Applicability of provisions of Arbitration & Conciliation Act to Section 18 of the MSMED Act

The judgment of the Supreme Court in Gujarat State Civil Supplies Corporation Ltd. vs. Mahakali Foods Pvt. Ltd. arises out of seven appeals with different factual backgrounds but based on similar questions of law, all in relation to the interplay between the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act) and the Arbitration and Conciliation Act, 1996 (A&C Act).

Section 18 of the MSMED Act provides that whenever any amount due to a micro, small or medium enterprise is in dispute, reference for adjudication of such dispute may be made to the Micro and Small Enterprises Facilitation Council (the Council).

The Council shall conduct conciliation of such dispute. Where the conciliation does not lead to any settlement, the Council shall either conduct itself arbitration proceedings in relation to the dispute or refer the dispute to any institution providing alternate dispute resolution services. The A&C Act shall apply to the proceedings under this provision.

The Supreme Court identified the following issues:

1. Whether the provisions of MSMED Act would have an overriding effect on the A&C Act, vis-à-vis the manner and extent of applicability of the A&C Act in arbitration or conciliation proceedings being facilitated by the Council.

2. Where an arbitration agreement already exists between the parties, whether the dispute would be resolved under the A&C Act or under Section 18 of the MSMED Act.

3. In view of the bar contained under Section 80 of the A&C Act, whether the Council having acted as the conciliator could also act as the arbitrator.

The Court discussed the object of the MSMED Act which was enacted for promotion and development of the micro, small and medium enterprises. It also makes provisions for interest on delayed payments or any amount due. These provisions ensure that the small-scale enterprises can run smoothly without facing financial lags.

In determining whether the MSMED Act would have an overriding effect on the provisions of A&C Act, the Court observed that the purpose and policy underlying the two statutes and the intendment conveyed by the language of their provisions would be the relevant considerations.  

The Court relied on the legal maxims leges posteriores priores contrarias abrogant (later law shall abrogate earlier contrary law) and generalia specialibus non derogant (general laws do not prevail over special laws) to hold that the special law would prevail over general law. By the former principle, MSMED Act having been enacted later in point of time than the A&C Act, would have an overriding effect. In the latter principle, the Court sought to determine whether the MSMED Act could be said to a special law having an overriding effect on the A&C Act, being perceived as a general law.

MSMED Act governs disputes of specific nature between specific categories of businesses while the A&C Act is a general law which lays down the procedure for arbitration. Further, the MSMED Act provides for a dedicated statutory forum for resolution of disputes specified under the Act. The Court thus held that MSMED Act being a special law would have precedence over the A&C Act.

Section 18 of the MSMED Act starts with a non obstante clause which means that its aim is to supersede other laws. By the same reason, once the statutory mechanism under section 18 is triggered, it would override any other independent agreement between the parties. A private agreement between the parties cannot obliterate the statutory provisions.

This view was reasoned by the Court with the observation that the interpretation which enhances the object of the statute should be preferred over the one which would frustrate its object. The Court reiterated that the MSMED Act ensures smooth payment of dues to micro, medium and small enterprises and thus an agreement entered between the parties cannot be given primacy over statutory provisions.  Section 18 provides a clear choice to parties to approach the Facilitation Council despite a pre-existing arbitration agreement.

On the final issue, the Court again referred to the precedence of the MSMED Act over the A&C Act. It held that the bar under Section 80 of the A&C Act which does not allow a conciliator to act as an arbitrator would stand superseded by Section 18 and 24 of the MSMED Act. The Facilitation Council would thus be competent to act both as a conciliator as well as an arbitrator.

The Supreme Court while upholding the precedence of the MSMED Act over the A&C Act has also clarified the clear and direct relationship between Section 18 of the MSMED Act and the A&C Act. The provisions of the A&C Act would very much be applicable to conciliation or arbitration proceedings being adjudicated by the Council including Section 16 of the A&C Act which means that like any other arbitral tribunal, the Council would be competent to decide on its own jurisdiction.

Amit Meharia is a Managing Partner & Tannishtha Singh is a Legal Head at MCO Legals (Meharia & Company).