MSME Council Cannot Reject Arbitrable Claims Without Providing Any Reasons When Meditation U/S 18 Of MSME Act Has Failed: Calcutta HC

The Calcutta High Court bench of Justice Shampa Sarkar has held that the Micro, Small and Medium Enterprises (MSME) Facilitation Council cannot reject the arbitrable claims of the supplier without providing an opportunity to present evidence in support of the same, especially when mediation, as required under Section 18 of the Micro, Small and Medium Enterprises Development Act, 2006 (MSME Act) has failed. As per law, the Council is then mandated to either adjudicate the arbitrable matter itself or refer it to an institution providing alternative dispute resolution services. Brief Facts: The Council rejected the claim even before pleadings were complete, stating that the supplier failed to execute the job as per the contract and did not submit satisfactory documents. It further held that the remaining 10% payment couldn't be released as the job satisfaction certificate had not been released in favor of the supplier. Against the above order of the Council, the present application under section 34 of the Arbitration and Conciliation Act, 1996 (Arbitration Act) has been filed. Contentions: The Petitioner submitted that it was the buyer's duty to clear the dues. The CBI enquiry and ongoing litigations were no bar to payment, as the supply unit had fulfilled its contractual obligation by handing over the results and relevant documents. It was further submitted that the MSME Council was the appropriate forum to adjudicate the dispute, and the buyer's decision to withhold 10% of the payment despite full performance by the service provider raised an arbitrable issue. Per contra, the Respondent submitted that the petitioner failed to carry out the recruitment process in a free and fair manner. Such failure was a breach. Thus, 10% of the amount was not payable on account of unsatisfactory performance. It was further submitted that Only upon the buyer unit being satisfied that the work had been done to the satisfaction of the buyer unit, could the entire balance payment be released. Moreover, after the court cases were filed, another agency was engaged to perform some of the remaining functions. Observations: The court observed that the law mandates that once mediation fails, the Council must either handle the arbitration itself or refer the dispute to an institutional centre. Proceedings shall be governed by the Arbitration Act thereafter. The Council is required to allow both parties to present evidence. It further added that the Council noted that the claimant alleged the 2016 Job Completion Certificate was withheld, yet failed to address this as a dispute. Instead, the claim was rejected due to the absence of the certificate. The respondent had not presented arguments but only requested time to file a reply. Based on the above, the court held that the petitioner should have been given the opportunity to prove the legitimacy of the claim for the remaining 10%. Additionally, the Council should have made a specific finding on whether the petitioner was responsible for discrepancies in the results due to unfair examination practices, as per the agreement. The court held that the Council's order seems to have been passed with a closed mind and lacks any supporting evidence. Both parties should have been given the opportunity to present evidence. While interference by a Court under Section 34 of the Arbitration Act is limited, an arbitral award can be set aside if it is perverse or unreasoned. The Supreme Court in Bharat Coking Coal Ltd. v. L.K.Ahuja (2001) held that in cases where an arbitrator exceeds the terms of the agreement or passes an award in the absence of any evidence, which is apparent on the face of the award, the same could be set aside. Similarly, the Supreme Court in PSA Sical Terminals (P) Ltd. v. V.O. Chidambranar Port Trust (2023) held that a decision is perverse if it is based on no evidence, relies on irrelevant material, or ignores vital evidence in arriving at its conclusion. The court concluded that the impugned award is perverse and violates principles of natural justice, particularly by denying the opportunity to adduce evidence. Case Title: UMC TECHNOLOGIES P LTD VS ASSISTANT DIRECTOR OF POSTAL SERVICES, (RECRUITMENT) Case Number: AP-COM/39/2024 Judgment Date: 03/04/2025 Mr. Rishabh Karnani, Adv. Mr. Sanjay Kr. Baid, Adv. …for the petitioner Mr. Swatarup Banerjee, Adv. Mr. Pradyat Saha, Adv. …for the respondent Click Here To Read/Download The Order

MSME Council Cannot Reject Arbitrable Claims Without Providing Any Reasons When Meditation U/S 18 Of MSME Act Has Failed: Calcutta HC

Mohd Malik Chauhan

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