Whether An Agreement Is A Works Contract Or Not To Be Decided By Arbitrator For Applying MSMED Act: Delhi High Court

The Delhi High Court has held that an issue whether an agreement is in the nature of works contract and the consequent issue of applicability of MSMED Act to such contracts is to be decided by the arbitrator. The bench of Chief Justice Satish Chandra and Justice Saurabh Banerjee dismissed an LPA against the orders of a single judge bench holding that the single bench had correctly referred the issue to be decided by the arbitrator as the court cannot go into the said determination at the stage of appointment of arbitrator or in a writ petition. It further held that that mere nomenclature of the agreement is not material to determine its nature. The Court further reiterated that the MSMED Act would apply when the supplies were made and the bills were raised post the registration of the supplier as an MSME. It held that the supplier might not have been an MSME at the time of the agreement, however, if post its registration it continues to make supply and raise bills pursuant to that agreement, it would be entitled to the benefits of the MSMED Act. Facts The supplier/respondent was registered as an MSME under the MSMED Act on 07.09.2019. However, the agreement in question precedes the date of registration, but the respondent continued to make supplies and raise invoices post its registration under the same agreement. A dispute arose between the parties and the respondent invoked the jurisdiction of MSEFC seeking reference of the disputes to arbitration resulting in Reference Orders dated 07.02.2022 passed by MSEFC referring the disputes to the Delhi International Arbitration Centre for initiation of arbitration proceedings. The petitioner challenged the order of the MSEF Council in W.P.(C) 4520/2020. The ld. Single Judge dismissed the writ petition and also the review petition by upholding the jurisdiction of the MSEF Council to entertain the reference filed by the respondent and left the issue of works contract to be decided by the arbitrator. Aggrieved by the orders of the Ld. Single Judge, the petitioner filed an LPA against such orders. Contention of the Parties The petitioner challenged the impugned orders on the following grounds: The respondent was not an MSME at the time of the agreement and also at the relevant time when the supplies were made. Only one invoice was raised by the respondent post its registration under the MSMED Act, therefore, the respondent would not have the benefit the MSMED Act and the MSEF Council erred in entertaining the reference and the Ld. Single Judge erred in upholding the jurisdiction of MSEF Council. Further, the agreement between the parties is a works contract which involves element of both supply of goods and rendering of services and is by nature an indivisible contract and is different from a mere contract for supply of goods or services. The MSMED Act does not apply to a works contract, therefore, the MSEF Council does not have the jurisdiction to decide the issue between the parties. The respondent made the following counter-arguments in favour of the impugned orders: The respondent was raising the bills qua the agreement in question after its registration under the MSMED Act.The supplies were continued to be made after the registration of an entity as a MSME, the same shall fall within the ambit of the MSME Act.The Ld. Single Judge has rightly reserved for the adjudication for the tribunal, the issue regarding the determination of the nature of the contract and the consequent applicability of the MSMED Act. Analysis by the Court The Court observed that the respondent continued to make supplies and raise bills for those supplies post its registration under the MSMED Act. The Court held that the MSMED Act would apply when the supplies were made and the bills were raised post the registration of the supplier as an MSME. It held that the supplier might not have been an MSME at the time of the agreement, however, if post its registration it continues to make supply and raise bills pursuant to that agreement, it would be entitled to the benefits of the MSMED Act. The Court held that an issue whether an agreement is in the nature of works contract which are indivisible contracts including the ‘supply of goods’ and which ‘render a service’ and the consequent issue of applicability of MSMED Act to such contracts is to be decided by the arbitrator. The Court dismissed an LPA against the orders of a single judge bench holding that the single bench had correctly referred the issue to be decided by the arbitrator as the court cannot go into the said determination at the stage of appointment of arbitrator or in a writ petition. It further held that that mere nomenclature of the agreement is not material to determine its nature. Case details: Jaiprakash Associates Limited v. MSEFCCitation: 2023 LiveLaw (Del) 660 Date: 02.08.2023 ...

Whether An Agreement Is A Works Contract Or Not To Be Decided By Arbitrator For Applying MSMED Act: Delhi High Court

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