements. Corollary to this the agreements in question did not expressly provide for a "seat" of arbitration. In Ircon, the MSME Facilitation Council in Kanpur, Uttar Pradesh had passed the arbitral award whereas the disputes between parties under the agreement were subject to the jurisdiction of the Courts at Delhi. Similarly in Ozone, the award had been passed by the Facilitation Council at Nagpur, whereas the purchase orders issued were subject to the jurisdiction of the Courts at Delhi.

The position of law laid down in Ozone by the Single Bench of the Delhi High Court earlier this year was that the 'seat' of arbitration would be the place where the Facilitation Council under the MSMED Act has conducted the arbitral proceedings as per the provisions of Section 18(4) of the MSMED Act. Contrary to this, the Division Bench, in the case of Ircon, has after considering and disagreeing with the view taken in Ozone, held that the arbitration proceedings undertaken before the Facilitation Council under Section 18 of the MSMED Act, are undertaken at the 'venue' where the Facilitation Council is located. The place of the arbitration continues to be the place over which the court has exclusive jurisdiction, as agreed between the parties.

Juxtaposing party autonomy with the MSMED Act

The Division Bench in Ircon considered the decision of the Delhi High Court in Indian Oil Corporation Ltd. vs. FEPL Engineering (P) Ltd., 2019 SCC OnLine Del 8007 ("IOCL"), and the Supreme Court in Gujarat State Civil Supplies Corporation Ltd. vs. Mahakali Foods Pvt. Ltd.(Unit 2) and Another, 2022 SCC OnLine SC 1492 ("Gujarat Civil Supplies"), and distinguished the facts of the matter from the landmark cases of BGS SGS Soma JV vs. NHPC Limited 2020 4 SCC 234 and Hindustan Construction Company Ltd. s. NHPC Limited and Anr., 2020 4 SCC 310, on the determination of seat and venue of the arbitration proceedings.

In IOCL, the Court had considered a contract that contained an arbitration clause and laid down that while the provisions of the MSMED Act would override the provisions of the contract between the parties, it did not mean that the jurisdiction clause agreed between the parties has to be given a go-by. Accordingly, it was concluded that the jurisdiction of the Facilitation Council under the MSMED Act, which is decided on the basis of the location of the supplier, would only determine the 'venue', and not the 'seat' of arbitration. It was held that the 'seat' of arbitration would continue to be governed in terms of the arbitration agreement between the parties. This ratio was not followed in Ozone given that the subject purchase order in Ozone did not contain an arbitration clause. In this regard, it had been argued by the Appellant in Ircon that Section 19 of the MSMED Act, allows filing of an application for setting aside the award, decree, or order made by the Council before 'any court' which, would mean any Court having jurisdiction, including territorial and pecuniary jurisdiction. While the Court did not explicitly affirm the above submissions propounded by the Appellant, it observed that once an arbitral award is pronounced, and there is an exclusionary clause of jurisdiction agreed between the parties, thereby, agreeing upon the jurisdiction of only one Court, in exclusion to others, the challenge initiated by the aggrieved party under the 1996 Act, even against an award passed by the Facilitation Council under the MSMED Act, will lie only before the Court upon which the parties have agreed to place exclusive jurisdiction.

In Gujarat Civil Supplies, the Apex Court ruled that an independent arbitration agreement executed between the parties under the 1996 Act would not prevail over the statutory provisions of the MSMED Act. In this context, the Court observed that only the procedure of constitution of the arbitral tribunal is obliterated by the operation of the provisions of the MSMED Act, but the same does not eclipse the agreement between the parties of foisting exclusive jurisdiction on a particular Court.

Conclusion

Accordingly, in a welcome decision, the Delhi High Court appears to have harmoniously interpreted the existing law on the determination of seat and venue under the 1996 Act vis-à-vis the statutory mandate of the MSMED Act in an attempt to protect and preserve the intention of parties to an agreement to the extent possible. This judgment appears to be an effort to counterbalance the existing MSME regime with the underlying tenets of a commercial transaction, considering that once a statutory arbitration is invoked, contractual provisions are rendered redundant to the extent of any inconsistency with the provisions of the MSMED Act which is tilted heavily in favour of the MSME entity.

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