Provisions Of The MSMED Act Overrides The Arbitration Agreement Between The Parties: Madras High Court

The Bench of Justice Pushpa Sathyanarayan and Justice P. Velmurgan observed that once a reference is filed before the MSME Council under S. 18 of the Act, the provisions of the arbitration clause must yield to the provisions contained under S. 18 of the Act.

Facts

The Parties entered into an agreement for "Creation of e-Learning Portal and Development of Digital Content for Directorate of Distance Education." Clause 14 of the agreement provided for arbitration. Certain disputes arose between the parties regarding the payments, the 2^nd respondent filed a reference before the MSME Council under S. 18 of the Act and claimed interest on the payment. The Council admitted the reference application.

The Appellant filed a writ petition against the reference application. However, the Court dismissed the writ petition on the ground that the dispute falls within the realm of private law and an alternative mechanism for settlement of the dispute is available under the aegis of the Council.

Contention Of The Parties

The Appellant challenged the invocation of the jurisdiction of the MSME Council on the following grounds:

• That the parties have entered into an agreement that contains an arbitration clause that sets out the scope and ambit of arbitration, therefore, the respondent cannot be permitted to now file a reference before the MSME Council contrary to the terms of the agreement.
• That the respondent has registered as an MSME only after the agreement between the parties was entered into, therefore, the respondent cannot file a reference in relation to an agreement that preceded its registration.
• That the arbitration clause had specifically provided for a procedure to appoint the arbitrator and designated Madurai as the seat of Arbitration, however, the reference is filed before the Council at Coimbatore, therefore, the same is not valid.

The respondent countered the arguments canvassed by the Appellant on the following grounds:

• MSMED Act is a special legislation enacted to promote and facilitate the development of MSMEs.
• At best, the agreement can only be regarded as an additional method of appointment of an arbitrator, the same cannot exclude the provisions of the MSMED Act.
• Section 18 is also a non-obstante clause which gives it an overriding effect; therefore, the agreement stands eclipsed.

Analysis By The Court

The Court relied on the judgments of various High Courts wherein the Courts have specifically expounded on the same issue to hold that the provisions of the MSMED Act would override the arbitration clause between the parties.

The Court observed that S. 18 of the MSMED Act will override the arbitration clause between the parties. The Court observed that since S. 24 of the MSMED Act is a non-obstante clause, it gives overriding effect to the provisions of S. 15 -23 of the Act. Moreover, S.18 itself begins with a non-obstante clause, therefore, the same shall supersede the arbitration clause.

The Court also relied on the period of limitation, provided under MSMED Act, to complete the arbitration proceedings to hold that the Act is a special enactment and will override the Arbitration Act in case of any inconsistency.

However, the Court clarified that S.18 is confined to the issue of unpaid dues, therefore, for disputes other than unpaid dues, the arbitration agreement shall prevail.

Consequently, the Court dismissed the Writ Appeal.

Case Title: Madurai Kamraj University v. The Chairman, Micro & Small Enterprises Facilitation Council and Anr. W.A.(MD) No. 1002/2021

Date: 01.02.2022

Counsel for the Appellant: Mr. Sricharan Rangarajan and Mr. T. Sakthi Kumaran

Counsel for the Respondents: Mr. K.V. Om Prakash for Conscientia Law Associates.

Citation: 2022 LiveLaw (Mad) 160

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