Supreme Court Directs Reconsideration of Arbitration in MSME Dispute

The Supreme Court of India recently delivered a significant judgment in a case involving a contractual dispute between M/s Vijeta Construction and M/s Indus Smelters Ltd., addressing the applicability of the Micro, Small, and Medium Enterprises Development (MSMED) Act, 2006, in arbitration matters. The Court ruled on whether the rejection of a claim by the Micro and Small Enterprises Facilitation Council (Facilitation Council) constituted an ‘award’ under arbitration law and whether the High Court was correct in denying writ jurisdiction in favor of an alternative remedy under Section 34 of the Arbitration and Conciliation Act, 1996.

Background of the Case

The dispute arose between M/s Vijeta Construction and M/s Indus Smelters Ltd. regarding unpaid dues for the supply of TMT bars. M/s Indus Smelters Ltd., claiming outstanding payments amounting to Rs. 1,20,42,846, approached the Facilitation Council under the MSMED Act for resolution.

The Facilitation Council, by an order dated 10.01.2012, declined to adjudicate, stating that it lacked jurisdiction to conduct a thorough inquiry into the matter. Consequently, M/s Indus Smelters Ltd. challenged the order in the Chhattisgarh High Court through a writ petition. The High Court dismissed the petition, holding that the rejection by the Facilitation Council was equivalent to an arbitral award, making it appealable under Section 34 of the Arbitration Act.

Arguments Presented

Appellant’s Arguments (M/s Vijeta Construction)

The order passed by the Facilitation Council was not an ‘award’ as it did not settle the dispute on merits.
The High Court erred in holding that the only remedy available was under Section 34 of the Arbitration Act.
The Facilitation Council failed to follow the statutory procedure under Section 18 of the MSMED Act, which mandates conciliation before arbitration.
Since the Facilitation Council declined jurisdiction, the writ petition was maintainable to challenge its order.

Respondent’s Arguments (M/s Indus Smelters Ltd.)

The Facilitation Council’s rejection of the claim should be treated as an award, making it challengeable under Section 34 of the Arbitration Act.
The Facilitation Council’s jurisdiction is well-defined under the MSMED Act, and its decision must be treated as final unless set aside under arbitration law.
The appellant should have approached the District Court rather than invoking writ jurisdiction.
The High Court rightly dismissed the writ petition, as an alternative remedy was available under the Arbitration Act.

Supreme Court’s Analysis and Judgment

The Supreme Court examined the role of the Facilitation Council and the procedure it must follow under the MSMED Act.

On the Nature of the Facilitation Council’s Order

“The Facilitation Council’s order cannot be treated as an arbitral award since it did not adjudicate upon the dispute but merely refused jurisdiction.”

The Court held that for an order to be an award, it must conclusively settle the dispute between parties. Since the Facilitation Council refused to hear the matter on merits, its order could not be considered an arbitral award.

On the Requirement of Conciliation

“The MSMED Act mandates conciliation as a precondition to arbitration. The Facilitation Council failed to follow this procedure.”

The Court emphasized that under Section 18(2) of the MSMED Act, the Facilitation Council must first attempt conciliation before referring the dispute to arbitration. Skipping this step violated the statutory procedure.

On the Maintainability of the Writ Petition

“The High Court erred in dismissing the writ petition outright. Since the Facilitation Council’s order was not an award, the appellant was justified in approaching the High Court.”

The Supreme Court held that since the Facilitation Council had refused to exercise jurisdiction, the appellant had the right to challenge its order through a writ petition. The availability of an alternative remedy under Section 34 did not preclude writ jurisdiction in such circumstances.

Final Judgment

The Supreme Court set aside the High Court’s order and directed the Facilitation Council to reconsider the dispute in accordance with the prescribed procedure under Section 18 of the MSMED Act. It ruled:

“The matter is remitted to the Micro, Small, and Medium Enterprises Facilitation Council, Chhattisgarh, to decide the case afresh within six months following the statutory procedure.”

Implications of the Judgment

Reinforces Due Process: The judgment clarifies that the Facilitation Council must adhere to the statutory framework and cannot reject jurisdiction arbitrarily.
Strengthens MSME Rights: Small enterprises can seek fair dispute resolution under the MSMED Act without procedural roadblocks.
Clarifies Arbitration Law: The ruling distinguishes between administrative orders and arbitral awards, ensuring that only properly adjudicated disputes are subject to arbitration appeals.
Restores Writ Jurisdiction: High Courts can intervene in cases where statutory bodies fail to exercise their mandated powers.

Conclusion

The Supreme Court’s decision upholds the integrity of the MSMED Act’s dispute resolution process. By directing the Facilitation Council to reconsider the dispute and follow proper conciliation and arbitration procedures, the judgment ensures that small enterprises are not unfairly denied justice. It also reaffirms the principle that High Courts can exercise writ jurisdiction when statutory bodies fail to act in accordance with the law.

Petitioner Name: M/s Vijeta Construction.
Respondent Name: M/s Indus Smelters Ltd. & Anr..
Judgment By: Justice M. R. Shah, Justice A. S. Bopanna.
Place Of Incident: Chhattisgarh.
Judgment Date: 23-09-2021.

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