MSME Act Doesn't Bar Independent Arbitration Under Arbitration And Conciliation Act Based On Agreement Clause: Calcutta High Court

The bench held that if a party involved in a dispute chooses to pursue arbitration independently under the Arbitration and Conciliation Act, 1996, based on an arbitration clause in the agreement between the parties, the MSME Act does not restrict the claimant from doing so.

Brief Facts:

Gita Refractories Pvt Ltd (Petitioner), an MSME unit registered under the Micro, Small & Medium Enterprises Development Act, 2006 (MSME Act) since its inception, filed an application under Section 11 of the Arbitration and Conciliation Act, 1996 in the High Court. The Petitioner argued that the mandatory provisions of Section 18 of the MSME Act are not applicable. It contended that under sub-section (1) of Section 18, the parties are provided with an option to either resolve their dispute through mediation and arbitration under the MSME Act or seek remedies through other legal avenues. The use of the term "may" in the statute, according to the Petitioner, suggests that the parties are not obligated to follow the process outlined in Section 18.

Further, the Petitioner argued that its claim is not confined solely to the recovery of amounts due under Section 17 of the MSME Act, which would otherwise fall within the purview of Section 18. In addition to the recovery of the payment for goods supplied, the Petitioner sought a direction requiring the respondent to purchase goods that the petitioner procured for supply under their agreement. In the alternative, the Petitioner sought damages or compensation for the Respondent's failure to accept and purchase those goods. This, according to the Petitioner, broadens the scope of the dispute beyond what is contemplated under Section 17 of the MSME Act.

On the other hand, the Respondent argued that the application filed under Section 11 of the Arbitration Act does not comply with the necessary procedural requirements. Specifically, it argued that the Petitioner has failed to adhere to the Practice Directions issued by the Court concerning Commercial Courts, as per the notification dated October 13, 2023. The Respondent pointed out that the Petitioner has not complied with Clauses (a) and (e) of Clause 6(1) of these directions, thereby making the application procedurally defective.

Observations by the High Court:

The High Court noted that the mandate and strict requirements of the non obstante clause preceding Section 18(1) of the MSME Act apply only if the parties choose to submit to the jurisdiction of the said Act. It held that the expression "may," as used in sub-Section (1) of Section 18, makes it abundantly clear that a party has the option to decide whether to take its dispute to the Facilitation Council under the MSME Act or pursue an alternative remedy before a different forum. It held that the rest of the provision becomes mandatorily applicable only when a party raising the dispute opts to submit to the jurisdiction of the Facilitation Council under Section 18 of the MSME Act.

It held that the second component of the Petitioner's argument was equally justified. The bench held that Sub-Section (1) of Section 18 of the MSME Act pertains solely to disputes arising under Section 17 of the Act, which is concerned with the recovery of amounts due for goods supplied or services rendered by the supplier. In the case, however, the claim of the Petitioner was broader and not limited to the recovery of an amount due for goods supplied. It noted that it extended to a direction being sought against the Respondent for purchasing the goods procured by the Petitioner for supply to the respondent and, alternatively, for compensation or damages from the Respondent for failing to purchase such goods. Since the scope of the dispute went beyond Section 17, the bench held that the Petitioner cannot be confined to the relief contemplated under Section 18, which only covers disputes under Section 17.

Further, the High Court observed that Section 18 of the MSME Act does not create any substantive rights or liabilities but merely provides an alternative modality for parties to resolve disputes, other than through court proceedings. It held that if a disputing party chooses to opt for arbitration independently under the Arbitration Act, relying on an arbitration clause in the agreement between the parties, nothing in the MSME Act prevents the claimant from doing so.

Regarding the Respondent's objection concerning non-compliance with the Practice Directions, the High Court noted that the application was one under Section 11 of the Arbitration Act which is merely a precursor to the appointment of an arbitrator. It held that the application was not required to undergo the same rigours as a plaint or a statement of claim. It is only after the appointment of the arbitrator under Section 11 that the pleadings are required to be filed by the parties in the form of a claim and a defence. Hence, at this preliminary stage, the bench held that it would be premature to apply the full rigours of pleadings akin to a plaint.

Therefore, the High Court allowed the petition on contest and appointed Mr. Reetobroto Kumar Mitra, a member of the Bar Library Club, as the sole arbitrator to resolve the dispute between the parties.

Case Title: Gita Refractories Pvt Ltd Vs Tuaman Engineering Limited

Case Number: AP-COM/707/2024

Advocate for the Petitioner: Mr. Shayak Chakraborty, Adv. Ms. Sanjukta Majumdar, Adv. Mr. Rameez Alam, Adv. . . .for the petitioner.

Advocate for the Respondent: Mr. Amit Kumar Nag, Adv. Ms. Pritha Bhaumik, Adv. . . .for the respondent.

Date of Judgment: 10th September, 2024