Even In The Absence Of An Arbitration Agreement, The Matter Can Be Referred To Arbitration Under Section 18 Of The MSMED Act: Punjab And Haryana High Court

The Single Bench of Justice Lisa Gill reiterated that the MSMED Act being a Special Act shall prevail over the Arbitration and Conciliation Act, 1996 (A&C Act). The Court held that even if there was an agreement between the parties for resolution of disputes by arbitration, if a seller was covered under the MSMED Act, the agreement between the parties would have to be ignored in view of the mechanism provided under the MSMED Act.

The respondent M/s Goyal Plywood LLP supplied goods to the petitioner M/s SGM Packaging Industries. After the petitioner failed to clear the dues in respect of the goods supplied to it, the respondent filed a claim before the Haryana Micro and Small Enterprises Facilitation Council (HMSEFC). The HMSEFC, thereafter, appointed a Sole Arbitrator and referred the parties for arbitration.

The petitioner filed a petition before the Punjab and Haryana High Court under Section 14 of the A&C Act read with Section 151 of the Code of Civil Procedure, 1908, seeking termination of the mandate of the Sole Arbitrator.

The petitioner SGM Packaging Industries submitted before the Punjab and Haryana High Court that the matter was referred for arbitration without any appropriate procedure of conciliation being followed under the MSMED Act.

The petitioner contended that it had filed an application under Section 12 of the A&C Act before the Sole Arbitrator seeking the required declaration from the Arbitrator regarding his independence and impartiality. The petitioner added that it had raised an objection in the said application that there was no arbitration agreement existing between the parties and thus the matter could not be referred to arbitration. The petitioner averred that the said application was dismissed by the Sole Arbitrator.

The respondent Goyal Plywood LLP averred that it was registered under the MSMED Act and that it had approached the HMSEFC for redressal of its grievances regarding non-payment of the outstanding dues by the petitioner firm. The respondent contended that the petitioner was intimated by the HMSEFC regarding the same and that the petitioner was advised to pay the outstanding amount to settle the dispute. The respondent averred that after the petitioner failed to pay the outstanding amount, the HMSEFC passed an order referring the matter to the Sole Arbitrator. The respondent added that the petitioner had failed to challenge the said order of the HMSEFC referring the matter to the Arbitrator and that the arbitral proceedings were maintainable under the MSMED Act.

The respondent contended that in order to approach the HMSEFC under the MSMED Act, existence of an arbitration agreement between the parties was not required.

Section 18(1) of the MSMED Act provides that any party to a dispute may make a reference to the Micro and Small Enterprises Facilitation Council (MSEFC). Under Section 18(2), the MSEFC shall either itself conduct conciliation proceedings in the matter or it may seek the assistance of any institution or centre. Section 18(3) provides that where the conciliation initiated under Section 18(2) is not successful, the MSEFC may either itself take up the dispute for arbitration or refer the matter to any institution or centre for arbitration.

The Court noted that the petitioner had not challenged the appointment of the Sole Arbitrator by the HMSEFC. The Court added that the respondent, who was registered under the MSMED Act, was entitled to approach the HMSEFC under the MSMED Act for redressal of its grievance.

The Court observed that in view of the decision of the Supreme Court in the case of M/s Silpi Industries versus Kerela State Road Transport Corporation (2021), the MSMED Act being a Special Act shall prevail over the A&C Act and have an overriding effect.

Thus, the Court held that even if there was an agreement between the parties for resolution of disputes by arbitration, if a seller was covered under the MSMED Act, the agreement between the parties would be ignored in view of the mechanism provided under the MSMED Act. The Court added that the seller, in that case, could approach the competent authority to address its grievances under the MSMED Act.

The Court noted that Section 18 of the MSMED Act, that deals with reference of a dispute to a Micro and Small Enterprises Facilitation Council (MSEFC), starts with a non-obstante clause.

Thus, the Court held that even in the absence of an arbitration agreement between the parties, the matter could be referred to arbitration under Section 18 of the MSMED Act.

The Court added that though the petitioner had contended that no conciliation proceedings under the MSMED Act were carried out and therefore the reference to arbitration was invalid, the petitioner had not challenged the appointment of the Sole Arbitrator.

Thus, the Court held that the only remedy the petitioner had was to challenge the arbitral award after it was made. The Court thus dismissed the petition.

Case Title: M/s SGM Packaging Industries versus M/s Goyal Plywood LLP

Citation: 2022 LiveLaw (PH) 147

Dated: 10.06.2022 (Punjab and Haryana High Court)

Counsel for the Applicant: Mr. D.S. Sobti

Counsel for the Respondent: Mr. Vikram Amarnath

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