[S.18 MSMED Act] Arbitration Agreement Pending Adjudication By Facilitation Council Is Eclipsed, Not Obliterated: Calcutta High Court

The Calcutta High Court has recently held that an arbitration agreement pending adjudication by the facilitation council is eclipsed not obliterated.

A single bench of Justice Moushumi Bhattacharya held:

There is nothing in the MSMED Act to suggest, least of all section 18, that the arbitration conducted by the Facilitation Council would subsume the arbitration agreement between the parties or alter the seat/venue chosen by them. At best, the arbitration agreement is eclipsed during the adjudication by the Facilitation Council – only to rise again after the Council pronounces its decision. Thus, the arbitration agreement between the parties takes precedence after publication of the award by the Facilitation Council. 

Brief facts

The petitioner/award-debtor prayed for stay and setting aside of an award passed by the West Bengal Micro Small Enterprises Facilitation Council ('Council').

Respondent/award-holder submitted that the Calcutta High Court would not have territorial jurisdiction to entertain the application since the MSME Council was the only venue for the arbitration and the dispute resolution clause provided for the conciliation to be conducted at Bhubaneshwar. 

It was argued that courts in Odisha shall have jurisdiction to entertain any disputes and that the venue of the arbitration being the MSME Council office shall not be considered the seat of arbitration. 

Counsel for the petitioner submitted that although the venue was contemplated to be at Bhubaneshwar, the respondent had bypassed the arbitration agreement by taking recourse to the MSMED Act.

It was argued that under Section 24 of the MSMED Act, the arbitration agreement was superseded by Section 18 of the Act, and once the respondent had availed the mechanism under the Act, it could not go back to the arbitration agreement.

Court's findings

Court noted that the agreement between the parties showed that they intended to approach the Court in Odisha for adjudication of disputes arising out of the agreement and the question was whether the parties could revert to the venues of their choice once an award had been made by the facilitation council.

It was observed that Section 18 provided for a sequence of stages after a reference made by a party under section 17 of the Act.

It was noted that Section 18(3) of the Act provided that the provisions of the Arbitration Act, 1996, shall apply to the dispute in the same manner as would be applicable over an arbitration agreement under Section 7(1) of the 1996 Act.

Court observed that Section 18 of the MSMED Act would operate only during the pendency of the conciliation and ends with the decision of the Council.

In negating the petitioner's argument under Rule 9 of the West Bengal Micro and Small Enterprises Facilitation Council Rules, the Court said that the arbitration cannot be un-seated simply by the statutory arbitration under the provisions of the MSMED Act which, in any event, is meant to last till the Facilitation Council decides on the reference under section 18(1) of the said Act.

It was further held that since Section 18(3) vests the facilitation council with the power to either take up the arbitration or refer it to any other alternate dispute resolution center, the venue of the facilitation council would not become the seat of the arbitration.

Rule 9 of the 2016 Rules must be read in the above context and be construed as the venue and not the seat of arbitration. This is also by reason of the fact that the arbitration provided by the Facilitation Council cannot take away the free choice of the parties in the matter of seat and venue and override the same by the situs of the statutory arbitration, it said.

In perusing the non-obstante clauses in Section 18(1) and (4) of the MSMED Act, the Court said that the MSMED Act was a special statute and section 18 makes the location of the defendant irrelevant for initiating proceedings before the facilitation council, and that the non-obstante clauses must be given a limited meaning.

It stated that the MSMED Act does not contemplate a lock-in dispute resolution mechanism where a party who approaches the council must relinquish its rights or freedom to choose the manner of dispute resolution under an independent arbitration agreement.

Court hence refused to accept the argument that the arbitration agreement was obliterated when the respondent approached the facilitation council. 

It was held that the MSMED Act vests the facilitation council with the power of an arbitrator under the deeming fiction of Section 18(3) of the Act.

However, it was also reiterated that the council's roleplay as the arbitrator only lasts till the pronouncement of the decision on the reference. It said:

The framework of section 18 makes it clear that the legislature intended to clothe the Facilitation Council with the powers of an arbitrator only for the limited purpose of adjudicating upon the reference under section 18(1) and for the necessity of grounding the adjudication on a statute.

It was stated that the legislative intent behind Section 18(3) of the MSMED Act was not to usurp the powers of the Arbitration Act and was only brought in to speed up the process of adjudication by the Facilitation Council between a supplier and a buyer when the supplier is a micro, small or medium enterprise.

There is nothing in the MSMED Act to suggest, least of all section 18, that the arbitration conducted by the Facilitation Council would subsume the arbitration agreement between the parties or alter the seat / venue chosen by them. At best, the arbitration agreement is eclipsed during the adjudication by the Facilitation Council – only to rise again after the Council pronounces its decision, it was held.

Accordingly, the Court stated that the arbitration conducted by the facilitation council cannot vest the jurisdiction in Calcutta High Court in derogation of the venue chosen by the parties to be Odisha, in the arbitration agreement. 

It was held that the facilitation council was not the seat of the arbitration, but the venue and therefore the Calcutta High Court would not be able to hear the challenge against the award of the facilitation council.

Citation: 2024 LiveLaw (Cal) 74

Case: Odisha Power Generation Corporation Limited Vs. M/s. Techniche Consulting Service and Others

Case No: AP Com 365 of 2024

Click here to read order