Ad-Hoc Arbitrator Can Grant Interest U/S 16 Of MSMED Act, Even If Reference Was Not Made To MSME Council: Delhi High Court

The Delhi High Court bench of Justice Jasmeet Singh held that an ad-hoc arbitrator (appointed under the Arbitration and Conciliation Act, 1996) is empowered to grant interest rate contemplated under Section 16 of the Micro, Small and Medium Enterprises Development Act, 2006, even if the reference was not made to the MSME Facilitation Council for resolving disputes. Brief Facts: Respondent No. 2 (“Owner”) owned a thermal power plant in Haldia, West Bengal. It appointed BF Infrastructure Ltd. (“BFIL”) as the 'Engineering, Procurement, and Construction (EPC)' contractor of the plant. In 2012, the Owner invited bids for a coal handling project related to the plant. A successful bid was submitted by Scorpio Engineering Pvt. Ltd. (“Scorpio”). A tripartite agreement was executed between the Owner, Scorpio and BFIL with a total project value of Rs. 47.5 Crore. In 2013, BFIL invited bids for various works related to the same project. Shristi Infrastructure Development (“Shristi Infrastructure”) submitted a successful bid. Subsequently, letters of intent were issued. On 20th December 2013, a purchase order and a works order were issued in favour of Scorpio for the equipment and related services. On the same day, BFIL and the Owner directed Shristi Infrastructure to issue identical purchase and works order to Scorpio. On 6th June 2014, the Owner, BFIL and Shristi Infrastructure entered into a tripartite agreement, transferring all of the BFIL's obligations to the Owner. As a result of this agreement, Shristi Infrastructure started dealing with the Owner directly. On 3rd August 2015, the Owner confirmed the substitution of Shristi Infrastructure as the new EPC contractor by executing a supply contract. Disputes arose and Scorpio sent a legal notice to Shristi Engineering and the Owner, invoking arbitration on 14th April 2017. Shristi Engineering claimed that it never received the notice. Subsequently, Scorpio filed a petition under Section 11 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) and a sole Arbitrator was appointed. The Arbitrator pronounced the award on 16th October 2019 and directed Shristi Engineering and the Owner to jointly and severally pay Rs. 6,56,84,982/- to Scorpio. This included Rs. 5,73,15,078/- for unpaid supplies and services, and Rs. 83,69,904/- for costs incurred to continue bank guarantees. An interest rate of 38.85% per annum was also levied from the date of the award until actual payment. In case of delay beyond six weeks, an enhanced rate of 2% above the prevailing interest rate was to apply. Feeling aggrieved, Shristi Infrastructure challenged the award under Section 34 of the Arbitration Act, before the Delhi High Court (“High Court”). Contentions of Shristi Infrastructure: Shristi Infrastructure contended that the Arbitrator did not have jurisdiction over the subject matter, as it was a dispute under the Micro, Small and Medium Enterprises Development Act, 2006 (“MSMED Act”). Section 18 of the MSMED Act is a special provision. Hence, it overrides the Arbitration Act. Therefore, an arbitration could only have been conducted by the 'facilitation council', as provided under the MSMED Act. Shristi Infrastructure further contended that it was not a party to the agreement signed on 20th December 2013, which issued a purchase and works order in favour of Scorpio. Therefore, there was no contractual relationship or privity of contract with either Scorpio or the Owner. Hence, Shristi Infrastructure could not have been made a party to the arbitration. Shristi Infrastructure was also not a part of the group structure of the Owner entity and hence, the application of the group of companies doctrine was not applicable. Despite this, the Arbitrator held that Shristi Infrastructure acted as an agent of the Owner. Even though the agency was assumed, Section 230 of the Indian Contract Act provides that an agent can't be personally held liable for the act of the principal. The statement of claim filed by Scorpio was directed against the Owner solely and all actions such as changes in layout plans and delays were attributed to the Owner. However, the Arbitrator also imposed liability on Shristi Infrastructure. Shristi Infrastructure was never a part of any correspondence or meetings relating to the performance of the contract. Further, the invoices submitted by Scorpio were never approved by Shristi Infrastructure. However, the Arbitrator awarded the sum of Rs. 5,73,15,078, relying solely on those invoices without verification. Contentions of Scorpio (Respondent No.1): Scorpio contended that this petition was filed during the pendency of a previous Section 34 petition challenging the same arbitral award, which remained defective for more than 3 years. When Shristi Infrastructure failed to cure the defects, it filed this Section 34 petition to bypass the limitation period. The award was passed...

Ad-Hoc Arbitrator Can Grant Interest U/S 16 Of MSMED Act, Even If Reference Was Not Made To MSME Council: Delhi High Court

Smita Singh

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Ad-Hoc Arbitrator Can Grant Interest U/S 16 Of MSMED Act, Even If Reference Was Not Made To MSME Council: Delhi High Court

Smita Singh

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