[This article has been authored by Ryan Joseph, a third-year law student at JGLS.]
Keywords: MSMED Act, Party Autonomy, Arbitration, MSME Facilitation Council, Supreme Court.
The Supreme Court of India (“SC”) in Gujarat State Civil Supplies Corporation Ltd. and Ors. vs. Mahakali Foods Pvt. Ltd. (Unit 2) and Ors. (“the judgment”) heard seven appeals that were tied together by the common question of whether parties can refer a dispute under Section 17 of the Micro, Small and Medium Enterprises Development Act, 2006 (“MSMED Act”) to the Micro and Small Enterprises Facilitation Council (“Facilitation Council”) under Section 18(1) of the MSMED Act even when the parties have an arbitration agreement in the contract from which the dispute arises. The SC answered the question in the affirmative. Critics have argued that this judgment is a blotch on India’s reputation as an arbitration hub, for the judgment wantonly obliterates party autonomy. This article reviews the judgment and finds that the judgment has failed to sufficiently elaborate its reasoning and has merely stated platitudes that may lead one to believe this judgment militates against party autonomy. However, this article finds that a deeper analysis of the judgment would show that the SC has eschewed the negative liberty interpretation of party autonomy and has instead adopted a positive interpretation to further party autonomy in India.
Understanding the Issue
The legislature having taken cognizance of the commercial hardships faced by MSME’s in India, specifically qua recovery of trade dues, enacted the MSMED Act to promote and support the MSME sector in competing with bigger businesses. Before 2006, MSME’s took the benefit of the Interest on Delayed Payments to Small Scale and Ancillary Industry Undertakings Act, 1993; however, the same did not contain exhaustive provisions on enabling MSME’s to recover their dues, nor did it contain a provision to resolve disputes. The MSMED Act sought to change this status quo by providing for stringent provisions against trade payable defaults and created an MSME Facilitation Council (“Council”) that would facilitate and resolve MSME disputes. Section 17 of the MSMED Act allowed MSME suppliers to recover trade receivables, and Section 18(1) of the MSMED Act, allowed any party to refer any dispute qua the recovery of any amount of money under Section 17 to the Council. The council could either conduct mandatory conciliation by itself or seek the assistance of any institution to conduct the same on its behalf. In case the conciliation process is infructuous, the Council could either conduct or seek the assistance of any institution to arbitrate the dispute. On the flip side of the coin is Section 8 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”), which mandates courts to refer any dispute arising from a contract with a valid arbitration agreement to arbitration. Therefore, whenever parties had a dispute under Section 17 of the MSMED Act and had an arbitration agreement in their contract, the confusion of whether to appoint arbitrators as provided under the agreement or to refer the dispute to the Facilitation Council would arise.
The Judicial Attempt at Resolving the Issue
High Courts (“HC”) around India, had differing views on this matter, with the Gujarat and Delhi HC ruling that the MSMED Act would supersede an independent arbitration agreement between the parties. Whereas the Bombay HC ruled that the arbitration agreement would be given precedence over Section 18 of the MSMED Act. Special Leave Petitions were filed against all these orders, and the SC clubbed seven of them and heard them together in the Mahakali Foods Judgement. The SC ultimately sided with the Gujarat and Delhi HC, and its conclusion stood on three legs. First, Section 18(1) of the MSMED Act is a special law that provides the mode of resolving disputes of a very specific nature, whereas the Arbitration Act is a general law that applies to all disputes that are arbitrable. Upon applying the doctrine of generalia specialibus non derogant, the Court held the special law prevails over the general law. Second, when interpreting seemingly conflicting law, an effort must be made at all times to read the laws in a manner that both laws are allowed to operate in their domain, also known as the doctrine of harmonious construction. Therefore, any interpretation that allows one law to operate and renders the other otiose is a violation of this doctrine. The SC applied this doctrine and held that if private agreements are allowed to supersede Section 18, the object of the provision will be made redundant, and hence Section 18 shall supersede such agreements. Interestingly, when building the third leg, the SC had to grapple with the argument that allowing Section 18 to supersede the arbitration agreement violates the principle of party autonomy in as much the section obliterates the consensus reached by the parties on resolving their disputes which is manifested in the arbitration agreement. The SC had the perfect opportunity to engage in a deeper analysis of the concept of party autonomy; however, it chose to dismiss the argument by stating that no parties can agree to a provision that violates an express provision of law. Furthermore, it read Section 18 to merely be an enabling provision in allowing MSMEs to approach the Facilitation Council as the same was envisaged to address the needs of the MSME sector.
