Exploring the Admissibility of Ad Hoc Arbitration under the MSMED Act, 2006

 Introduction

Arbitration is a widely recognized alternative dispute resolution mechanism that offers parties a flexible and efficient means of resolving their disputes outside of traditional court proceedings. However, when it comes to arbitration proceedings under the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act), certain complexities and limitations arise. This article examines the permissibility of arbitration proceedings by empanelled arbitrators under the MSMED Act, particularly in light of recent judicial pronouncements.

Background of the MSMED Act and Arbitration Mechanism

The MSMED Act, enacted to promote and facilitate the development of micro, small, and medium enterprises (MSMEs) in India, includes provisions for the recovery of delayed payments along with interest. Section 18 of the MSMED Act establishes a statutory mechanism for the resolution of disputes arising from such delayed payments. This mechanism involves two stages: conciliation proceedings and arbitration proceedings if conciliation fails.

Under Section 18(2) of the MSMED Act, the Micro and Small Enterprises Facilitation Council (Council/MSEFC) is empowered to either conduct conciliation itself or seek the assistance of an institution or center providing alternate dispute resolution services. Similarly, Section 18(3) states that the MSEFC may either undertake the arbitration process itself or refer the dispute to an institution or center providing such services.

Overriding Effect of the MSMED Act

The Supreme Court, in the case of Gujarat State Civil Supplies Corpn. Ltd. v. Mahakali Foods (P) Ltd., has clarified that the provisions of the MSMED Act have an overriding effect on the Arbitration and Conciliation Act, 1996. The Court emphasized that once the statutory mechanism under Section 18(1) of the MSMED Act is triggered, it supersedes any arbitration agreement between the parties.

Prohibition on Ad Hoc Arbitration

The issue, whether ad hoc arbitration is permissible under Section 18(3) of the MSMED Act was examined by various High Courts. In Paper and Board Converters v. U.P. State Micro and Small Enterprises, the Allahabad High Court held that the MSEFC alone has jurisdiction to act as a conciliator or arbitrator. The Court concluded that the reference of the dispute to an external sole arbitrator appointed by one of the parties is illegal and set aside the arbitral award.

Similarly, the High Court of Delhi, in BHEL v. Micro and Small Enterprises Facilitations Centre, held that Section 18(3) of the MSMED Act does not allow for non-institutional arbitration. These decisions establish that, irrespective of the existence of an arbitration agreement, ad hoc arbitration is not permitted under the MSMED Act.

The Role of Empaneled Arbitrators and Recent Judicial Interpretation

The Haryana MSEFC Rules, 2021, replaced the previous rules governing the arbitration process under the MSMED Act. Rule 6 of the 2021 Rules outlines the procedure for reference and arbitration. It provides that the Council may conduct conciliation itself or refer it to an institution. If conciliation fails, the MSEFC shall undertake the arbitration process and may refer the matter to an institution.

The State of Haryana adopted a modus operandi where the arbitration process is referred to empanelled sole arbitrators appointed by the MSEFC. However, this practice raises questions regarding compliance with Section 18(3) of the MSMED Act, as it may be considered non-institutional arbitration.

In the case of Indian Oil Corpn. Ltd. v. Haryana Micro and Small Enterprise Facilitation Council, the High Court of Punjab and Haryana addressed this issue. The petitioners argued that the appointment of empanelled sole arbitrators by the Council violated the provisions of the MSMED Act, which require arbitration to be conducted through an institution or center providing alternative dispute resolution services.

However, the Court rejected the petitioners' contentions and held that the arbitration conducted by the empanelled arbitrators falls under the purview of the Facilitation Council and is compliant with the MSMED Act. The Court emphasized that the empanelled arbitrators do not have the authority to pass the final award, and their role is limited to facilitating the arbitration process and submitting a report to the Council. The Council, after considering the report and hearing both parties, decides the dispute and passes the final award.

Conclusion

Based on the recent judicial pronouncements, it is clear that ad hoc arbitration is not permissible under Section 18(3) of the MSMED Act. The role of empanelled arbitrators appointed by the MSEFC has been subject to scrutiny, but the courts have upheld their involvement as long as they function within the framework of the Facilitation Council and do not have the power to pass the final award. It remains crucial for parties involved in disputes under the MSMED Act to understand the specific arbitration mechanism and comply with the statutory provisions to ensurethe validity of the arbitration process. Compliance with the MSMED Act and adherence to the established procedure will contribute to the effective resolution of disputes and the promotion of a conducive business environment for micro, small, and medium enterprises in India.

