Once Arbitration Commences After Failure Of Conciliation Under MSME Act, It Cannot Be Reinitiated By Halting Arbitration: Calcutta High Court

The Calcutta High Court bench of Justice Sabyasachi Bhattacharyya has held that once arbitral proceedings commenced under Section 18(3) under the MSME Act, the process could not be reversed to reinitiate pre-arbitral conciliation. The Council did not do so either. It was only at the petitioner's request that additional avenues for mutual settlement were explored alongside the arbitration. Upon the failure of these efforts, the Council proceeded to decide the matter on merits. Brief Facts: The present application under Section 34 of the Arbitration and Conciliation Act, 1996 (“the 1996 Act”) has been preferred against an award passed in respect of a claim filed by the respondent herein 2 in a reference under Section 18 of the Micro, Small and Medium Enterprises Development Act, 2006 ( “the 2006 Act”). The Petitioner submitted that the impugned award is a nullity, since the mandate of the Council as the arbitral tribunal had already terminated when the award was passed, by operation of Section 29-A of the 1996 Act, the provisions of which statute were applicable in terms of Section 18(3) of the 2006 Act. It was further submitted that the Council violated principles of natural justice by not allowing it to present oral arguments after conciliation ended. Proceeding solely on written submissions, without a hearing, amounts to denial of fair opportunity and renders the award vulnerable under Section 34 of the Arbitration Act. It was further submitted that the Council initiated conciliation amid the arbitration proceedings and, as such, committed a patent illegality in deciding the matter on merits during such conciliation attempts, by construing the said proceedings to be an arbitral proceeding under Section 18(3) of the 2006 Act. Per contra, the Respondent submitted that provisions of Section 29-A of the 1996 Act are not applicable, particularly insofar as the timelines are concerned, to a proceeding under the 2006 Act. It was further submitted that Conciliation efforts during arbitration were initiated at the petitioner's request and did not amount to pre-arbitral conciliation, which had already been terminated by the Council. It was further submitted that GC-1 and GC-2 Forms were submitted and work completion was certified, but GC-3 (a No Dues Certificate) wasn't submitted as dues remained unpaid—forming the core of the present dispute. It was further submitted that the power of the Council of adjudicating interest was not delegated to a CA. The Council came to specific conclusions as to the date from which and the rate at which the interest is payable. Thus, it was merely the arithmetical calculations which were left to the CA. Observations: The court noted that the timeline stipulated under Section 29A of the 1996 Act are not applicable to an arbitral proceeding under the 2006 Act. Rather, the period stipulated under Section 18(5) of the 2006 Act is the relevant guiding factor. However, the latter period is directory and not mandatory. It further observed that unlike Section 29A(1) of the 1996 Act, Section 18(5) of the 2006 Act prescribes a 90-day timeline for arbitral proceedings without imposing a penalty for delay or terminating the Council's mandate, indicating the provision is directory, not mandatory. Referring to the scheme of the both the Acts, it held that a contrary interpretation—treating the 90-day period in Section 18(5) of the 2006 Act as mandatory—would defeat the very purpose of the Act by allowing substitution of the Facilitation Council or initiation of fresh arbitration under the 1996 Act, undermining the special mechanism designed for MSMEs. The court further observed that it is evident that both parties had already argued extensively on both jurisdiction and merits. The Council, acting on the petitioner's insistence, decided the issue of jurisdiction first on May 12, 2021, and scheduled adjudication on merits for a later date. It further added that not only was ample opportunity given to the petitioner to argue the matter on merits but the petitioner had availed of such opportunity by arguing the matter on merits as well as on jurisdiction on several dates, covering the salient features of the dispute. The prior adjudication of the issue of jurisdiction, that too on the insistence of the petitioner, does not automatically signify that the other issues were not heard previously. The court further observed that the GC-3 Form, being a “No Dues Certificate” under the contract, could only be submitted if the respondent had no outstanding claims. Since the dispute concerns non-payment of legitimate dues, insisting on the GC-3 Form is illogical, as its submission would imply full satisfaction of claims, defeating the respondent's case entirely. It further noted that once arbitral proceedings commenced under Section 18(3), the process could not revert to...

Once Arbitration Commences After Failure Of Conciliation Under MSME Act, It Cannot Be Reinitiated By Halting Arbitration: Calcutta High Court

Mohd Malik Chauhan

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