Unsuccessful Conciliation Proceedings Can't Be Converted Into Arbitration Without Prior Declaration Of Termination: Telangana High Court

Brief Facts:

The matter pertained to an arrangement between the Bharat Heavy Electronics Limited and Respondent No.4 for the supply of products for a 4X270 MW project in Manuguru, Telangana. Respondent No.4, claiming to be a registered entity under the Micro, Small and Medium Enterprises Development Act, 2006 (MSME Act), filed an application under Section 18(1) of the MSME Act alleging non-receipt of certain amounts from the Petitioner. The application sought recourse against the Petitioner company for the alleged claim amount under Purchase order. Conciliation proceedings were initiated by Respondent No.3 as a Conciliator under the powers granted by the MSME Act, but the conciliation efforts failed.

Subsequently, Respondent No.3 issued a notice, informing the Petitioner's company about the initiation of arbitration proceedings. The authorized representative of the Petitioner's company raised objections during the meeting, asserting that proper notice regarding the appointment of an arbitrator was not given. Despite these objections, an arbitration award was passed, with the Petitioner alleging a lack of communication about the initiation and progress of arbitration proceedings. Feeling aggrieved, the Petitioner filed a writ petition in the Telangana High Court (“High Court”) alleging the award as being illegal, arbitrary and nonest in law

The Petitioner contended that that the dispute, pertaining to the year 2015, should not have been referred in 2022. The Petitioner asserted that the failure of conciliation proceedings should have been communicated before initiating arbitration, and the principles of natural justice were violated in the arbitration award issued without providing an opportunity for the Petitioner to be heard.

In response, the Respondent argued that the writ petition was not maintainable as the Petitioner challenged the Arbitral Award without exhausting the alternative remedy of filing an appeal under the MSME Act. Referring to Section 18(3) of the MSME Act, the Respondent contended that since the conciliation proceedings failed, the conciliation officer had the authority to take up arbitration proceedings.

Observations by the High Court:

The High Court noted that according to Section 18 of the MSME Act and its sub-clause (2), upon filing an application and receiving a reference under sub-section (1), the council is mandated to either conduct conciliation or seek assistance from an institution or center providing alternate dispute resolution services. This process is to be governed by the provisions of Sections 65 to 81 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”), as if the conciliation were initiated under Part-III of the Arbitration Act.

Highlighting the distinctions, the High Court noted that arbitration proceedings, governed by Sections 18 to 33 of the Arbitration Act, have a different procedural framework compared to conciliation proceedings. The High Court held that conciliation proceedings cannot be automatically converted into arbitral proceedings without a prior declaration of failure and termination of the conciliation process. It underscored the necessity for the conciliator to pass a written declaration of termination and intimate the same to the parties before initiating arbitral proceedings. Additionally, it expressed the opinion that the conciliator, having access to confidential information from both parties, should not become a member of the arbitral tribunal and should refer the matter to another arbitrator.

The High Court held that if the conciliation proceedings are unsuccessful and terminated without any settlement, the council, as per sub-section (3) of Section 18 of the MSME Act, can either take up the dispute for arbitration or refer it to any institution or center for arbitration, subject to the provisions of the Arbitration Act.

The High Court, based on the communication from the Chairman of MSMED to the Government Pleader, found that after conducting conciliation meetings, the Respondent No.3 concluded that the conciliation proceedings failed. However, it observed that the declaration under Section 76 had not been given by the conciliator before referring the matter for arbitration under the Arbitration Act.

Consequently, the award was set aside, and the Respondent was directed to re-initiate proceedings under the Arbitration Act.

Case Title: M/S. Bharat Heavy Electricals Limited vs State Of Telangana And Others.

Case Number: W.P.No. 1603 of 2023

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