 

Wide Powers of Court under Section 9 of the A&C Act: Calcutta High Court Clarifies the Burden of Proof in Interim Relief Applications

Introduction

In a recent judgment, the Calcutta High Court shed light on the scope of powers conferred upon a court under Section 9 of the Arbitration and Conciliation Act, 1996 (A&C Act) and distinguished them from the provisions of Order XXXVIII Rule 5 of the Code of Civil Procedure (CPC). The court held that an applicant seeking interim relief under Section 9 of the A&C Act is not burdened with the strict requirements of Order XXXVIII Rule 5 of the CPC, particularly the necessity to establish the dissipation of assets. 

This article analyzes the court's ruling in the case of Uphealth Holdings Inc v. Glocal Healthcare Systems Pvt Ltd, highlighting the implications of the decision.

Factual Background

The dispute arose from a Share Purchase Agreement between the Petitioner and Respondent. The agreement contained an Arbitration Clause with the seat in the US. After the Respondents failed to transfer control and management of Respondent no.1, the Petitioner invoked arbitration proceedings. The Arbitrator issued an award in favor of the Petitioner, directing the Respondents to pay a substantial amount.

The Petitioner approached the Calcutta High Court under Section 9 of the A&C Act, seeking the deposit of the awarded amount with the court or the provision of bank guarantees. Additionally, the Petitioner requested the court to order the Respondents to file an affidavit declaring their assets and liabilities.

Submissions and Court's Analysis

The Respondents raised various objections, including lack of jurisdiction, prematurity of the affidavit of assets request, ongoing bankruptcy proceedings in the USA, and the alleged unenforceability of the award under Section 48 of the A&C Act. Additionally, they argued that the interim relief application did not fulfill the requirements of Order XXXVIII Rule 5 of the CPC since no allegation of asset dissipation was made.

The Calcutta High Court rejected the objection regarding the non-fulfillment of Order XXXVIII Rule 5 of the CPC. It clarified that the powers of the court under Section 9 of the A&C Act are broader than those available under Order XXXVIII Rule 5 of the CPC. The court emphasized that applicants under Section 9 should not be burdened with the rigorous requirements of the CPC.

Moreover, the court dismissed the objection regarding the award's validity due to the time limit and held that the award was passed within the permissible period under the ICC Arbitration Rules.

The court further opined that the ease of doing business in India is a matter of public policy, and the Respondents' actions, including defiance of tribunal and court orders and fraudulent conduct, undermined this policy.

Considering the quantum of damages awarded, the Respondents' conduct in avoiding liability, and the risk of asset dissipation, the court found it necessary to order the Respondents to file an affidavit of their assets. It held that such an order facilitates the enforcement of the award, which the court can grant in a Section 9 application. The court was satisfied that the Respondents had failed to establish any grounds under Section 48 of the A&C Act.

Conclusion

The judgment of the Calcutta High Court in Uphealth Holdings Inc v. Glocal Healthcare Systems Pvt Ltd clarifies the expansive powers of a court under Section 9 of the A&C Act. The ruling confirms that applicants seeking interim relief under Section 9 are not burdened with the requirements of Order XXXVIII Rule 5 of the CPC. This decision provides clarity and facilitates the effective enforcement of arbitral awards, ensuring that the objectives of the A&C Act, including ease of doing business, are upheld.

The Validity of Appointment Procedures in Arbitration Agreements

Introduction

Under the Arbitration & Conciliation Act, 1996, parties have significant autonomy in determining the procedure for appointing arbitrators. However, disputes regarding the validity of arbitration agreements have emerged, challenging the commencement of arbitration proceedings. In this article, we explore recent judgments from the Hon'ble High Courts of Delhi and Bombay, shedding light on the impact of appointment procedure illegality on the entire arbitration process.

Bombay High Court's Ruling

Analyzing the case of Sunil Kumar Jindal v. Union of India, the Hon'ble Bombay High Court considered the effect of certain clauses in the agreement. Despite specific appointment criteria, the court referred to earlier Supreme Court judgments and emphasized that if the intention of the parties to arbitrate is evident, the appointment procedure's illegality does not invalidate the entire clause. The court held that essential elements of a binding arbitration agreement were satisfied, enabling the arbitration proceedings to proceed.

