Dispute Resolution under MSMED Act: Jurisdiction of Facilitation Councils vs Arbitration Agreements

This case involves several appeals that raise critical questions about the interplay between the provisions of the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 and the Arbitration and Conciliation Act, 1996. At the heart of these disputes is the jurisdiction of the Micro and Small Enterprises Facilitation Council (MSEFC) in resolving disputes, especially when there is an existing arbitration agreement between the parties. These appeals examine whether the provisions of the MSMED Act override the Arbitration Act in cases where both apply, particularly regarding the jurisdiction of Facilitation Councils and their role in arbitration proceedings.

Background of the Case

The appellants in these cases challenge the jurisdiction of the MSEFC to entertain disputes under Section 18 of the MSMED Act, particularly when an independent arbitration agreement exists between the parties. The MSMED Act, 2006 was enacted to provide a mechanism for the timely resolution of disputes involving micro and small enterprises, especially regarding delayed payments. However, the Arbitration Act, 1996 provides for arbitration as a means of resolving commercial disputes, and several questions arise when these two mechanisms come into conflict.

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Legal Arguments of the Petitioners

The petitioners in these appeals, primarily the buyers, argue that the provisions of the MSMED Act, particularly Section 18, cannot override the independent arbitration agreements between the parties. They contend that the Facilitation Council should not have jurisdiction when the parties have explicitly agreed to resolve their disputes through arbitration. Furthermore, they argue that Section 18 only provides an option and not a mandatory requirement for the parties to resort to the Facilitation Council, and it should not supersede an already existing contractual arbitration clause.

Another key point raised by the petitioners is that Section 18(3) of the MSMED Act, which allows the Facilitation Council to act as an arbitrator if conciliation fails, cannot apply in the presence of a pre-existing arbitration agreement. The petitioners argue that this provision creates a legal conflict, as it imposes a statutory obligation to resort to the Facilitation Council, regardless of the arbitration agreement.

Arguments from the Respondents

On the other side, the respondents, representing the suppliers, argue that the MSMED Act, 2006 is a special legislation designed to protect the interests of micro and small enterprises, and thus, it takes precedence over general laws such as the Arbitration Act, 1996. They highlight that Section 18 of the MSMED Act provides a statutory right for suppliers to approach the Facilitation Council to resolve disputes related to delayed payments, and this right cannot be negated by an arbitration agreement between the parties. The respondents argue that the Facilitation Council is a dedicated forum created specifically for this purpose and that it is empowered to act as an arbitrator if conciliation fails.

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Furthermore, the respondents emphasize that the MSMED Act’s provisions are meant to ensure the timely payment of dues to small enterprises, a matter of public policy that cannot be overridden by private arbitration agreements. They also cite the non-obstante clauses in Sections 18(1) and 18(4) of the MSMED Act, arguing that these clauses grant the Facilitation Council overriding jurisdiction in disputes involving small enterprises, irrespective of other agreements.

Supreme Court’s Judgment

The Supreme Court, in its judgment, addressed several critical questions related to the jurisdiction of the Facilitation Councils and the applicability of the Arbitration Act. The Court held that the provisions of the MSMED Act, particularly Sections 18(1) and 18(4), have an overriding effect over the provisions of the Arbitration Act, 1996. It emphasized that the MSMED Act is a special legislation aimed at promoting and protecting small enterprises, and its provisions should be given precedence over the general provisions of the Arbitration Act, 1996.

Regarding the jurisdiction of the Facilitation Council, the Court ruled that the Council could entertain disputes even if an independent arbitration agreement exists between the parties. The Court found that the MSMED Act provides a statutory right to the supplier to approach the Facilitation Council, which cannot be overridden by a private agreement between the parties. The Court further ruled that the Facilitation Council could act as an arbitrator under Section 18(3) of the MSMED Act, even in the presence of an arbitration agreement, as long as the conciliation process under Section 18(2) fails.

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The Court also clarified that the MSMED Act, being a special statute, would override the provisions of the Arbitration Act in cases of conflict. It rejected the argument that an existing arbitration agreement would preclude the invocation of Section 18 of the MSMED Act. The Court stated that any dispute relating to delayed payments could still be referred to the Facilitation Council, and that the provisions of the Arbitration Act would only come into play after the conciliation process under Section 18(2) fails.

Key Points of the Judgment

• The provisions of the MSMED Act, particularly Section 18, override the provisions of the Arbitration Act, 1996, in cases of conflict.
• The Facilitation Council can exercise jurisdiction to resolve disputes, even in the presence of an arbitration agreement between the parties.
• The MSMED Act is a special statute aimed at protecting the interests of micro and small enterprises, and its provisions cannot be negated by private agreements.
• The Facilitation Council has the authority to act as an arbitrator under Section 18(3) of the MSMED Act, even if it has previously conducted conciliation proceedings.
• The Arbitration Act, 1996 applies to arbitration proceedings conducted by the Facilitation Council under Section 18(3) of the MSMED Act.
• A party that was not the ‘supplier’ at the time of the contract cannot seek the benefit of the MSMED Act, 2006 for disputes arising from that contract.

Conclusion

The Court’s decision reinforces the primacy of the MSMED Act in protecting the interests of small enterprises, especially in cases of delayed payments. The ruling clarifies the scope of Section 18 and establishes that it provides an independent and overriding mechanism for resolving such disputes, even in the presence of arbitration agreements. This judgment provides clarity on the relationship between the MSMED Act and the Arbitration Act, particularly in disputes involving micro and small enterprises.

Petitioner Name: Gujarat State Civil Supplies Corporation Ltd. and others.
Respondent Name: MSE Facilitation Council and others.
Judgment By: Justice Bela M. Trivedi, Justice Uday Umesh Lalit.
Place Of Incident: Gujarat, Maharashtra.
Judgment Date: 31-10-2022.

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