Separate Arbitration Agreement Necessary Between Parties For Reference To Arbitration U/s 18(3) Of MSMED Act by Council: Bombay High Court

Brief Facts:

M/s Bafna Udyog (“Petitioner”), registered as a small entity under the Micro, Small & Medium Enterprises Development Act, 2006 (“MSMED Act”), claimed that Siddhivinayak Exports (“Respondent No.2”), a buyer, was liable to pay Rs.92,41,072/- with future interest as per the MSMED Act till realization of the amount. After attempts to resolve disputes, the Petitioner filed a certificate of termination under Section 76(d) of the Arbitration & Conciliation Act, 1996 (“Arbitration Act”) with the Micro & Small Enterprises, Facilitation Council (“MSEFC”). The MSEFC, however, failed to act in accordance with Section 18(3) of the MSMED Act and did not refer the dispute to arbitration. This inaction prompted the Petitioner to file an application under Section 11(6) of the Arbitration Act in the Bombay High Court (“High Court”).

The Petitioner argued that the MSEFC's failure to arbitrate within the mandatory ninety-day period after conciliation failure grants the court jurisdiction to appoint an arbitrator under Section 11(6) of the Arbitration Act. The Petitioner emphasized that Section 18(3) of the MSMED Act provides for a deemed arbitration agreement, thereby, eliminating the need for a separate arbitration agreement between the parties. Additionally, it contended that Section 11(6) of the Arbitration Act empowers the court to appoint an arbitrator when an institution, such as the statutory council, fails to perform its statutory function.

Observations by the High Court:

The High Court noted that the contractual authority for the Arbitral Tribunal to adjudicate disputes is derived from the arbitration agreement, in which parties enter voluntarily, relinquishing their rights to adjudicate through conventional legal channels.

The High Court noted that Section 18 of the MSMED Act provides conciliation as the initial step, and if unsuccessful, the MSEFC may take up the dispute for arbitration or refer it to any institution. Only then do the provisions of the Arbitration Act apply as if the arbitration was in pursuance of Section 7 of the Arbitration Act. Addressing Section 11(6)(c) of the Arbitration Act, the High Court clarified that this provision vests jurisdiction in the court to appoint an arbitrator if a person or institution fails to perform a function entrusted to it "under that procedure." The High Court highlighted that the phrase “under that procedure” refers to a procedure agreed upon by the parties, implying the existence of an arbitration agreement as per Section 7 of the Arbitration Act. In the absence of such an agreement, Section 11(6)(c) of the Arbitration Act cannot be invoked.

Additionally, the High Court referred to the decision of the Supreme Court in Mahanadi Coal Fields v. IVRCL AMR. Joint Venture [2022 LiveLaw (SC) 657], wherein the SC held that the invocation of the court's jurisdiction under Section 11(6) of the Arbitration Act was invalid without a valid arbitration agreement between the parties. The High Court held that the Petitioner cannot rely on the inaction of the MSEFC in referring to arbitration to invoke Section 11(6) of the Arbitration Act and appoint an arbitrator without the existence of an arbitration agreement.

Consequently, the High Court dismissed the petition as not maintainable but granted the Petitioner the liberty to seek redressal through the available legal remedies.

Case Title: M/s Bafna Udyog vs Micro & Small Enterprises, Facilitation Council and anr.

Case Number: ARBITRATION PETITION NO.201 OF 2023

Advocate for the Petitioner: Mr Alankar Kirpekar, with Mr Ayush Tiwari, Shekhar Bhagat, Rajas Panandikar, i/b Shekhar Bhagat

Advocate for the Respondent: N.A.

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