Delhi High Court's Perspective

In the matter of S K Engineering and Construction Company India v. Bharat Heavy Electrical Ltd., the Hon'ble Delhi High Court addressed a conditional arbitration clause. The respondent argued that the occurrence of a specified contingency terminated the consent to arbitrate. However, the court rejected this argument, relying on the Supreme Court's precedent in Perkins Eastman Architects DPC & Anr. v. HSCC (India) Ltd. The court emphasized that an invalid appointment procedure does not render the entire arbitration clause void but should be excised.

Conclusion

Both the Bombay and Delhi High Courts have reinforced the principle of giving effect to arbitration agreements. The courts have emphasized that technical issues with appointment procedures should not invalidate the entire arbitration clause. Instead, they should be treated as separable, allowing arbitration proceedings to continue. This interpretation aligns with the legislative intent of the Arbitration & Conciliation Act, which promotes party autonomy and limits judicial interference.

By upholding the validity of arbitration agreements, these judgments provide clarity and certainty to parties engaging in arbitration. They underscore the significance of respecting the intentions of the parties and ensuring the efficacy of alternate dispute resolution mechanisms.

Supreme Court's Landmark Judgment: Substituted Provision Prevails over Repealed Provisions

Introduction

In a significant ruling, the Supreme Court of India has established the precedence that a repealed provision ceases to operate from the date of repeal, while the substituted provision starts operating as soon as it is substituted, subject to statutory stipulation. This landmark judgment, authored by Justice P.S. Narasimha, sheds light on the operation and applicability of repealed and substituted provisions in statutory frameworks.

 

Background

The case pertained to Pernod Ricard India (P) Ltd., a sub-licensee operating under the M.P. Excise Act, 1915, for the manufacturing, import, and sale of Foreign Liquor. The Madhya Pradesh Foreign Liquor Rules, 1996, governed the regulations for this operation. Rule 16 specified the permissible limits of loss of liquor in transit, while Rule 19 provided for penalties in case of a breach.

During the license period of 2009-10, a violation occurred, but no action was taken against the appellant at that time. Subsequently, in March 2011, Rule 19 was substituted through an amendment, reducing the penalty from four times the maximum duty payable to an amount not exceeding the duty payable on foreign liquor. A notice was then issued to the appellant for payment of the penalty under the old Rule 19.

 

Court's Analysis

After thorough deliberation, the Division Bench of Justices Narasimha and Aravind Kumar underscored the purpose of the amendment, which aimed to strike a balance between crime and punishment. The Court emphasized that subordinate legislations operate differently as they depend on the parent act and are determined by its empowerment.

Referring to Section 63 of the M.P. Excise Act, 1915, which governs the publication of rules and notifications, the Court observed that the repealed provision would not operate for rights and responsibilities that occurred while it was valid. The Court clarified that the government can issue subordinate legislation with effect from a specified date, but in this case, no such date was notified regarding the substituted Rule 19.

The Court highlighted the intention behind the amendment, emphasizing the need for good governance and efficient liquor regulation. It held that the amended provision should not be ignored, and the State cannot recover the penalty as per the unamended rule if the purpose of the amendment was to reduce the quantum of penalty for better administration and regulation of foreign liquor.

Furthermore, the Court rejected the State's argument that the substituted rule cannot be given retrospective effect. It reasoned that the amended rule, applied to the case from the issuance of the demand notice in November 2011, operated retroactively. This approach prevented arbitrary classification of offenders into two categories without any purpose to serve.

 

Conclusion
The Supreme Court's landmark judgment clarifies the operation and applicability of repealed and substituted provisions in statutory frameworks. By establishing that the substituted provision prevails over repealed provisions, subject to statutory stipulation, the Court ensures a fair and consistent interpretation of laws. This decision emphasizes the importance of understanding the intended purpose of laws and upholding the principles of good governance. It serves as a significant precedent in cases involving the operation of repealed and substituted provisions, promoting clarity and uniformity in legal interpretations.

