Arbitration attempt mandatory after failure of conciliation under MSMED Act: Supreme Court

The Supreme Court recently held that proceedings for conciliation and arbitration under the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act) cannot be clubbed (Jharkhand Urja Vikas Nigam Ltd v The State of Rajasthan and Ors)..The Bench of Justices Indira Banerjee and R Subhash Reddy thus set aside an order passed by the Rajasthan Micro & Small Industries Facilitation Council for failing to fulfil its statutory obligation of conducting arbitration after attempts at conciliation failed..The brief facts of the case are that the appellant, Jharkhand Urja Vikas Nigam Limited, entered into a contract with the Anamika Conductors, Jaipur for supply of ACSR Zebra Conductors. Anamika, claiming to be a small scale industry, approached the Rajasthan Micro and Small Enterprises Facilitation Council, claiming around ₹74 lakh towards the principal amount of bills as well as approximately ₹92 lakh towards interest. In 2012, after the appellant failed to appear for conciliation, the Council directed the appellant to make the payment within a period of thirty days from the date of the order. This order was challenged before and dismissed by the Rajasthan High Court, prompting the appellant to move the Supreme Court..In this case, it was noted that the Council did not initiate arbitration proceedings in accordance with the relevant provisions of the Arbitration Act. After hearing the parties, the apex court found that the Council's order was passed in utter disregard to the mandatory provision under Section 18 of the MSMED Act and the provisions of Arbitration and Conciliation Act, 1996. As per Section 18(3) of the MSMED Act, if conciliation is not successful, the proceedings stand terminated and the Council is then empowered to take up the dispute for arbitration on its own or refer to any other institution. In this light, the Court held,"If the appellant had not submitted its reply at the conciliation stage, and failed to appear, the Facilitation Council could, at best, have recorded the failure of conciliation and proceeded to initiate arbitration proceedings in accordance with the relevant provisions of the Arbitration and Conciliation Act, 1996, to adjudicate the dispute and make an award. Proceedings for conciliation and arbitration cannot be clubbed.".The Bench went on to hold,"The order dated 06.08.2012 is patently illegal. There is no arbitral award in the eye of law. It is true that under the scheme of the Arbitration and Conciliation Act, 1996 an arbitral award can only be questioned by way of application under Section 34 of the Arbitration and Conciliation Act, 1996. At the same time when an order is passed without recourse to arbitration and in utter disregard to the provisions of Arbitration and Conciliation Act, 1996, Section 34 of the said Act will not apply. We cannot reject this appeal only on the ground that appellant has not availed the remedy under Section 34 of the Arbitration and Conciliation Act, 1996.".While passing the order, the Bench left it open to the Council to either take up the dispute for arbitration on its own or refer the same to any institution or centre providing alternative dispute resolution services..Senior Standing Counsel Anup Kumar appeared for the appellant. Senior Advocate Manish Singhvi represented the Council, while Senior Advocate Kailash Vasdev appeared for Anamika Conductors..[Read Judgment]