Court Can Appoint Arbitrator U/S 11(6) Of Arbitration Act If MSME Council Fails To Initiate Mediation U/S 18 Of MSMED Act: Delhi HC

Brief Facts:

The respondent placed a Letter of Intent for execution of civil and associated work for construction of New Flash Butt Weld Engineering Workshop at Sabarmati. On 14.11.2018, the respondent placed a revised Letter of Intent for execution of the said work.

On 06.08.2023, the petitioner requested the respondent to release outstanding contractual payment of Rs.37,20,31,671/- both under the Purchase Order as well as the Service Order. Parties tried to resolve their disputes but failed to arrive at consensus. On 29.02.2024, the petitioner invoked arbitration and proposed 5 names to the respondent for choosing any one of them as a Sole Arbitrator.

Contentions:

The Petitioner submitted that the mandatory requirement of mediation as per section 18 of MSME Act has also been complied with by the petitioner. Upon failure of mediation, the petitioner is constrained to approach this Court under section 11(6) of the Arbitration Act. Reliance is placed on Microvision Technologies (P) Ltd. v. Union of India, 2023.

Per contra, the Respondent submitted that the petitioner has a choice either to initiate action under Section 11 of the Arbitration Act or make a reference under the MSME Act, 2006.Once the petitioner has invoked the provisions of MSME Act, the petitioner is required to take it to a finality and cannot midway approach this Court by filing a petition under Section 11 of the Arbitration Act.

Observations:

The court noted that section 18(2) of the MSME Act provides that the Facilitation Council upon receiving reference under sub-section (1) shall either conduct mediation itself or refer the matter to any mediation service provider as provided under the Mediation Act, 2023.

It further added that further section 18(3) states that when the mediation is not successful or stands terminated without any settlement between the parties, the Council shall refer either itself take up the dispute for arbitration or refer it to any institution or centre providing alternative dispute resolution services.

The Supreme Court in Gujarat State Civil Supplies Corpn. Ltd. v. Mahakali Foods (P) Ltd., (2023) held that the MSME Act will prevail over the Arbitration Act as the object of MSME Act is to ensure timely and smooth payment to the suppliers who are the micro and small enterprises, and to provide a legal framework for resolving the dispute with regard to the recovery of dues between the parties under the MSME Act.

The court held that the Arbitration Act is not inconsistent with the provisions of the MSMED Act as the only provision for appointing an Arbitrator under the MSMED Act is section 18. If the Facilitation Council fails to appoint the Arbitrator, the Arbitrator can be appointed by the Supreme Court or the High Court under section 11(6) of the Arbitration Act.

The court noted that the petitioner wrote to the MSME council on 16 May, 2024 seeking mediation under section 18 of the MSME Act. However no response was given by the Council till 16 July, 2024 when the petitioner approached the court nor has it responded to date.

Based on the above, the court held that the MSME Facilitation Council did not initiate the process of mediation under section 18 of MSME Act and hence, the present petition filed under section 11(6) of the Arbitration Act needs to be allowed.

The Bombay High Court in Microvision Technologies (P) Ltd. (supra) held that “upon the failure on the part of the Facilitation Council to refer the dispute to arbitration, an Application may be made under Section 11(6) (c) and accordingly in the present case the application was made for appointment of an Arbitrator. Thus, Section 18 of the MSMED Act has to be read harmoniously with Section 11 of the Arbitration Act.”

Accordingly, the present petition was allowed and the Arbitrator was appointed.

Case Title: M/S VALLABH CORPORATION versus SMS INDIA PVT LTD

Case Number:ARB.P. 1119/2024

Judgment Date: 17/03/2025

For Petitioner: Mr. Ramesh Singh, Sr. Adv. with Ms. Monisha Nanda, Mr. Rajul Shrivastav, Advs.

For Respondent: Mr. Sujoy Datta, Mr. Surekh Kani Baxy, Mr. Aarsheya Sharda, Advs.

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