Judgment

Understanding Interim Awards in Arbitration Proceedings

In the realm of arbitration, interim awards play a pivotal role in shaping the course of proceedings and facilitating effective dispute resolution. These awards hold substantial weight under the Arbitration and Conciliation Act of 1996, as they directly address specific case merits and impact the substantive rights of involved parties.

An Overview

Interim awards, though crucial, often lack detailed legislative definition, leading to confusion among parties. This ambiguity sometimes results in the misinterpretation of routine procedural or interlocutory rulings as interim awards. Consequently, parties may attempt to challenge such orders under Section 34 of the Act, causing unnecessary delays and shifting the dynamics of arbitration proceedings.

Distinguishing Interim Awards from Procedural Orders

Courts have consistently delineated between interim orders, procedural orders, and interlocutory orders to maintain clarity in arbitration proceedings. The case law provides invaluable insights into understanding the nuances of these distinctions.

The Delicate Balance: Finality and Issue Determination

In landmark judgments such as Cinevistaas Ltd. v. Parsar Bharti and Shah Babulal Khimji v. Jayaben D. Kania, courts have emphasized the importance of evaluating the nature of an order to ascertain its classification. If an order conclusively determines an issue, it qualifies as an interim award, subject to challenge under Section 34 of the Act.

The determination of an interim award hinges on several factors, notably the concept of finality and issue determination. Courts have reiterated that the decisive factor is whether the order conclusively resolves a substantive issue in the arbitration proceedings.

Landmark Cases: Setting Precedents

Judicial pronouncements in cases like ONGC Petro Additions v. Tecnimont S.P.A and Vil Rohtak Jind Highway Pvt. Ltd. v. National Highways Authority of India provide valuable guidance on identifying interim awards. These cases underscore the significance of finality in determining the nature of an order.

Challenging Interim Awards: Legal Ramifications

While some challenges to interim awards have been upheld, others have been rejected by the judiciary. Supreme Court rulings in cases like Indian Farmers Fertilizer Co-operative Limited v. Bhadra Products and lower court decisions in matters like Punj Lloyd Ltd. v. Oil and Natural Gas Corporation Ltd. highlight the complexities surrounding such challenges.

Judicial Prudence: Balancing Expediency and Justice

Courts have adopted a cautious approach in adjudicating challenges to interim awards, recognizing the need to balance expediency with justice. The overarching goal remains to ensure a fair and efficient resolution of disputes while upholding the principles of natural justice.

Conclusion

In conclusion, understanding the intricacies of interim awards is essential for all stakeholders involved in arbitration proceedings. While courts continue to refine the legal framework surrounding interim awards, parties must remain vigilant and seek clarity on the classification of orders to avoid unnecessary delays and legal complexities.

 

Delhi High Court Validates Service via WhatsApp and Email Address

In a landmark decision, the Delhi High Court has set a precedent by validating service through WhatsApp and email addresses. This pivotal ruling, which brings the legal system into the digital age, has far-reaching implications for legal proceedings and service of notices. Let's delve into the details of this groundbreaking judgment and its significance.

Embracing Digital Service: A Paradigm Shift in Legal Practice

Traditionally, service of legal documents has been conducted through physical means, such as registered post or personal delivery. However, with the proliferation of digital communication platforms, there has been a growing need to adapt legal procedures to the digital landscape. The Delhi High Court's decision to recognize service via WhatsApp and email addresses reflects a progressive approach to embracing technology in the legal domain.

The Case in Question: Setting Precedent for Digital Service

The ruling was delivered in response to a petition challenging the validity of service through WhatsApp and email addresses in a legal dispute. The petitioner argued that such methods were unreliable and prone to manipulation. However, the court, after careful consideration, upheld the validity of service via digital platforms, citing their widespread use and efficiency.

Ensuring Reliability and Authenticity: Safeguards in Digital Service

While acknowledging the potential concerns regarding the reliability of digital service, the court laid down certain safeguards to ensure authenticity and integrity. These include:

• Acknowledgment Receipt: Requiring recipients to acknowledge receipt of the digital notice to confirm its delivery.
• Encryption and Security Measures: Implementing encryption and security measures to prevent tampering or unauthorized access to digital communications.
• Certification by Service Provider: Mandating certification by the service provider to validate the authenticity of the communication and the identity of the sender.

