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The Delhi High Court while recently dismissing the petition filed for appointment of a sole arbitrator has observed that once the provisions of MSME Act (“Act”) are invoked, recourse to an ad hoc arbitration would not be available & the provisions of MSME Act to that extent would also override the provisions of agreement between the parties or the Arbitration & Conciliation Act (“A & C Act”)

“Once the disputes are referred to arbitration in terms of Sub-section (3) of Section 18 of the MSME Act, the arbitration would proceed in the same manner as it would have pursuant to an agreement under Section 7 of the A&C Act. Thus, by virtue of the MSME Act, it is imputed that the parties had agreed to refer disputes for arbitration to MSEFC or to any institution rendering dispute resolution services to which a reference is made by the MSEFC. It is obvious that the arbitration would proceed in accordance with the procedure followed by the MSEFC or the Centre/Institution for alternative dispute resolution services, as the case may be. There is no scope to further truncate the arbitral proceedings contrary to the A&C Act or the applicable rules of arbitration before the MSEFC or the Centre/Institution for alternative dispute resolution services, as the case may be.”, Single Bench of Justice Vibhu Bhakru observed. 

In the present matter, the petitioner entered into an Agreement dated 31.03.2015 with the respondent for Project Management Consultancy Services for setting up and operations of way-side amenities on National Highways in India. In the course of time, disputes arose between the parties in connection with the agreement. The respondent by invoking the Dispute Resolution Clause sent a notice of dispute on 01.05.2018 invoking arbitration. The respondent’s claim was that the petitioner neglected & failed to pay a sum of Rs 2,04,90,000/- in terms of the agreement & sought for recovery of the said amount with interest. On 18.07.2018, the respondent further sent a notice invoking the provisions of Act as it did not receive any response to the earlier notice & also notified the petitioner that the Chairman did not have the right to appoint an Arbitrator. Also, the respondent referred the dispute to the Micro and Small Enterprises Facilitation Council, Coimbatore Region (“Facili􏰁a􏰁ion Council􏰂/MSEFC”).

The petitioner filed its statement of defence before the facilitation council contending that the respondent’s claim did not fall within the jurisdiction of the Facilitation Council under the MSME Act. it was also contended that the relationship between the parties was contractual & was thus governed by the terms of the Agreement. Since the parties did not resolve the disputes through Conciliation before the Facilitation Council, the Council referred the disputes between the parties to the Arbitration Centre, Madras High Court. Thereafter, the petitioner approached this Court u/s 11(6) of the A&C Act praying for appointment of a Sole Arbitrator to adjudicate the disputes that have arisen between the parties in terms of the Arbitration Clause as included in the Agreement dated 31.03.2015 entered into between the parties.

The petitioner’s Counsel contended that since the reference lapsed, there was a need to appoint a Sole Arbitrator. Further, it was also argued that as per Section 18(5) of the Act every reference was required to be decided within a period of 90 days from the date of making such reference & the same also includes a reference of dispute to Arbitration Centre for arbitration. 

The Respondent’s Counsel on the other hand while countering the petitioner’s submission submitted that the provisions u/s 18(5) are directory & not mandatory. 

The issue that arose for consideration was as to whether the reference made to the Arbitration Centre had lapsed and the mandate of the Arbitral Tribunal stood terminated.

The Bench observed that petitioner’s contention that the term “every reference” u/s 18(5) of the Act also refers to dispute by any party to the Facilitation Council as contemplated u/s 18(1) is repugnant to section 18(3) of the Act inasmuch as, it expressly provided that the provisions of A&C Act would be applicable as to the arbitration as if the arbitration was in pursuance of an arbitration agreement referred to in sub-section (1) of section 7 of that Act. 

It was also remarked that, “Notwithstanding that there is no agreement between the parties to refer disputes to arbitration by the MSEFC or to any Arbitration Centre or institution rendering alternate dispute resolution services, the provisions of Sub-section (2) of Section 18 of the MSME Act would apply and a party to a dispute as referred to in Section 17 of the MSME Act could refer the same for conciliation to MSEFC and failing such conciliation, MSEFC could refer the same to arbitration in terms of Sub-section (3) of Section 18 of the MSME Act.”

Reliance was placed on Sultana Begum v. Premchand Jain: (1997) 1 SCC 373 & Madanlal Fakirchand Dudhediya v. Shree Changdeo Sugar Mills Ltd: (1962) AIR SC 1543 to further observe that the rule of harmonious construction requires that the expression “every reference” u/s 18(5) must be construed to mean reference(s) to MSEFC. 

“The heading of Section 18 is also indicative of the reference as contemplated under Section 18 􏰎 that is, a reference to MSEFC of any dispute with regard to any amount due under Section 17 of the MSME Act, that is, an amount due from the buyer of goods supplied or the services rendered, by a supplier.”, the Court observed. 

It was also observed by the Court that it found merit in the respondent’s contention that provisions u/s 18(5) of the Act are directory & not mandatory. Further while referring to the judgement of Supreme Court in State of Uttar Pradesh v. Babu Ram Upadhyaya: (1961) AIR SC 751, the Bench observed that the legislative intent must be ascertained not only from the language but from the context and the scheme of the Statute. The question whether any consequence follows for non-compliance of the Statute is material in determining whether the Statute is mandatory or directory.

Thus, the Bench while dismissing the petition further observed that, 

“Sub-section (5) of Section 18 of the MSME Act does not provide for any consequences for not deciding the reference within the stipulated period of ninety days. Further, it is held that failure to decide the reference within the period of ninety days would result in termination of the mandate and the parties would be relegated to other remedies and, would not further the objective of Section 18 of the MSME Act which is to provide expeditious resolution of disputes either by conciliation or by arbitration. Surely, the timelines as set out in Sub-section (5) of Section 18 of the MSME Act of the MSME Act must be substantially adhered to. However, the same does not mean that in case the time lines get exceeded for some reason, the proceedings itself stand frustrated. This militates against the scheme of Section 18 of the MSME Act.”

Case Title: Indian Highways Management Company Limited V. Mukesh & Associates

Law Point/Statute Involved: Section 18 of MSME Act,2006