Bombay HC decides upon the effect of application of Section 18(3) of MSME Act on the validity arbitration agreements between parties

On May 15, 2020 , the Bombay High Court (“High Court”) in the matter of Microvision Technologies Private Limited v. Union of India, inter alia, held that an arbitration agreement between the parties shall not cease to have effect irrespective of the powers of the Micro and Small Enterprises Facilitation Council (“Facilitation Council”) under Section 18(3) of the Micro, Small and Medium Enterprises Development Act, 2006 (“MSME Act”) to act as an arbitrator or refer the dispute to arbitration. Facts of the case Microvision (“Applicant”), the supplier under the MSME Act, was awarded contracts by the Union of India through Central Railways (“Respondent”) for electrification of integrated security system-video surveillance system proposed to be implemented by the Central Railways at certain places. Disputes arose between the parties in connection with these contracts, which were referred to conciliation under Section 18(2) of the MSME Act. Upon failure of conciliation, the Applicant applied to the Facilitation Council to act under Section 18(3) of the MSME Act to commence arbitral proceedings. The Facilitation Council to whom an application was made by the Applicant for reference to arbitration under Section 18 of the MSME Act was in Nashik, Maharashtra. Pending consideration of the application before the Facilitation Council, the Applicant moved a petition under Section 9 of the Arbitration and Conciliation Act, 1996 (“Aand C Act”) before the District Court at Nashik, seeking interim reliefs pending arbitration. The Applicant itself then moved an application under Section 11 of the Aand C Act before the High Court seeking appointment of an arbitrator for adjudication of the disputes and differences. The High Court allowed the Section 11 application and appointed a sole arbitrator. The Applicant thereafter, withdrew its petition under Section 9 of the Aand C Act from the District Court at Nashik with liberty to apply for interim reliefs before the arbitral tribunal. The arbitration reference thereafter, proceeded before the sole arbitrator and an award was passed. The award was challenged under Section 34 of the Aand C Act on various grounds. Also, an application was filed for transferring the Section 34 challenge to Nashik Court considering Section 42 of the Aand C Act. Issues The issues arising in the matter were as follows If an application is made in a court, but withdrawn or not pressed, would it still qualify as a prior application made in such court so as to restrict all future jurisdiction to that court as per Section 42 of the Aand C Act? Whether the term “Court” under Section 42 of the Act shall mean any court or only a court of competent jurisdiction? Whether the arbitration held before the sole arbitrator could be said to be under the arbitration agreement between the parties or under Section 18(3) of the MSME Act? Held On Issue no. 1, the High Court left the question open to be decided in a suitable matter in view of its decision on the issue of competence of the court arising under Issue No. 2. On Issue No. 2, the High Court held that the expression 'Court' used in Section 42 must take within its sweep only that court which is defined under Section 2(1)(e) of the Aand C Act and it is only when a prior application under any provision of Part I of the Aand C Act has been made to such 'Court' that Section 42 would have a play. In the facts of the case, the High Court held that the District Court in Nashik was not a Court under Section (2)(1)(e) of the Aand C Act and therefore Section 42 could not be invoked to restrict the jurisdiction to that court. On Issue No. 3, the High Court observed that the reference was made by the High Court under Section 11(6) of the Act and not by the Facilitation Council under Section 18(3) of the MSME Act. The High Court referring to Section 18(3) of the MSME Act, observed that the Facilitation Council has to either take up the dispute for arbitration or refer it to any institution or centre providing alternate dispute resolution services for such arbitration. The provisions of the Aand C Act apply only when the dispute is so taken up by the Facilitation Council or referred by it to the institution or centre for arbitration. The High Court held that, if the Facilitation Council fails to take up the dispute or fails to refer the dispute to an institution or centre for arbitration, the Court may, in an appropriate application, require the Facilitation Council to perform its functions. However, Section 18(3) of the MSME Act cannot be treated as an arbitration agreement for the Chief Justice or his designate to act upon under Section 11(6) of the Act. The High Court relied on the judgment of the Bombay High Court in Steel Authority of India Limited v. The Micro, Small Enterprise Facilitation Council AIR 2012 Bom 178, wherein it was inter alia held that merely because Section 18 provides for a forum of arbitration, an independent arbitration agreement entered into between the parties will not cease to have effect. In Steel Authority, the Bombay High Court had barred the Facilitation Council to proceed under the provisions of Section 18(3) of the MSME Act in view of independent arbitration agreement between the parties. The High Court also distinguished the judgements in the case of (i) Paper and Board Converters vs. U.P. State Micro and Small Enterprises Facilitation Council, Kanpur 2014 (5) AWC 4844, passed by the Allahabad High Court and (ii) Principal Chief Engineer vs. Manibhai and Brothers First Appeal No. 637 of 2016 decided on June 20, 2016, passed by the Gujarat High Court. The Allahabad High Court and the Gujarat High Court, while disagreeing with the dicta laid down in Steel Authority, have held that the MSME Act and, in particular, Section 18 thereof, confers exclusive jurisdiction on the Facilitation Council to first conciliate and later adjudicate the disputes or refer them to arbitration. The High Court accordingly held that while the Facilitation Council may still have jurisdiction to take up a dispute for arbitration or refer it to an institution or a centre for arbitration notwithstanding anything contained in an arbitration agreement between the parties, the arbitration agreement shall continue to be valid even in the face of the Facilitation Council's powers under Section 18 of the MSME Act. Contributed by Ranjit Shetty (Senior Partner) and Rahul Dev (Senior Associate). Download Pdf