Application Of MSMED Act And Arbitral Tribunal's Jurisdiction Over Contractual Disputes Must Be Determined By Arbitral Tribunal,Not By Court In Writ Jurisdiction: Delhi High Court

The Delhi High Court has clarified the legal position of the intersection between the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act) and the Arbitration and Conciliation Act, 1996. The bench of Justice Sanjeev Narula, while hearing a petition filed under Article 226 of the Constitution, seeking to quash a notice requesting the parties to file their Statement of Claims (SoC) and subsequent communications, has clarified the legal position concerning the period of limitation under Section 18(5), the registration of an MSME supplier following the issuance of purchase order and the impact on MSME Claims. Section 18 of the MSMED Act pertains to the referral of disputes to the facilitation council. Facts: GAIL issued a tender for the service of HDD works at Kochi, Koottanad, Banglore, Manglore, Phase II Section VIIB. The petitioner was awarded the contract under this tender. To fulfil the contractual obligations, the petitioner subcontracted the work to Harji Engineering Pvt Ltd for the installation of '24 PE coated pipe + 6 Dia Pipe with HDD works', and a purchase order dated 10 July 2018 was issued by HEWPL in favour of Respondent No. 3. HWEPL sent a letter dated 30 November 2018 to the petitioner, stipulating that M/S Knock Pro Infra Pvt Ltd bills would be paid directly by M/S CIPL from the R A bill raised by HEWPL. A settlement sheet, duly signed and agreed upon, will be provided. According to this letter, a settlement sheet dated 14 December 20218 was executed between HWEPL and Respondent No. 3. The settlement sheet contained a 'Direct Payment Agreement' for the HDD services provided by Respondent No. 3. Respondent No. 3 filed a case before the Micro and Small Enterprise Facilitation Council (MSFEC), alleging non-payment of dues by the petitioner. The conciliation proceedings between the parties were unfruitful. Consequently, a reference was made to the Delhi International Arbitration Center (DIAC) under Section 18(3) of the MSMED Act to initiate arbitration proceedings. Regarding the reference, DIAC, vide notice dated 13 May 2024, instructed the parties to file their respective SoC. The parties were warned that failure to file the SoC would result in the closure of proceedings. DIAC vide communication dated 2 July 2024, and 2 August 2024 directed the parties to pay the Arbitrator's fee and miscellaneous expenses with the DIAC. The petitioner invoked the jurisdiction under Article 226 and sought to quash the notice dated 13 May 2024 and communications dated 2 July 2024 and 2 August 2024 issued by DIAC. The petitioner aslo sought a declaration that the arbitral proceedings be deemed terminated/lapsed in light of Section 18(5) of the MSMED Act and Section 29A of the Arbitration Act. Submissions of the Parties: The petitioner made the following submissions: There are no outstanding dues to be paid to Respondent No. 3, as reflected in the settlement sheet dated 14 December 2018, which had already been settled by HEWPL. Respondent No. 3's action in initiating proceedings before the MSEFC was undertaken with mala fide intention to extort money.Due to the absence of a 'buyer and supplier' relationship between the petitioner and Respondent No. 3, the claim before the MSEFC was not maintainable. Although a purchase order was issued in favour of Respondent No. 3, there was no privity of contract between the petitioner and Respondent No. 3. A claim for recovery of due was not maintainable before the MSEFC under Sections 17 and 18 of the MSMED Act without a direct agreement for the supply of goods and services.After the purchase order was issued by HEWPL, Respondent No. 3 was registered as a Micro and Small Enterprise. Therefore, the contractual dispute arising before Respondent No. 3's registration falls outside the MSEFC's jurisdiction. Respondent No. 3 failed to file its SoC within the prescribed time limit. After almost 1.5 years, DIAC unilaterally issued a notice dated 13 May 2024 to resume the proceedings. This action of DIAC contravened Section 18(5) of the MSMED Act and Section 29A of the Arbitration Act. Analysis of the Court: The Bench observed that the letter dated 30 November 2018 and the settlement sheet dated 14 December 2018 indicated a 'Direct Payment Agreement' involving the petitioner, suggesting that the responsibility for clearing the outstanding dues may rest with the petitioner. The Supreme Court in Gujarat State Civil Supplies Corporation Ltd. v. Mahakali Foods Pvt. Ltd. has held that if the registration under the MSMED Act is obtained after the contract, it would apply prospectively and would apply to the supply of goods and services following the registration. In light of the facts, Respondent No. 3 obtained the registration after the purchase order was issued by HEWPL. The question is whether Respondent No. 3 continued to provide services related to the contract...

Application Of MSMED Act And Arbitral Tribunal's Jurisdiction Over Contractual Disputes Must Be Determined By Arbitral Tribunal,Not By Court In Writ Jurisdiction: Delhi High Court

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Mohd Talha Hasan

Application Of MSMED Act And Arbitral Tribunal's Jurisdiction Over Contractual Disputes Must Be Determined By Arbitral Tribunal,Not By Court In Writ Jurisdiction: Delhi High Court

Mohd Talha Hasan

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