Facilitation Council Under MSMED Act Has No Jurisdiction To Conduct Arbitration Dispute Arising Under A Works Contract: Bombay High Court

The bench of Justice Manish Pitale remarked that a works contract is not amenable to the provisions of the MSMED Act, and therefore the MSMED Act could not have been invoked by the claimant/ award holder.

The Court concluded that the lack of jurisdiction of the Facilitation Council to conduct the arbitral proceedings rendered the arbitral award patently illegal.

The petitioner, National Textile Corporation Ltd, floated a tender for Works Contract. The respondent, Elixir Engineering Pvt Ltd, was the successful bidder, and thereafter, contracts were executed between the parties, leading to issuance of various work orders.

Not satisfied with the final payments made under the Contract, the respondent, Elixir Engineering, raised claims under various heads, which were not allowed by the Corporation. Thereafter, Elixir Engineering filed an application under Section 18 of the MSMED Act before the Facilitation Council. In the arbitral proceedings undertaken by the Facilitation Council under Section 18(3) of the MSMED Act, the Facilitation Council passed an award directing the Corporation to pay an amount along with interest to the respondent.

The petitioner, National Textile Corporation, filed a petition under Section 34 of the Arbitration and Conciliation Act, 1996 before the Bombay High Court, challenging the said award.

The Corporation submitted before the Court that the arbitral award was passed without jurisdiction, since a works contract is not amenable to the provisions of the MSMED Act. Since the dispute between the parties arose in relation to the works contracts, the Facilitation Council had no jurisdiction to undertake statutory arbitration under Section 18(3), it pleaded.

The Corporation further argued that no reasons were recorded in the award while allowing the claims of the respondent, Elixir Engineering. Thus, the award was passed in violation of public policy of India, it submitted.

Perusing the contracts/ work orders executed between the parties, the bench concluded that the contracts in question were indeed works contracts.

The bench referred to the judgment of the Bombay High Court in M/s. P. L. Adke vs. Wardha Municipal Corporation/Council (2021), where it was ruled that a works contract is not amenable to the provisions of the MSMED Act. The High Court in P. L. Adke (2021) had reckoned that a works contract being a composite contract, is indivisible and it cannot be deconstructed into its elements of supply of goods and services.

Thus, the bench concluded that the MSMED Act could not have been invoked by the respondent, Elixir Engineering.

“Therefore, following the judgment in the case of M/s. P. L. Adke Vs. Wardha Municipal Corporation/ Council, it is held that the provisions of the MSMED Act could not have been invoked by Respondent No. 1. This clearly shows that the initiation of the statutory arbitration under the provisions of the MSMED Act on the part of Respondent No. 1 in the context of contracts in question before the Facilitation Council, was a stillborn exercise and that the Facilitation Council could not have exercised jurisdiction to conduct the arbitration proceedings,” the Court said.

While holding that the said aspect goes to the very root of the matter, the bench remarked that the lack of jurisdiction of the Facilitation Council to conduct the arbitration proceedings rendered the arbitral award patently illegal.

While dealing with the Corporation’s contention that the award was passed in violation of public policy of India since no reasons were stated in the award, the Court, on perusing the award, remarked that although the Facilitation Council had referred to the submissions made on behalf of the parties, but the discussion was not satisfactory. Further, the most significant aspect pertaining to the jurisdiction of the Facilitation Council was itself not dealt with in an appropriate manner, the Court said.

Referring to the award, the Court added, “The Facilitation Council has also not considered the fact that the contracts/work orders specifically provided that there shall be no payment for drawings and yet it has granted the claims of Respondent No. 1 under the said head. Therefore, there is substance in the contention raised on behalf of the Petitioner that the impugned awards are against public policy of India.”

The Court, however, ruled that since the provisions of the MSMED Act could not have been invoked in the present case, the award was rendered without jurisdiction and thus, it was liable to be set aside on the said ground alone.

The bench thus allowed the petition and set aside the award.

Case Title: National Textile Corporation Ltd vs. Elixir Engineering Pvt Ltd & Anr.

Citation: 2023 LiveLaw (Bom) 150

Dated: 21.03.2023

Counsel for the Petitioner: Mr. Siddhesh Sutar i/by Mr. Anjani Kumar Singh, Mr. Shardul Singh, Ms. Swapnila Rane and Ms. Vanita Kakar.

Counsel for the Respondents: Mr. Suresh Dhole, Mr. S. Shamin, Mr. Murtuza Statwala i/by Shamin & Co; Mr. Himanshu B. Takke, AGP for Respondent No. 2 – State.

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