Party autonomy v. Statutory Arbitration under the MSME Act: The unsettled woe

In current times, arbitration has become a preferred mode of dispute resolution; almost every commercial contract has an arbitration clause. Party autonomy is a cardinal principle of the law of arbitration. According to the principle, parties to such an agreement can decide the mode of settlement of disputes and the procedure involved therein.

In an effort to build and project India as a pro-arbitration hub, the Indian courts have made this rule the norm in almost all cases.

However, there are certain statutes wherein the law provides a fixed procedure for resolving disputes, which includes statutory references to arbitration. A pertinent example is the Micro, Small and Medium Enterprises Development Act, 2006, which deals with the promotion, development, and enhancement of the development of Micro, Small and Medium Enterprises (MSME). Section 18 of the Act provides for a specialised mechanism for resolution of disputes involving MSMEs.

The Section reads as follows:

18. Reference to Micro and Small Enterprises Facilitation Council-(1) Notwithstanding anything contained in any other law for the time being in force, any party to a dispute may, with regard to any amount due under Section 17, make a reference to the Micro and Small Enterprises Facilitation Council.

(2) On receipt of a reference under sub-section (1), the Council shall either itself conduct conciliation in the matter or seek the assistance of any institution or centre providing alternate dispute resolution services by making a reference to such an institution or centre, for conducting conciliation and the provisions of Sections 65 to 81 of the Arbitration and Conciliation Act, 1996 (26 of 1996) shall apply to such a dispute as if the condition was initiated under Part III of that Act.

(3) Where the conciliation initiated under sub-section (2) is not successful and stands terminated without any settlement between the parties, the Council shall either itself take up the dispute for arbitration or refer to it any institution or centre providing alternate dispute resolution services for such arbitration and the provisions of the Arbitration and Conciliation Act, 1996 (26 of 1996) shall then apply to the dispute as if the arbitration was in pursuance of an arbitration agreement referred to in sub- section (1) of section 7 of that Act.

(4) Notwithstanding anything contained in any other law for the time being in force, the Micro and Small Enterprises Facilitation Council or the centre providing alternate dispute resolution services shall have jurisdiction to act as an Arbitrator or Conciliator under this section in a dispute between the supplier located within its jurisdiction and a buyer located anywhere in India.

(5) Every reference made under this section shall be decided within a period of ninety days from the date of making such a reference.

The principles that can be culled out from the Section are as follows:

i. The Section begins with a non-obstante clause, therefore the procedure provided therein overrides any other statute.

ii. Any party (one of them must be a MSME) may make a reference to the Micro and Small Enterprises Facilitation Council for resolving a contractual dispute.

iii. On receipt of a reference, the Council shall first conduct conciliation proceedings (either by itself or through a third party).

iv. If the conciliation fails, the Council shall conduct the arbitration proceedings between the parties (either by itself or through a third party). The limitation for deciding the reference under the Section is 90 days.

v. It should be noted that Section 24 of the Act further reiterates that the provisions of Section 15-23 of the Act have an overriding effect over any other law.

Although the language of the provision clearly stipulates that Section 18 has an overriding effect over any other law, there has been a lack of clarity over whether the Section allows parties to act upon an independent arbitration mechanism agreed between them. In the present article, we aim to discuss the position of law as it stands today and argue for the need of developing a uniform approach.

The divergent views of the High Courts-

M/s Steel Authority of India and Anr. v. MSEFC

The aforesaid decision was the first significant case to deal with this issue elaborately. Disputes arose between the parties and respondent No.2 issued a notice to the petitioner, invoking the arbitration clause in their agreement. In response, the petitioner appointed an arbitrator of its choice to adjudicate the disputes.

Respondent No.2 objected to such appointment and urged that the matter be referred to the Council. The petitioner objected to the reference, but the Council (respondent No.1) agreed to hear the matter. Aggrieved, the petitioner filed a writ petition before the High Court, to restrain the Council from entertaining the reference.

The Court allowed the petition and held that the Council is not entitled to proceed with the proceedings under Section 18, owing to the arbitration proceedings invoked pursuant to the independent arbitration agreement between the parties. The Council may, however, hold the conciliation proceedings since the independent arbitration agreement did not contain a provision to that effect.

In its verdict, the Court made the following observations –

First, by virtue of the non-obstante clause in Section 18, it cannot be said that an independent arbitration agreement between the parties will cease to have effect. The Court opined that the overriding clause only overrides things inconsistent therewith and there is no inconsistency between an arbitration conducted by the Council under Section 18 and arbitration conducted under an individual clause since both are governed by the provision of the Arbitration Act, 1996.

