Judgment name: Sunwin Paper v. Sivdarshini Papers Pvt. Ltd.
Citation: Arb O.P. (Com. Div.) No. 195 of 2021
Court: High Court of Judicature at Madras
Coram: M. Sundar, J.
Date: 11th August 2022
Keywords: Arbitration, Section 34, Section 16, patent illegality, appeal.
The case pertains to a dispute over non-payment for the delivery of goods. Sunwin Paper (“Sunwin”) registered itself with the Ministry of Micro, Small and Medium Enterprises (“MSME”) in 2015 under the sub-classification of Wholesale waste, scrap and other products and Wholesale paper in bulk. The dispute arose when Sunwin alleged that Sivadarshini Papers Pvt. Ltd. (“SPPL”) did not make payments for the supplies that Sunwin delivered as per the Agreement. The dispute triggered a mechanism under the Micro Small and Medium Enterprises Development Act, 2006 (“MSMED Act”). Section 18 of the MSMED Act incorporates the Arbitration and Conciliation Act, 1996 (“Act”). When the parties invoked the provision of the MSMED Act, they were referred to the Madras High Court Arbitration Centre as per the MSMED Act. There, SPPL raised a preliminary issue under Section 16 of the Act. They argued that through a notification issued in 2017 under the Office Memorandum, the sub-classification under which Sunwin had registered itself had been excluded. Therefore, they argued that Sunwin ceased to be an MSME. The Arbitral Tribunal (“AT”) consisting of a Sole Arbitrator decided in favour of SPPL. Based on this, the AT decided that they did not have the jurisdiction to entertain the matter. Sunwin filed an ‘Arbitration Original Petition’ (“Arb OP”) under Section 34 of the Act, challenging the Arbitral Award. The court, while referring to the Award as an “impugned award” clarified that such reference was made for the sake of convenience even though the proceedings were under Section 16 of the Act. The court framed the following two issues for adjudication.
I. Whether the petition is maintainable under Section 34 of the Act or if it’s a proceeding under Section 16 of the Act.
II. Whether the reference to arbitration was bad owing to the new notification that was issued in 2017.
To address the first issue, the court relied on the ratio laid down in Indian Farmers Fertilizer Cooperative Limited v. Bhadra Products (“Bhadra”). In the Bhadra case, a principle with regards to challenging the award under Section 16 of the Act was laid down. The principle states that an order will be subject to appeal under Section 37 of the Act if it concludes arbitral proceedings under Section 16. Therefore, the court justified entertaining the Arb OP because the impugned award closed the arbitral proceedings.
On the second issue, the court recognised that Sunwin was a registered company. The court in its order reproduced several documents adduced by Sunwin to underpin its claim. The Office Memorandum was dated 27th October 2017. The court ruled that it is a well-settled principle that subordinate legislation is prospective. Here, the Office Memorandum was not even legislation but only a notification made under a Statute. There was nothing to suggest that the notification had a retrospective application. Moreover, registration under the MSMED Act was not even compulsory. The AT, however, answered the preliminary question in favour of SPPL by accepting its plea of lack of jurisdiction due to the non-registration of Sunwin under the MSMED Act. Instead, the AT should have answered the preliminary issue in favour of Sunwin. The dispute should have been adjudicated by arbitral proceedings. Instead, the arbitration could not go forward. Therefore, the court held this to be a case of patent illegality under Section 34(2A) of the Act. The Award, the court said, also conflicts with the public policy of India as per Clause (ii) of Explanation 1 under Section 34(2)(b)(ii) of the Act since it did not adhere to a fundamental policy of Indian law. The Arb. OP was set aside.
The Madras High Court here made a seminal ruling: if an AT passes an order under Section 16 of the Act where it has ruled on its own jurisdiction, and the award has the effect of concluding the arbitral proceedings, then the award could be challenged under Section 34 of the Act. The case adds to the ever-on-going dialogue about the scope of interference by the courts in arbitration proceedings.
[This case note has been authored by Paritoshika Singh, an Editor at Mapping ADR.]