Buyer Cannot Seek Separate Arbitral Reference For Counter-Claims Once Arbitration Under MSMED Act Has Commenced: Calcutta High Court

The Calcutta High Court has held that once arbitral proceedings are commenced before the Micro and Small Enterprises Facilitation Council (“Council”) under Section 18(3) of the MSMED Act, 2006, a buyer cannot seek appointment of a separate arbitrator under section 11 of the Arbitration and Conciliation Act, 1996 ("Arbitration Act") and therefore all claims including claims for damages by the buyer must be raised before the Council itself which then functions as the arbitral forum. Justice Shampa Sarkar dismissed a Section 11 petition filed by Macmet Engineering Ltd., seeking appointment of an independent arbitrator against Mecgale Pneumatics Pvt. Ltd., holding that parallel arbitral proceedings would defeat the object of the MSMED Act. Background: The dispute arose out of purchase orders issued in 2018 for supply, installation, testing, and commissioning of a silo loading and extraction system for an infrastructure project in Haldia, West Bengal. The buyer claimed damages for the expenses incurred on account of delay, short supply and deficiencies. The supplier which is an MSME approached the MSME Council at Nagpur claiming unpaid dues. The arbitration commenced under section 18(3) of the MSMED Act after failure of conciliation between the parties. During the pendency of those proceedings, the buyer invoked the arbitration clause under the contract and filed an application under section 11 seeking appointment of a separate arbitrator contending that the claims for damages fell outside the jurisdiction of the council. The buyer argued that claims for damages and compensation fell outside the jurisdiction of the council and that the underlying contract was a works contract which was outside the council's jurisdiction. Findings: The court observed that section 18 of the MSMED Act gives an overriding effect to its provisions over the Arbitration Act. It further held that after conciliation fails, arbitration before the council is deemed to have commenced pursuant to an arbitration agreement under section 7 of the Arbitration Act and all provisions of the Arbitration Act including section 23(3A) permitting counter claims apply. Rejecting the contention of the buyer, the court held that the phrase “any party to a dispute” under section 18(1) also includes buyer and therefore the buyer's counter claims including claims for damages are maintainable before the council itself. “Section 18(1) provides that, any party to a dispute, with regard to the amount due under Section 17 of the MSMED Act, can make a reference to the Council. This expression includes the buyer as well, for the reason that, for adjudication of the claim of the supplier, the counter-claim of the buyer had to be taken into consideration. The claim of the seller cannot be decided separately…The right of the buyer to make a counter-claim in the proceeding before the Council, could not be curtailed. The MSMED Act did not limit such right of the buyer by any express provision”, the court held. In light of the above discussion, the court held that allowing the present plea to appoint the arbitrator would lead to multiplicity of proceedings and conflicting decisions which will defeat the very purpose of the MSMED Act. It held that “instead of permitting any other arbitral proceeding to run parallel to the arbitral proceeding initiated under Section 18(3) of the MSMED Act, the issues should be adjudicated by the Council under Section 18(3) itself. Parallel proceedings before various fora cannot be the objective and purpose behind a beneficial legislation. Multiplicity of proceedings cannot enure to the benefit of the Micro Small and Medium Enterprises. Parallel proceedings can also lead to conflicting decisions and give rise to an anomalous situation.” While rejecting the contention that since the MSME approached the Council, the buyer must be permitted to seek appointment of an arbitrator under section 11, the court held that the proceedings under the MSMED Act must be completed within 90 days. Considering the time bound nature of the proceedings, the court said, the buyer cannot be permitted to initiate a parallel arbitration even when a separate arbitration agreement exists, the buyer's counter claims must be raised before the council itself which then works as the arbitral forum. The court copiously referred to the Supreme Court's judgments in Silpi industries and Gujarat State Civil Supplies Corporation Ltd to reiterate that the MSMED Act is a special, beneficial legislation that prevails over the general arbitration law. The court concluded that the second arbitral reference is not maintainable once the arbitration under the MSMED Act has commenced. Since the seller, the court observed, has approached the council claiming unpaid dues which have been disputed by the buyer while at the same the buyer is claiming damages for deficiency in...

Buyer Cannot Seek Separate Arbitral Reference For Counter-Claims Once Arbitration Under MSMED Act Has Commenced: Calcutta High Court

Mohd Malik Chauhan

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Buyer Cannot Seek Separate Arbitral Reference For Counter-Claims Once Arbitration Under MSMED Act Has Commenced: Calcutta High Court

Mohd Malik Chauhan

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