Reference Made Under MSMED Act; District Court Has Power To Extend Mandate Or Substitute Arbitrator Under Section 29A Of A&C Act: Bombay High Court

The Single Bench of Justice Anuja Prabhudessa held that since there is no provision under the MSMED Act to extend the mandate of the arbitrator or substitute the arbitrator, hence, if the provisions of Section 29A of the A&C Act are made inapplicable to the reference made under the MSMED Act, it would render the arbitral scheme under the MSMED Act otiose.

The Bench, noting that there are conflicting views regarding the jurisdiction of the District Court to extend the mandate or substitute the Arbitrator under Section 29A of the A&C Act, ruled that the meaning of the word 'Court', as defined in Section 2(1)(e) of the A&C Act, is subject to the requirement of the context.

The respondent- M/s. Artcad Systems, an enterprise registered under the provisions of the MSMED Act, supplied certain goods to the petitioner- M/s. Magnum Opus IT Consulting Private Limited. Certain disputes arose between the parties relating to the amount payable to the respondent for the goods supplied by it, which was taken up for arbitration by the Facilitation Council under Section 18 of the MSMED Act.

After the Facilitation Council closed the matter since the petitioner failed to appear before the Council, the respondent filed an application before the Bombay High Court to revive the arbitral proceedings. The Bombay High Court revived the arbitral proceedings and directed the Facilitation Council to decide the reference.

Since the Facilitation Council failed to conclude the arbitration within the stipulated time and there was no progress in the arbitral proceedings for a period of over three years, the respondent filed an application under Section 29A of the A&C Act before the District Court to substitute the Arbitrator. The District Court allowed the application and substituted the Arbitrator. Against this, the petitioner filed a writ petition before the Bombay High Court.

The petitioner M/s. Magnum Opus submitted before the High Court that Section 29A of the A&C Act is not applicable to the arbitral proceedings initiated under the MSMED Act.

The petitioner contended that the District Court did not have the jurisdiction to substitute the Arbitrator appointed under the provisions of the MSMED Act, especially in view of the fact that the Bombay High Court in its order had revived the arbitral proceedings and appointed an Arbitrator. Hence, it argued that the power to extend the mandate of the Arbitrator or to substitute the Arbitrator lied only with the Supreme Court and the High Court and not with the District Court.

The respondent M/s. Artcad Systems contended that since the arbitral proceedings pending before the Facilitation Council under the MSMED Act were not concluded within the time limit stipulated under Section 29A of the A&C Act, therefore, the District Court, which is a 'Court' as defined under Section 2 (1)(e) of the A&C Act, had the jurisdiction to extend the mandate or to substitute the Arbitrator. Further, the respondent argued that the Bombay High Court had not appointed an Arbitrator under Section 11 of the A&C Act, and that it had only revived the arbitral proceedings which were terminated by the Facilitation Council.

Referring to the provisions of Section 18(3) of the MSMED Act and Section 2(4) of the A&C Act, the Court held that the provisions contained in Part I of the A&C Act are applicable to the arbitral proceedings initiated under Section 18 of the MSMED Act.

While holding that Section 18 of the MSMED Act provides for an independent forum for arbitration and stipulates the time period to conclude the arbitration, the Court noted that there is no provision under the MSMED Act for extension of time or substitution of the Arbitrator even in cases of inordinate delay in passing an award or in cases of inaction by the Arbitrator.

Hence, the Court held that by virtue of Section 18(3) of the MSME Act, the provisions of Section 29A of the A&C Act, which enables the Court to extend the mandate of the Arbitrator or substitute the Arbitrator, would be applicable to the reference made under MSMED Act.

The Bench added that the object of Section 18 of the MSMED Act is to provide for an expeditious and efficacious dispute resolution mechanism to resolve the disputes regarding the amount payable to the supplier under Section 17 of the MSMED Act. Hence, it held that if the provisions of Section 29A of the A&C Act are made inapplicable to the reference made under the MSMED Act, it would render the arbitral scheme under the MSMED Act otiose.

While noting that there are conflicting views regarding the jurisdiction of the District Court to extend the mandate or substitute the Arbitrator under Section 29A of the A&C Act, the Court ruled that the meaning of the word 'Court', as defined in Section 2(1)(e) of the A&C Act, is subject to the requirement of the context.

"Hence, when the High Court or the Supreme Court, as the case may be, appoints the Arbitrator in exercise of jurisdiction under Section 11, the term 'Court' would require contextual interpretation, which is permissible in view of the rider contained in Sub Section 1 of Section 2 of the Arbitration and Conciliation Act. Any other interpretation would create anomalous situation and irreconcilable conflict between the power of the superior court to appoint an Arbitrator and the power of the District Court to substitute such Arbitrator in exercise of powers under Section 29-A. Such conflict can be avoided only by purposive interpretation."

Noting that the Facilitation Council under the MSMED Act had not concluded the arbitration within a period of 90 days, as stipulated under Section 18(5) of MSMED Act, or within the time limit specified under Section 29A of the A&C Act, the Bench held that the inaction of the Arbitrator had rendered the Arbitral Scheme envisioned under Section 18 of the MSMED Act nugatory. Observing that there is no provision under the MSMED Act to extend the mandate of the arbitrator or substitute the arbitrator, the Court ruled that the only remedy available to the respondent was to approach the Court under Section 29A of the A&C Act.

"As noted above, in the instant case, the Arbitration proceedings had commenced under section 18 of the MSMED Act. The Arbitrator was neither appointed under section 11 of the Arbitration and Conciliation Act nor substituted by this Court, by order dated 17/11/2017. By this order, this Court had only revived the arbitration proceedings which were closed by the Council. Hence, in the context of the present matter, interpreting the word 'Court' to mean principal civil court of original jurisdiction does not lead to an anomalous situation and does not give rise to conflict of powers", the Court said.

Ruling that the petitioner has a remedy under Section 34 of the A&C Act to challenge the jurisdiction of the Arbitrator, the Court held that the order passed by the District Court did not suffer from lack of inherent jurisdiction. Thus, the Court dismissed the writ petition.

Case Title: M/s. Magnum Opus IT Consulting Private Limited versus M/s. Artcad Systems

Dated: 14.09.2022 (Bombay High Court)

Counsel for the Petitioner: Mr. Nitesh Bhutekar

Counsel for the Respondent: Mr. Anand Bhandari i/b. Mr. Vivekanand V. Krishnan

Citation: 2022 LiveLaw (Bom) 354 

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