Ironing Out the Inconsistencies: MSME Act and Independent Arbitral Clauses



[This article is authored by Smiti Verma]


Keywords: MSME, Arbitration, Facilitation Council.


Introduction

The Micro, Small and Medium Enterprises Development Act, 2006 ("MSME Act") was enacted with the object and purpose of facilitating the promotion and development and enhancing the competitiveness of micro, small and medium enterprises. One of its most notable features is the provision for statutory arbitration for adjudication of disputes that come within its ambit.


In order to ensure an expeditious redressal of disputes concerning MSME entities, the MSME Act provides for disputes to be referred to the concerned state’s MSME Facilitation Council (Facilitation Council), which first attempts to resolve the dispute by conciliation and in the event of its failure and termination, conducts arbitration to adjudicate upon the dispute. Both the conciliation and arbitration are in accordance with the provisions of the Arbitration and Conciliation Act ("Arbitration Act").


While having been incorporated to ensure speedy redressal of disputes concerning MSME entities, these statutory provisions have seen a few issues recur on account of several conflicting decisions by different High Courts. Before we discuss one of them, viz. the question of inconsistency between provisions of the MSME Act and any independent arbitration agreement between the parties, it is important to analyze the relevant statutory provision.

Statutory Analysis

Sub-section (1) of Section 18 begins with a non-obstante clause and provides for reference to the Facilitation Council notwithstanding anything inconsistent in any other law for the time being in force qua a sum due under Section 17 of the Act. Upon receipt of such reference, the Facilitation Council commences conciliation proceedings either itself or through an institution providing alternate dispute resolution ("ADR") services. If the conciliation proceedings fail, the Facilitation Council commences arbitration proceedings between the parties, either itself or refers the dispute to an ADR institution. Another notable feature is the incorporation of the provisions of the Arbitration and Conciliation Act, 1996 by reference as the Section stipulates that such arbitration shall be in accordance with the provisions of the Arbitration and Conciliation Act, 1996. Sub-section (4) is also a non-obstante clause that provides that notwithstanding anything in any other law in force, the Facilitation Council shall have jurisdiction to adjudicate upon a dispute concerning MSME entities.


While this section stipulates conciliation, and upon its failure, arbitration by the Facilitation Council that is dehors any agreement between the parties, it is fairly common for parties to enter into an arbitration agreement, which might, in several situations, be inconsistent with Section 18. For example, the pre-existing arbitration agreement between the parties will in all likelihood set out the manner in which the arbitral tribunal will be appointed, whereas Section 18 provides that a party may make a reference to the Facilitation Council subsequent to which the party has no role to play in the appointment of the arbitrator. Further, Sub-section (2) provides for mandatory conciliation between the parties, which may or may not be envisaged in the agreement between the parties.


The issue regarding what prevails in such an event where there is an inconsistency between Section 18 and an independent arbitration agreement between the parties has been the subject matter of much debate and litigation, which has been further exacerbated due to different High Courts taking different stands on the issue.


Inconsistency with a pre-existing arbitration agreement

One of the first instances in which the aforesaid issue was addressed was Steel Authority of India Limited v. Micro, Small Enterprise Facilitation Council before the Hon’ble Bombay High Court.


The Hon’ble High Court noted that Section 24 of the MSME Act provided that Sections 18 to 23 would have overriding effect notwithstanding anything inconsistent in any other law. The Court, however, observed that there was nothing in the MSME Act that renders an arbitration agreement between parties ineffective. Further, adverting to Section 24, it said that the said provision would not have the effect of negating an arbitration agreement since it only overrides such things as are inconsistent with Sections 15 to 23, including Section 18, and there was no inconsistency between arbitration pursuant to Section 18 of the MSME Act and arbitration pursuant to an arbitration agreement between the parties, both of which prescribed that the arbitration would take place in accordance with the provisions of the Arbitration Act . The judgment, therefore, held that there was no inconsistency between Section 18 and an independent arbitration agreement between the parties.


In subsequent decisions, however, Courts have distanced themselves from this view. In a frequently cited judgment by the Hon’ble Allahabad High Court- M/s Paper & Board Convertors v. U.P. State Micro & Small Enterprises, the supplier had made a reference to the Facilitation Council, after which the buyer appointed an arbitrator in terms of the agreement between the parties. The Facilitation Council, after the failure of conciliation proceedings, referred the dispute to the arbitrator originally appointed by the buyer.


The High Court observed that the purport of Section 18 was clear. The non-obstante provisions in sub-sections (1) and (4) of Section 18 operate to ensure that only the concerned Facilitation Council has the jurisdiction to act as a conciliator or arbitrator in a dispute between a supplier and a buyer and the supplier has made a reference, the only recourse available to the Facilitation Council was to either conduct the arbitration itself or to refer the parties to an institution providing ADR services.


Subsequent to the judgment in Paper & Board Convertors (supra), most High Courts have taken the view that in the event of an inconsistency between the MSME Act and an arbitration agreement between the parties, it is the MSME Act that will prevail, primarily on the ground that the MSME Act being special legislation will prevail over the provisions of the Arbitration Act particularly when it has an express non-obstante clause.


There have, however, been a few decisions that have taken the line that Section 18 cannot be held to be mandatorily applicable in all cases indiscriminately, most notable of which are Porwal Sales v. Flame Control Industries and a recent decision of the Hon’ble Delhi High Court in AVR Enterprises v. Union of India in which the Courts have held that Section 18 could not be held to be applicable in instances where no reference had been made to the concerned Facilitation Council, as a reference to the Facilitation Council was a pre-requisite for the process to be set in motion in terms of the MSME Act.


Conclusion

While the question as to what prevails in the event of an inconsistency between Section 18 and an independent arbitral clause continues to remain inconclusive and it appears that it will finally have to be settled by the Hon’ble Supreme Court, it is humbly submitted that the following considerations may have to be kept in mind while deciding the issue:


1. When a statute prescribes something to be done in a particular manner, it must be done in that manner alone;

2. In the event of an inconsistency between the statute and a contractual term, it is usually the statute that prevails; and

3. The MSME Act was enacted for the benefit of MSME entities, and keeping in mind the object of the MSME Act, such entities should be allowed to elect the proceedings suitable to them and constraining them to mandatorily make a reference under Section 18 might not always be in their interest.


Apart from the factors set out hereinabove, there also remain practical constraints like state Facilitation Councils simply not having enough resources and manpower to ensure expeditious redressal of disputes.


In view of the aforesaid, it is humbly submitted that the views taken by the Hon’ble Bombay and Delhi High Court in the aforesaid decisions viz. Porwal Sales (supra) and AVR Enterprises seem to have balanced the aforesaid competing considerations well. The position that emerges is that once a reference to the Facilitation Council is made by a party, the provisions of Section 18 shall mandatorily apply and override any inconsistency in the arbitration agreement between the parties. However, if no reference is made and the jurisdiction of the Facilitation Council is not invoked, it cannot be said that Section 18 shall still apply to such disputes, no reference having been made notwithstanding.


These decisions also seem to be in line with the view that an MSME entity should not be constrained to seek adjudication of its disputes only under the provisions of the MSME Act and the alternative to seek redressal under its own agreement must remain available to it.

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