Arbitral Award By MSEF Council Without Conciliation Process Under Section 18(2) Is Liable To Be Set Aside: Orrisa High Court

The bench of Justice S.K. Panigrahi held that in terms of Section 18(2) of the MSMED Act, the MSEF Council to conciliate between the parties either itself or take assistance from any other institution. It held that it is mandatory for it to appoint a third party as a ‘conciliator’ who would facilitate dialogue between both the parties and merely directing the parties to attempt to amicably settle the dispute between themselves is not sufficient.

The Court further held that an arbitral award passed by the MSEF Council without deciding the Section 16 application filed by the buyer and without properly appreciating the evidence shocks the conscience of the Court.

Facts

The case involves a dispute between M/s Orissa Coal Chem. Pvt. Ltd. (Supplier) and M/s National Aluminum Company Ltd. (Buyer) over the supply of hard coal-tar pitch. The Supplier claimed that the Buyer's delay in payments caused a cash crunch and affected production. The Buyer withheld a significant amount from the Supplier's account. Despite the outstanding payment, additional purchase orders were placed, and the Supplier requested the release of the pending amount. The Buyer raised issues of non-furnishing of performance bank guarantees and threatened to offload the contracted quantities at the Supplier's risk and cost if supply wasn't resumed.

The Buyer terminated the purchase order, claiming the outstanding amount as forfeited. The Supplier filed a petition for dispute settlement under the Interest on Delayed Payment of Interest Act, 1993, seeking recovery, which later got transferred to the Micro and Small Enterprises Facilitation Council (MSEFC) due to the repeal of the IDPI Act. During this process, the Buyer challenged the jurisdiction of the MSEFC.

While the case was pending before the MSEFC, the Buyer nominated an arbitrator for adjudicating the dispute, leading the Supplier to seek quashing of the arbitration proceedings. The court ordered a stay on the arbitration proceedings pending before the Buyer-appointed arbitrator.

MSEFC directed the parties to amicably settle the dispute, however, it did not appoint any third party as conciliator as required under Section 18(2) of the MSMED Act. The respondent also filed an application under Section 16 of the A&C Act challenging the jurisdiction of the Council. However, the Council without deciding such objection first, passed an award in favor of the Supplier, directing the Buyer to pay a sum along with interest under the MSMED Act. In the award, the Council failed to appreciate evidence and also to provide any reasons for its conclusion. The Buyer challenged the award, and the District Judge set it aside, remitting the dispute back to the MSEFC for fresh adjudication. Aggrieved by the impugned judgment the supplier challenged it under Section 37 of the A&C Act.

Contention of the Parties

The appellant challenged the impugned judgment on the following grounds:

• The Learned District Judge went beyond the scope of his powers as outlined in Section 34 of the Arbitration and Conciliation Act, 1996 (A&C Act) by reevaluating the evidence and making a fresh decision on the entire dispute based on its merits, which is not permitted by law.
• The application filed by the Buyer under Section 34 of the A&C Act was flawed as it did not adhere to the mandatory requirement of depositing 75% of the awarded amount. Although the Buyer requested an exemption from making the deposit, the request was denied. The Supplier argues that the application was properly initiated only on 17.5.2017, when the Buyer eventually deposited 75% of the award amount (excluding interest). This filing date exceeds the 90 days + 30 days timeframe specified in Section 34 of the A&C Act.
• The Learned District Judge erred in entertaining the appeal under Section 34 of the A&C Act since the Buyer failed to make the necessary deposit within the stipulated time period.

Analysis by the Court

The respondent also challenged the impugned judgement in the cross appeal on the following grounds:

• The Learned District Judge went beyond the scope of his powers as outlined in Section 34 of the Arbitration and Conciliation Act, 1996 (A&C Act) by reevaluating the evidence and making a fresh decision on the entire dispute based on its merits, which is not permitted by law.
• The application filed by the Buyer under Section 34 of the A&C Act was flawed as it did not adhere to the mandatory requirement of depositing 75% of the awarded amount. Although the Buyer requested an exemption from making the deposit, the request was denied. The Supplier argues that the application was properly initiated only on 17.5.2017, when the Buyer eventually deposited 75% of the award amount (excluding interest). This filing date exceeds the 90 days + 30 days timeframe specified in Section 34 of the A&C Act.
• The Learned District Judge erred in entertaining the appeal under Section 34 of the A&C Act since the Buyer failed to make the necessary deposit within the stipulated time period.

Analysis by the Court

The Court observed that though the MSEF Council had directed the parties to attempt to amicably settle the dispute, it did not however, appoint a conciliator who was supposed to facilitate the dialogue between both the parties. The Court held that merely directing the parties to try and settle the dispute in an amicable way is not sufficient compliance of Section 18(2) of MSMED Act and the council is required to itself act as the conciliator or to take assistance from any other institution.

The Court held that non-compliance of Section 18(2) of the Act would make the award passed under Section 18(3) susceptible to challenge under Section 34 of the Act.

The Court further observed that the Council failed to decide the application moved by the buyer/respondent under Section 16 of the A&C Act challenging its jurisdiction. The Court held that it was incumbent upon the council to decide such application, more so, for the reason that the Court had also directed it to decide the same.

The Court emphasized that the role of an arbitrator was crucial in dispute resolution, and the decision reached had to be fair, reasonable, and objective. The award had to reflect the arbitrator's reasoning and not be arbitrary or whimsical.

The Court stressed that the purpose of establishing the MSEFC under the MSMED Act was to provide an effective and expeditious dispute settlement system for micro and small enterprises, preventing them from being taken advantage of and ensuring they could recover swiftly.

The Court expressed deep concern over the award passed by the MSEFC in the present case, citing frequent reshuffling of Council members leading to a miscarriage of natural justice, lengthy proceedings beyond the statutory timeline, and a reluctance to offer conciliation to parties.

The Court opined that the MSEFC, when acting as an arbitrator, should have adhered to the principles of natural justice, thoroughly perused the evidence, and provided a well-reasoned award.

The Court advised the State Government to develop a fresh modus operandi for the MSEFC to ensure fair proceedings and to maintain an unaltered Council composition during the course of a dispute to create a level playing field for the parties.

Based on the above observations, the Court concluded that the MSEFC award dated 29.9.2016 was correctly set aside, and the matter was remitted back to the MSEFC for fresh adjudication.

The Court directed the parties to appear before the concerned MSEFC within 15 days to facilitate fresh adjudication in accordance with Section 18 of the Act, with the expectation that the matter would be decided preferably within 90 days.

Case Details: National Aluminum Company Ltd v. Orissa Coal Chem Pvt Ltd. ARBA No. 8 of 2020

Date: 01.08.2023

Counsel for the Appellant: Mrs. Pami Rath, Adv.

Counsel for the Respondent: Mr. G. Agarwal, Adv. Mr. Ashok Sahu, Adv. (for Respondent No.1) Mr. Ch. Satyajit Mishra, AGA (for Respondent No.2)

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