MSMED Act Prevail Over Arbitration Act, Seller Can Approach Facilitation Council Even In Presence Of Arbitration Act: Telangana High Court

Brief Facts:

The Applicant, engaged in electricity production in Gurha, Bikaner, Rajasthan, sought to purchase refractories for its power plant from the Respondent, a manufacturer of refractory products based in Chennai, Tamil Nadu. The Applicant argued that despite issuing the work order and subsequent amendments, the Respondent failed to complete the agreed-upon jobs within the stipulated timeframe which caused a delay in the plant's start-up. The Applicant also alleged that the Respondent's poor workmanship led to damages in the refractory lining which made it necessary to temporarily shut down for repairs. Feeling aggrieved, the Applicant approached the Telangana High Court (“High Court”) and filed an application under Section 11 (6) of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) to appoint a sole arbitrator in terms of Clause 16 of the Work Order.

In response, the Respondent contested the arbitration application and argued that there were ongoing proceedings under Section 18 of the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act) initiated before the Micro and Small Enterprises Facilitation Council (MSEFC), Chennai. The Respondent refuted the delay being solely attributable to it and alleged payment delays, quantity revisions, and pending mechanical activities on the Applicant's part. Additionally, the Respondent claimed that the Applicant proceeded with repair work without giving it an opportunity to rectify the damages under warranty.

The Respondent argued that the arbitration application was not maintainable as statutory proceedings were already initiated under the MSMED Act for the realization of outstanding amounts from the Applicant.

Observations by the High Court:

The High Court referred to the decision of the Supreme Court in Silpi Industries And Others vs Kerala State Road Transport Corporation where the SC delved into the interplay between the MSMED Act and the Arbitration Act. The SC held that the MSMED Act holds precedence over the Arbitration Act. The High Court held that the MSMED Act is a special statute with overriding effect vis-à-vis the Arbitration Act, which is a general enactment. The High Court noted that even if parties have an arbitration agreement, if a seller falls under the purview of the MSMED Act, they can approach the competent authority to pursue their claim and sidelining any agreement between the parties.

The High Court noted that the Respondent already initiated proceedings before the MSEFC seeking resolution of disputes. It held that it is important to allow counterclaims by buyers before the Facilitation Council to prevent conflicting findings and parallel proceedings.

Addressing the argument put forth by the Applicant regarding the purported difference in the cause of action between the Applicant's claim and the Respondent's counterclaim, the High Court held that both emanated from disputes arising out of the performance of obligations under the work order. The High Court held that it is important to harmonize the statutory obligations provided by the MSMED Act with the dispute resolution mechanisms outlined in the Arbitration Act. Therefore, the High Court dismissed the application.

Case Title: M/S. Lignite Power Pvt. Ltd. vs M/S Totale Global Private Ltd

Case Number: ARBITRATION APPLICATION No.205 of 2023

Date of Judgment: June 3, 2024

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