Peeling the Onion
It is widely recognised that the principal utility of arbitration does not accrue from the speed, privacy or access to expertise, but it’s from the party’s ability to tailor-make a mode of resolving disputes that perfectly suits their needs. The grundnorm of arbitration is party autonomy, and jurisdictions across the world take great efforts to ensure no shackles are placed on the ability of parties to arbitrate a dispute. In fact, the principal is taken so seriously that not only are parties allowed to choose what is best for them, but they also have the liberty to make decisions that objectively may seem inferior. Scholars such as Alan Rau argue that arbitration is blind to the merits of the party’s choice and opens its eyes to only what the parties want it to see. They argue that arbitration law should proscribe courts from superimposing an image of arbitration on the parties and only consider what the parties have put forth for the court to see. The rationale is to ensure that under no circumstances should the party’s autonomy ever be infringed. However, the concept of party autonomy is often applied and upheld without fully understanding what party autonomy is.
Autonomy can be viewed in two ways. The first is to adopt a negative liberty interpretation of autonomy where parties expect the state not to take any action that prohibits parties from acting the way they would like. In such an understanding of autonomy, any law that fetters a party from acting in a certain manner can be said to infringe upon their autonomy. On a prima facie level, this understanding may seem enough to understand the true meaning of party autonomy; however, upon probing a little deeper one asks, does a bird, that has lost the ability to fly, in a forest have greater autonomy than a bird, that can fly, but is constrained to the limits of a zoo? A positive liberty interpretation, unlike the negative interpretation that despises governmental intervention, looks towards the government to take steps that allow one to better access their liberty and enact enabling provisions that make one more autonomous. Paul Carrington and Paul Haagen have applied this understanding of autonomy in their works on arbitration and argue that unsophisticated parties rarely exercise their autonomy in negotiating dispute resolution clauses either due to the lack of expertise or due to the dearth of negotiating power. Tim Stipanowich argues that even the existence of choice is not always tantamount to autonomy, for parties may often be constrained by practical realities. They further argue that even sophisticated parties, such as executives in MNCs rarely exercise true party autonomy, for they may not have the time or feel the need to negotiate over a clause that does not activate immediately but only activates upon a dispute.
The difference between a law that confers powers upon parties and one that imposes a duty on parties, as highlighted by H. L. A. Hart in his work, becomes relevant in this context. The former are laws that equip one with the means to achieve their rights to the full extent, by removing any hurdles that restrained one from accessing their rights. The latter, on the other hand, are laws that prescribe a set of instructions or a code of conduct from which one cannot deviate. Power-enabling laws are of different kinds, but one facet of these laws is to create symmetry between parties who may not be on an equal footing in a transaction. For example, consumer protection laws, at the outset, do not prohibit the manufacturer from taking certain steps but rather empower the consumer to act against such actions when the actions have an unfair impact on them. Therefore, a scenario can arise wherein the consumer may very well opt not to act, and the manufacturer continues to behave as they did. In this scenario, the power-enabling law has a positive impact on the consumer’s autonomy by helping them better access it but may negatively infringe upon the manufacturer’s autonomy as they can no longer act in a certain way.
Most jurisdictions legislate arbitration laws in furtherance of a positive liberty understanding of party autonomy wherein they ensure they do not actively prohibit parties from taking any action, but at the same time, empower the weaker party to transact with the counterparty at an equal footing. Section 18 of the MSMED Act is rooted in a similar understanding of party autonomy. At the outset, it may seem that the SC is violating party autonomy by refusing to enforce arbitration agreements. However, this is a misunderstanding, for Section 18 does not seek to mandate parties transacting with an MSME supplier to refer their disputes only to the MSME Facilitation centre. It only enables the MSME supplier who is subjected to an arbitration agreement that either substantively or procedurally favours the buyer (this could be in the form of choosing an international institute specifically because the buyer knows the supplier will not be able to afford the proceedings before expensive institutions) to refer the dispute to a more even forum and hence enhances the autonomy of the supplier. The SC, unfortunately, in its judgment, did not engage sufficiently with these complex ideas of party autonomy and instead chose to simply use the doctrine of harmonious construction to sustain the efficacy of Section 18. It is this lack of in-depth analysis that makes the judgment look anti-party autonomy; however, on a closer view, the judgment furthers party autonomy.