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.
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