Second, the Court also held that since the parties had entered into an independent arbitration agreement, the Council could not proceed with the arbitration itself. What can be gleaned from this observation is that if a contract has an independent arbitration provision, the said provision shall prevail over the arbitration contemplated under Section 18, unless the two are inconsistent.

This decision has guided several other High Courts in their adjudication of similar matters. However, current trends dictate that the position stands altered.

Principal Chief Engineer v. M/s Manibhai and Brothers (Sleepers)

A contrary position was taken by the Gujarat High Court in a case wherein the appellant applied under Section 18 to the Council in view of the emergent disputes. The conciliation between the parties failed and, in the meanwhile, the parties applied under Section 8 of the Arbitration Act, 1996 to the Council, which was rejected.

The appellant challenged the rejection before the High Court, which held that the Council is empowered to conduct arbitration proceedings either by itself or a third party, and an application under Section 8 of the Arbitration Act would not be maintainable before the Council. The Court placed reliance on the overriding nature of Section 18, to give primacy to the arbitration conducted by the Council over independent arbitration proceedings.

The Court categorically rejected the view of the Bombay High Court in M/s. Steel Authority of India Ltd. It should be noted that this judgment of the Gujarat High Court has been upheld by the Supreme Court in Principal Chief Engineer v. Manibhai & Bros, and is the current law in India.

Several High Courts have relied on the above decision (See Bata India Limited vs Avs International Private). In fact, the Bombay High Court itself rejected the interpretation in the SAIL judgment and followed the decision in Manibhai (See Gujarat State Petronet v MSEFC and M/s Porwal Sales v. M/s Flame Control Industries).

Interestingly, the Delhi High Court in its recent decision in AVR Enterprises v. Union of India, has held that the provisions of the MSME Act would not come into play in case parties have opted for arbitration proceedings basis the arbitration clause as spelled out within the concerned contract. This interpretation presents the view that courts may also be inclined to allow parties to pursue arbitrations outside the MSME Act, thus adding to the uncertainty surrounding the issue.

Combating the Section 34 hurdle

From the foregoing paragraphs, it is clear that certain courts find that a reference to an arbitration as provided under the scheme of Section 18 of the Act would prevail over the operation of the independent arbitration clause within the arbitration agreement.

The pertinent question which arises therefore is whether if an award were passed through independent arbitration proceedings between the parties wherein one was an MSME, would such award be possibly set aside under the tests set under Section 34 of the Arbitration Act?

Firstly, it is important to note that several enactments in India contain provisions that call for statutory reference. The Supreme Court, in Registrar Co-operative Society v. Krishnan Kumar Singhania, dealt with a conflict between the statutory arbitration contained under the West Bengal Cooperative Societies Act and the Arbitration Act. In this case, the Court observed that the statutory reference would find prevalence. This indicates that to an extent, the issue of conflict in such context may not be res integra.

In such circumstances, if an award is to be challenged under the scheme of Section 34 of the Arbitration Act, its fate remains unknown.

As per the test elucidated in Associated Builder v. Delhi Development Authority, an award may be set aside on the grounds of patent illegality, if it were contrary to the substantive law of India. The question that would require settling in such scenario, is whether an award emergent because of independent arbitral proceedings in the face of statutory arbitrations would be considered as contrary to the substantive law of India. As noted earlier, the language of the provisions of the MSME Act provide a non-obstante clause. However, it is noteworthy that Section 18 (1) also provides that parties “may” refer a dispute.

The ordinary interpretation of “may” would impose a discretionary power on the party concerned to refer such dispute. This would support the view that the reference of a dispute to the Council would in fact be a discretionary exercise. If this is the correct view, on this ground alone the award concerned could not be set aside under the rigours of Section 34 of the Arbitration Act.

Concluding Remarks

Given the divergent views specifically concerning the provisions of MSME Act, there is an urgent need for a uniform position within the law. On the one hand, the MSME Act being a special statute. must be given due significance as it caters more specifically to the special needs of an MSME which may not in most instances have the resources of financially opting for ad hoc arbitrations.

On the other hand, the same has to be tested in view of established principles such as party autonomy, which is a core feature of arbitration. Therefore, the need of the hour is striking a balance between these divergent views to effectively cater to the stakeholders in question.

The authors are practicing advocates at the Delhi High Court.