In its landmark judgement, the Supreme Court discussed the interplay and the overlap between the Arbitration and Conciliation Act 1996 (Arbitration Act) and the Micro, Small and Medium Enterprises Development Act 2006 (MSME Act) and attempted to clarify and settle the position that may arise when there is a conflict between the two laws.

Factual Background

The Supreme Court judgement arises from seven appeals, originating from various High Courts. These appeals though factually different, were heard together due to the involvement of some common questions of law.

Legal Background

The MSME Act provides for certain criteria for an entity to qualify as an MSME entity or 'supplier' and avail the benefits of the MSME Act, especially Chapter V of the MSME Act as discussed below.

Chapter V of the MSME Act, containing sections 15 to 25, inter alia, deals with issues pertaining to delayed payments to an MSME entity. The provisions discuss the liability of a non-MSME entity to make payments to an MSME entity and the recourse available to the MSME entity if the non-MSME entity fails to make timely payments.

In the event, the non-MSME entity fails to make timely payments to the MSME entity, the non-MSME entity is liable to pay compound interest at three times the bank rate notified by the Reserve Bank of India, from the date prescribed under the MSME Act.

A reference to the Micro and Small Enterprises Facilitation Council (Facilitation Council) may be made by any party to a dispute in relation to amounts due under Chapter V. On such reference, the Facilitation Council is required to conduct or seek assistance of any institution or center providing alternative dispute resolution services to conduct conciliation as provided under Part III of the Arbitration Act. In the event such conciliation is not successful, the Facilitation Council shall arbitrate or refer the dispute to arbitration by the said institution or center.

Notably, the MSME Act provides that the above-mentioned provisions (sections 15 to 23) shall have an overriding effect on any law that may be inconsistent with the aforesaid provisions of the MSME Act.

Issues Discussed

The judgement discusses situations where there is an arbitration agreement in the agreement between an MSME entity and a non-MSME entity for supply of goods and/or services. The issues dealt with in the judgment have been summarized below-

(i) Whether the provisions of Chapter-V of the MSME Act, 2006 would have an effect overriding the provisions of the Arbitration Act?

(ii) Whether any party to a dispute with regard to any amount due under Chapter V would be precluded from making a reference to the Facilitation Council, if an independent arbitration agreement existed between the parties?

(iii) Whether the Facilitation Council could itself take up the dispute for arbitration and act as an arbitrator, when the council itself had conducted the conciliation proceedings under the MSME Act in view of the bar contained in Section 80 of the Arbitration Act?

(iv) Whether a party who is not a 'supplier' as per the MSME Act on the date of entering into a contract for supply of goods and/or services could make a reference to the Facilitation Council?

Holding of the Supreme Court

Before discussing the issues, the Supreme Court delved into the object of the two acts in question. The court opined that the MSME Act was enacted to "provide for facilitating the promotion and development and enhancing the competitiveness of" the MSME entities, to provide for a dispute resolution mechanism to avail the remedies provided for in the MSME Act and to extend statutory support to such entities. On the other hand, the Arbitration Act was enacted to consolidate laws relating to arbitration and comprehensively cover international and domestic arbitration as well as conciliation and encourage settlement of disputes, while limiting the supervisory role of the courts.

In light of the abovementioned object of the acts, the Supreme Court held that the MSME Act would override the provisions of the Arbitration Act. The following reasons were provided by the court-

  1. In view of the legal principle that a special statute overrides a general statute in cases of apparent conflict between the two statutes, the MSME Act being a special act would override the Arbitration Act which is a general statute. The court opined that the MSME Act was a special act aimed to provide statutory protection to the MSMEs, while the Arbitration Act was a general law relating to arbitration and conciliation that does not specify any dispute or class or category of persons that it may be applicable to.
  2. The unambiguous language used in the MSME Act such as the provision on the overriding effect of the MSME Act and the non obstante clauses in section 18 of the MSME Act indicated that the MSME Act would take precedence over any other general statute.
  3. Even if the Arbitration Act is considered a special statute, in view of the principle that a law enacted later shall abrogate earlier contrary laws, the MSME Act would supersede "any other law for the time being in force", including the Arbitration Act.

Further, the court held that the existence of an arbitration agreement between the parties would not preclude a party from making a reference to the Facilitation Council. A private agreement between the parties cannot obliterate the statutory provisions. The court added that once the statutory mechanism, of reference to the Facilitation Council, is triggered by any party, it would override any arbitration agreement independently entered by the parties.

The court also held that the bar under section 80 of the Arbitration Act is superseded by the provisions of Chapter V, and in view of the overriding effect of the MSME Act over the Arbitration Act, the Facilitation Council having acted as the conciliator can act as an arbitrator in the event the conciliation is unsuccessful.

On the last issue, the Supreme Court held that a party who did not qualify as a "supplier" under the MSME Act on date of entering the contract, could not seek any benefit as a supplier under the MSME Act. In the event the party qualifies as a "supplier" subsequently, it would be able to avail benefits of the MSME Act prospectively for the supply of goods and/or services from the date of such qualification.

Remarks

The judgement is welcomed as it provides further clarity on the interplay between the MSME Act and the Arbitration Act. In this judgement, reliance was placed on an earlier division bench decision of the Supreme Court in Silpi Industries etc. v Kerala State Road Transport Corporation & Anr1, wherein the Supreme Court had affirmed the overriding nature of the MSME Act vis-à-vis the Arbitration Act. Moreover, the judgment is also in consonance with other previous decisions, wherein a law providing statutory protection/benefit to a specific class of persons was held to supersede the Arbitration Act.

However, the judgement must be read cautiously and not interpreted to mean that (a) the contracts for supply of goods and/or services with an MSME entity may never be resolved through an independent arbitration (in cases where there has been no reference to the Facilitation Council); or (b) the arbitration agreements in such contracts are completely redundant.

The present judgement appears to discuss instances where reference of a dispute to the Facilitation Council is made before the arbitration agreement contained in the parties' contract is invoked. Against this backdrop, it was held that the arbitration before the Facilitation Council shall supersede. However, as discussed in Porwal Sales v. Flame Control Industries2, in the event an arbitration agreement has been invoked prior to the reference to the Facilitation Council, the arbitration under the arbitration agreement shall proceed. The present judgement appears to be in line with the aforesaid understanding as (a) the Supreme Court acknowledges, in view of the language provided in the MSME Act, that the parties to the dispute have a choice to either invoke the arbitration agreement or refer the dispute to the Facilitation Council; and (b) the statutory mechanism under the MSME Act would override the arbitration agreement once the reference to the Facilitation council is made.

Lastly, it appears that the rationale behind section 80 of the Arbitration Act is to prevent even an appearance of bias by barring a conciliator to act as an arbitrator in the same dispute. However, the effect of lifting such bar for the Facilitation Council, remains to be seen.

Footnotes

1. 2021 SCC OnLine SC 439

2. 2019 SCC OnLine Bom 1628

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