Arbitration Survives Even If Arbitration Under MSMED Act Declared Non-Maintainable: Madras High Court

However, the Court held that if the Facilitation Council declines to exercise jurisdiction on the ground that the petition was not maintainable before it, the arbitration clause contained in the agreement between the parties would survive.

The single bench of Justice Senthilkumar Ramamoorthy observed that by way of a legal fiction contained under Section 18(3) of the MSMED Act, an arbitration agreement in terms of the A&C Act is statutorily imported once the dispute is taken up for arbitration under the MSMED Act. The Court ruled that the said legal fiction does not have the effect of novating the agreement between the parties by deleting the arbitration clause contained in the said agreement.

The petitioner- M/s. Deetech Projects Pvt. Ltd., and the respondent- M/s. Batliboi Environmental Engineering Ltd., entered into a Consortium Agreement. After certain disputes arose between the parties, the petitioner referred the dispute to the Facilitation Council under the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act). The Facilitation Council passed an order holding that the petition filed by the petitioner was not maintainable before it under the MSMED Act. Thereafter, the petitioner issued a notice invoking the arbitration clause. After the respondent rejected the appointment of the person proposed by the petitioner as a sole arbitrator, the petitioner filed a petition under Section 11 (4)(a) of the Arbitration and Conciliation Act, 1996 (A&C Act) before the Madras High Court, seeking appointment of an arbitrator.

The respondent- M/s. Batliboi Environmental Engineering, submitted before the High Court that since the petitioner had elected to adjudicate the dispute under the MSMED Act, it had abrogated and waived its right under the arbitration clause to have the dispute adjudicated through arbitration. The respondent averred that the arbitration clause stands superseded once the parties take recourse to the statutory mechanism under the MSMED Act.

The High Court ruled that upon reference of the dispute to the Facilitation Council under the MSMED Act, if the Facilitation Council adjudicates the dispute on merits, such decision would operate as res judicata and would bar the institution of arbitral proceedings in respect of the same dispute. Further, the bench held that Section 18(3) of the MSMED Act contains a legal fiction by which an arbitration agreement in terms of Section 7 of the A&C Act, is statutorily imported once the dispute is taken up for arbitration by the Facilitation Council or is referred to any institution or centre for such arbitration.

While noting that the Facilitation Council had declined to exercise its jurisdiction on the ground that the petition was not maintainable before it, the Court observed that the petitioner could not avail the statutory remedy under the MSMED Act.

The Court laid down that the scope of a legal fiction cannot be extended beyond its purpose. Thus, the bench held that the legal fiction contained in Section 18(3) of the MSMED Act cannot be relied upon by the respondent to contend that it had the effect of novating the Agreement between the parties by deleting the arbitration clause contained therein.

The Court took into account that there was no evidence of novation of the Consortium Agreement containing the arbitration clause. Thus, it concluded that since the Facilitation Council had declined to exercise jurisdiction on the ground that the petition was not maintainable before it, the arbitration clause contained in the Agreement survived.

Holding that the petition clearly fell within the scope of Section 11 of the A&C Act, the Court allowed the petition and appointed a Sole Arbitrator.

Case Title: M/s. Deetech Projects Pvt. Ltd. versus M/s. Batliboi Environmental Engineering Ltd.

Citation: 2022 LiveLaw (Mad) 465

Dated: 03.11.2022 (Madras High Court)

Counsel for the Petitioner: Mr. N. Umapathi

Counsel for the Respondent: Mr. B. Sudarshan

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