Implications for Legal Proceedings and Service of Notices

The Delhi High Court's decision has significant implications for legal proceedings and service of notices. By recognizing digital platforms as valid means of service, the court has streamlined the process, making it more efficient and accessible. This is particularly beneficial in cases where the parties involved are geographically dispersed or where traditional methods of service are impractical.

Embracing Innovation: Adapting Legal Practices to the Digital Age

In an era characterized by rapid technological advancement, it is imperative for legal practices to evolve and adapt to the changing landscape. The Delhi High Court's decision exemplifies a willingness to embrace innovation and harness the potential of digital technology to enhance efficiency and accessibility in the legal system.

Conclusion: Paving the Way for Digital Transformation in Legal Services

The Delhi High Court's validation of service via WhatsApp and email addresses marks a significant milestone in the journey towards digital transformation in legal services. By recognizing the legitimacy of digital communication platforms, the court has opened up new possibilities for streamlining legal procedures and enhancing access to justice. As we move forward, it is essential for legal practitioners to embrace these changes and harness the power of technology to usher in a new era of efficiency and accessibility in the legal domain.

 JUDGMENT

Directors of a Company Cannot Be Included in Arbitration Proceedings under Group of Companies Doctrine

In a recent ruling, the Delhi High Court addressed an important aspect of arbitration law pertaining to the inclusion of Directors as parties to arbitration proceedings under the 'Group of Companies' doctrine. The judgment, rendered in the case of Vingro Developers Private Limited v. Nitya Shree Developers Private Limited, clarifies the scope of the doctrine and its applicability to Directors. This article provides an overview of the case and the Court's key observations.

Background:

The case was initiated through a petition filed under Section 11 of the Arbitration Act. The Petitioner, Vingro Developers Private Limited, had entered into twelve Builder Buyer Agreements (BBAs) with the Respondent, Nitya Shree Developers Private Limited, for the purchase of plots in the 'RLF City' project. Due to the Respondent's failure to deliver possession of the plots as per the agreed terms, the Petitioner invoked arbitration under Section 21 of the Arbitration Act.

 

Arguments:

The Petitioner contended that the Directors of the Respondent company, who were non-signatories to the arbitration agreement, should be made parties to the arbitration proceedings based on the application of the 'Group of Companies' doctrine. Citing the Cox and Kings judgment, the Petitioner asserted that the doctrine should bind non-signatories to the arbitration agreement. The Petitioner also highlighted that the Directors had signed the BBAs on behalf of the Respondent, and their collective response indicated their inseparability from the Respondent.

The Respondents, on the other hand, argued that the Directors were not party to the BBAs and therefore should not be encompassed by the arbitration clause. They relied on the Supreme Court's decision in Sundaram Finance Ltd. v. T. Thankam, which stated that arbitration cannot be invoked against parties who are not covered by or are not party to the arbitration agreement.

 

Court's Observations:

The Delhi High Court carefully examined the central issue of whether the Directors, as non-signatories to the arbitration agreement, could be bound by the agreement based on the Group of Companies doctrine. The Court acknowledged its limited power under Section 11 of the Arbitration Act to determine the existence of an arbitration agreement.

Referring to precedent cases such as Cox and Kings and Cheran Properties Ltd. v. Kasturi & Sons Ltd., the Court emphasized that the application of the Group of Companies doctrine requires a common intention among the parties to bind non-signatories to the arbitration agreement. The Court further noted that the Directors, as agents of the Respondent company, were only representatives and could not be held personally liable.

Relying on the Indian Contract Act, the Court clarified that in the absence of an intention to bind a non-signatory to the agreement, the Directors could not be made parties to the arbitration proceedings. The Court emphasized that an agent cannot be held liable for acts performed on behalf of a known principal unless specific conditions are fulfilled.

 

Conclusion:

The Delhi High Court concluded that, considering the relationship between the Respondent company and its Directors as that of a principal and agent, the Directors could not be included as parties to the arbitration proceedings under the Group of Companies doctrine. Accordingly, the Court appointed an arbitrator to adjudicate the dispute between the Petitioner and the Respondent company.

 

This ruling provides clarity on the scope and applicability of the Group of Companies doctrine in arbitration cases involving Directors. It reinforces the principle that unless there is a specific intention to bind non-signatories, Directors should not be made parties to arbitration proceedings.

 

JUDGMENT