Tribunal's Award However Erroneous, Must Be Challenged U/S 34 Of Arbitration Act, Court Cannot Exercise Writ Jurisdiction: Bombay HC

This court would not exercise jurisdiction under Articles 226 and 227 of the Constitution of India, only to avoid the aggrieved party from the hardship of deposit of 75% of the award amount in terms of Section 19 of the MSMED Act.

Brief Facts

The petitioner is a private limited company registered under the provisions of the Companies Act having its registered office at Sanaswadi, Nagar Road, Pune.

The petitioner entered into a supplier agreement with respondent no.3 effective from April 12, 2019. The petitioner, also entered into separate agreements i.e. duroshox supplier agreement and duroshox supplier quality agreement dated May 7, 2019 reflected in e-mail dated June 3, 2019 and December 22, 2019 and other correspondence between the parties, which includes supply manual and other forms of binding contracts between the parties.

It is the contention of the petitioner that respondent no.3 was mandated to manufacture and supply the material, as specified in the agreement and in the purchase orders raised by the petitioner. It is contended that the petitioner later on realized that the material supplied by respondent no.3 was lacking in quality and faulty in nature and the same was duly communicated to respondent no.3 along with the demand of undertaking corrective measures.

As respondent no.3 failed to remediate / replace defective supplies, the petitioner was exposed to incur huge remediation costs, cost for replacement of materials, transportation cost and cost for packaging

It is further stated that the petitioner in response to the claim had filed the details reply dated May 2, 2023 and a counter claim dated 02.05.2023 and an application under Section 25 of the Arbitration and Conciliation Act, 1996.

It is further stated that the matter was then taken up by the court, on 16.05.2023, wherein respondent no.3 was given time till 29.05.2023 to file reply to the counter claim dated 02.05.2023 and application under Section 25 of the Arbitration Act. Respondent no.3 submitted its reply to the application under Section 25 dated 26.05.2023 and reply to the counter claim dated 26.05.2023.

It is further stated that on 07.07.2023, the petitioner via purshis made an application to respondent no.2 that no settlement being arrived between the parties. Respondent No.2 under provisions of Section 18(3) of the Act ought to have referred the matter for arbitration in accordance with the provisions of the Arbitration Act.

Thereafter, respondent no.2 passed final order dated 02.02.2024, ordering the petitioner to pay outstanding amount of Rs.4,53,87,615/- amongst other directions. The order dated 02.02.2024 is challenged in the present proceedings on various grounds.

Contentions

The petitioner submitted that there was no notice regarding termination of conciliation proceedings and the commencement of arbitration proceedings and that respondent no.2 has violated the provisions of Section 18(3) of the MSMED Act, which mandates that in case of failure of the conciliation proceedings, arbitration in accordance with the Arbitration Act must be conducted and also violated principles of natural justice.

It was further contended that as per Section 18(3) of the MSMED Act, if conciliation is not successful, the said proceedings stands terminated. The said section makes it clear that when the arbitration is initiated all the provisions of the Arbitration Act will apply as if the arbitration was in pursuance of the arbitration agreement referred under Sub-Section 1 of Section 7 of the said Act.

It was further submitted the impugned order is passed in violation of Sections 65, 67, 76 and 80 of the Arbitration Act. It is stated that the respondent has not conducted the conciliation as contemplated under Section 65 to 81 of the Arbitration Act.

Per contra, the respondent submitted that there is statutory remedy of appeal available to challenge the impugned order and that the present is not the case for invoking the writ jurisdiction of the court as the judgment is passed by the authority constituted under the MSMED Act.

It was further submitted that the award passed under Section 18 has to be only challenged by invoking Section 34 of the Arbitration Act. The writ jurisdiction was invoked only to bypass the statutory deposit of 75% required to be made under Section 19 of the MSMED Act.

It was further submitted that there is the statutory remedy available to the parties and that the writ jurisdiction has to be exercised only in case of exceptional circumstances.

Issue Before Court

Whether the jurisdiction of the High Court under Article 226 / 227 of the Constitution of India can be invoked to set aside an 'Award' passed under Section 18 of the MSMED Act, as being ex-facie illegal and not being an 'Award' in the eyes of law.

Court's Analysis

The court first referred to the Supreme Court judgment in M/s. India Glycols Limited and anr. Vs. Micro and Small Enterprises Facilitation Council, Medchal – Makajgiri and Ors. (2023) wherein it was held that the Petition under Article 226 / Article 227 of the Constitution of India should not be entertained to challenge the 'Award' under Section 18 of the MSMED Act, as the Act provides for statutory remedy of challenging the award under Section 34 of the Arbitration Act.

The court further referred to the constitution bench judgment of the Supreme Court in SBP & Co. Vs. Patel Engineering Ltd. & Ors., (2005) wherein it was held that the interim orders of the arbitral tribunal cannot be corrected by the High Court in exercise of jurisdiction under Articles 226 and 227 of the Constitution of India and wait for final adjudication under Section 34 and 37 of the Arbitration Act.

The court discussed the scope of interference under article 226/227 of Constitution when order passed by the council is ex facie illegal. The court relied on the supreme court judgment in Jharkhand Urja Vikas Nigam Limited Vs. State of Rajasthan and others, (2021) wherein it was held that if Facilitation Council has passed final order / Award while the conciliation proceedings are in progress without undertaking the arbitration proceedings which were necessary to be undertaken under Section 18 of the Act then the Award is ex-facie illegal. Therefore, it has to be set aside.

Based on the above discussion, the court summarised the law pertaining to court's interference under article 226/227 against an award passed by the tribunal.

The court held that the High Court under Articles 226 and 227 of the Constitution of India would interfere rarely in exceptional circumstances in the arbitral proceedings, when the order passed by the Facilitation Council / Arbitral Tribunal is perverse and patently lacking in inherent jurisdiction and, when there is no semblance of 'Award' as contemplated under Section 18 of the MSMED Act.

The court refused to set aside the impugned award and observed that the impugned 'Award' is passed under Section 18 of the MSMED Act. The aggrieved party may challenge the award before the court under Section 34 of the Arbitration Act.

In view of the Judgment of the M/s. India Glycols Limited (supra), this court would not exercise the writ jurisdiction to obviate the requirement of deposit as contemplated under Section 19 of the MSMED Act.

Case Title: M/s. Duro Shox Pvt. Ltd. v. The State of Maharashtra and Anr.

Case Reference: 2024:BHC-AUG:25926

Court: Bombay High Court

Judgment Date: 22/10/2024

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