"Any Objection Regarding Non-Applicability Of MSMED Act Can Be Decided By Arbitral Tribunal U/S 16 Of A&C Act": Delhi High Court

Facts Overview:

GAIL issued a tender for the service of HDD works at Kochi, Koottanad, Banglore, Manglore, Phase II Section VIIB. The appellant was awarded the contract under this tender. To fulfil the contractual obligations, the appellant subcontracted the work to Harji Engineering Pvt Ltd (HEWPL) for the installation of 24 PE coated pipe + 6 Dia Pipe with HDD works from Singasndra Banglore to Krishnagiri Section for RLNG Gas Pipeline Project (Phase-II), and a purchase order dated 10 July 2018 was issued by HEWPL in favour of Respondent No. 3. HWEPL sent a letter dated 30 November 2018 to the appellant, stipulating that M/S Knock Pro Infra Pvt Ltd bills would be paid directly by M/S CIPL from the R A bill raised by HEWPL. A settlement sheet, duly signed and agreed upon, will be provided. According to this letter, a settlement sheet dated 14 December 20218 was executed between HWEPL and Respondent No. 3. The settlement sheet contained a 'Direct Payment Agreement' for the HDD services provided by Respondent No. 3.

Respondent No. 3 filed a case before the Micro and Small Enterprise Facilitation Council (MSFEC), alleging non-payment of dues by the appellant. The conciliation proceedings between the parties were unfruitful. Consequently, a reference was made to the Delhi International Arbitration Center (DIAC) under Section 18(3) of the MSMED Act to initiate arbitration proceedings. Regarding the reference, DIAC, vide notice dated 13 May 2024, called the parties to file their respective Statement of Claim (SoC). The parties were warned that failure to file the SoC would result in the closure of proceedings. DIAC vide communication dated 2 July 2024, and 2 August 2024 directed the parties to pay the arbitrator's fee and miscellaneous expenses with the DIAC.

The appeal is filed under Clause X of the Letters Patent Act, 1866, challenging the judgment passed by the single judge dismissing the writ petition as non-maintainable.

Submissions of the Parties:

The appellant made the following submissions:

• Per Section 23(4) of the A&C Act, the parties were obligated to complete their pleadings within six months from the date of the arbitrator's appointment. Under Section 25(a), the proceedings would terminate if there was non-compliance with Section 23(4). Given that respondent no. 3/claimant failed to submit the SoC within the stipulated time frame, starting from the notice dated 11 November 2022. The proceedings are deemed to have been terminated. Consequently, the notice issued by respondent no. 1/DIAC, on 13 May 2024, was without jurisdiction and violated the provisions of the A&C Act.
• The period for completion of the arbitral proceedings under Section 29A(1) and 29A(3) of the A&C Act has expired. The respondent no. 1/DIAC could not extend the time limit independently as neither the Act nor the DIAC Rules confer any such authority.
• In the absence of the privity of contract, no reference to the dispute to arbitration could be maintained. When awarding the sub-contract, respondent no.3/claimant was not registered under the MSMED Act. When a party is not registered under the MSMED Act, the reference of the dispute under Section 18(3) is not allowed. In light of the Supreme Court judgement in Gujarat State Civil Supplies Corporation Ltd v. Mahakali Foods Pvt. Ltd., the provisions of the MSMED Act would apply prospectively from the date of registration. When the claimant is not an MSME, such claimant cannot make any claim under the MSMED Act. To buttress the argument, reliance was placed on Silpi Industries Etc. v. Kerala State Road Transport Corporation & Anr., and Vaishno Enterprises v. Hamilton Medical AG & Anr.
• The Courts, under Article 226/227 of the Constitution, cannot interfere in the arbitral proceedings; however, in exceptional circumstances, the High Court can intervene. The facts and the legal position in the present case make it an exception, and therefore, the writ petition be declared to be maintainable.
• If the application under Section 16 is dismissed, no provision to appeal is provided under the A&C Act to challenge the order. The only recourse left is waiting for the final award's passing to appeal under Section 34.

The respondent no.3/claimant made the following submissions:

• The appellant has only advanced submissions regarding the disputed questions of fact and tried to portray the whole controversy from the lens of lack of jurisdiction on respondent no.1/DIAC or respondent no.2/MSEFC.
• There are documents showing the appellant's responsibility to make direct payments to respondent no.3/claimant, which can be proved in the arbitral proceedings. Furthermore, the arguments advanced by the appellant at this stage can be the subject matter of the Section 16 application.
• To the extent of the services rendered and bills raised after the registration under the MSMED Act, there is no ambiguity regarding the dispute being referred to arbitration under Section 18(3) of the MSMED Act. The remedies previously sought in the writ petition can be availed before the tribunal.

Analysis of the Court:

The bench observed that the referral to arbitration can only be prospective from the date the party is registered as an MSME under the MSMED Act. The Supreme Court in Gujarat State Civil Supplies Corporation observed that the same would apply to the supply of goods and services provided after the registration as MSME—the possibility of respondent no. 3/claimant supplying goods and services after the registration but before the completion of the awarded work cannot be dismissed. There is a dispute concerning the appellant being informed about the payment settlement reached between HEWPL and respondent no. 3/claimant, and whether prior payments were directly made to respondent no. 3/claimant by the appellant. Therefore, there are several disputed factual questions apart from the legal issues.

The question regarding the jurisdiction and authority of the respondent no. 1/DIAC is to grant an extension of limitation for filing the SoC; the validity of the reference of disputes by the reference of dispute respondent no. 2/MSEFC to respondent no. 1/DIAC; and regarding the termination of the arbitral proceedings in the interruption due to unexpected circumstances are issues linked to the facts arising from the appeal and thus cannot be assessed independently of such facts. Therefore, the Single Judge had rightly held that the court, under Article 226, cannot consider such facts. The Supreme Court in Bhaven Constructions v. Executive Engineer, Sardar Sarovar Narmada Nigam Ltd. & Anr, explicitly held that the judicial intervention in arbitral proceedings by courts exercising jurisdiction conferred by Articles 226 and Article 227 is permissible only in exceptional circumstances; the present case, however, cannot fall into the category of exceptional circumstances.

The bench further observed that the arbitral tribunal under Section 16 has the power to consider issues on the tribunal's jurisdiction and other objections that the appellant may have. Section 16 mandates the arbitral tribunal to adjudicate the issue of jurisdiction first before the same is examined by the courts in Section 34. Therefore, the appellant is not devoid of any remedy as the statute provides for an appeal, as under Section 34, the aggrieved party has an opportunity to adjudicate their grievances against the award, including an order passed under Section 16.

The court disposed of the appeal while agreeing with the liberty granted to the parties by the learned Single Judge to raise all objections before the Tribunal.

Case Title: Corrtech International Pvt Ltd v. Delhi International Arbitration Center and Ors.

Case Number: LPA 975/2024, CM.APPL. Nos. 57502-04/2024

Counsel for the appellant: Mr. Rajshekhar Rao, Senior Advocate with Ms. Anushree Kapadia, Mr. Ajay Sabharwal and Ms. Ekta Kundu, Advocates.

Counsel for the Respondent: Mr. Shreesh Chadha, Mr. Aman Singh Bakhshi and Mr. Divjot Singh Bhatia, Advocates for Respondent No. 3, with Mr. Harvinder Singh Bakshi, Director of Respondent No. 3.