Joinder Of Parties And Privity Of Contract: Legal Fiction Versus Entity Reality In MSME Arbitration

In MSME disputes, a micro or small enterprise usually sues the entity it has contracted with. It is like a contract between a lion and a lamb that both of them will drink water from the same pond. That is straightforward when the buyer is a private company. The difficulty arises when the counterparty is a government-linked body – for example, a society registered under the Societies Registration Act, 1860, but funded, staffed, and tightly controlled by the State Government. The natural question for a supplier then is: who is the real party in interest – the society on paper, or the State that stands behind it.

This is not a merely theoretical puzzle. A registered society is de jure a separate legal person. It can enter into contracts and can sue or be sued in its own name. At the same time, when that society is created by the State, funded by the State, run by government officials and used only to implement government programmes, the neat separation between “society” and “State” starts to blur between the de-jure and the de-facto. Whether the State can be joined as a party in arbitration (or MSME proceedings) becomes a question with serious financial and practical consequences. Recent disputes involving bodies such as the Jharkhand Education Project Council (JEPC) have thrown this issue into sharp focus.

The Micro, Small and Medium Enterprises Development Act, 2006 (“MSMED Act”) enters this picture with a very specific purpose: to protect micro and small suppliers from delay and procedural gamesmanship by their buyers. It creates a compulsory dispute resolution mechanism, strict timelines, statutory interest and a stringent pre-deposit condition for challenges to awards. When such suppliers contract with government-controlled societies, two worlds collide – contract law's insistence on privity, and public law's concern with substance over form.

The judgment of the Jharkhand High Court in M/s Deepak Printers & Publishers v. State Project Director, Jharkhand Education Project Council (24 January 2025) directly confronts these themes. It raises, among others, the interplay between Sections 79–80 and Order 27 Rule 5A of the Code of Civil Procedure, 1908 (CPC), the doctrine of legitimate expectation, and the principle that courts should look at real control rather than bare legal labels.

Privity Of Contract As The Starting Point

The doctrine of privity remains the foundation of arbitration. Section 7 of the Arbitration and Conciliation Act, 1996 requires an arbitration agreement in writing between identifiable parties. Courts have repeatedly underscored that arbitration is consensual: only those who are party to the agreement can ordinarily be compelled to arbitrate or be bound by the award.

Under Section 18 of the MSMED Act, a “supplier” may refer a dispute to the Facilitation Council against the “buyer.” Section 2(d) defines “buyer” as the person who purchases goods or receives services for consideration. In other words, identifying the buyer in the underlying contract is crucial; this is the person against whom the MSME claim properly lies.

Where the purchase order and agreement are in the name of a registered society, privity points squarely to that society. The fact that the State established and oversees the society does not, by itself, make the State a party to that contract. Nor does State funding, in isolation, transform the government into the contractual buyer. This approach respects separate legal personality and provides certainty, but it also risks concealing the true extent of State responsibility in some fact situations.(pl explain it a bit more}

The Group Of Companies Doctrine – And Its Limits

Over time, courts have softened the harshness of privity, particularly in complex commercial transactions. The “Group of Companies” doctrine is one such development. In Cox and Kings Ltd. v. SAP India Pvt. Ltd. (2023 INSC 1051), a Constitution Bench of the Supreme Court confirmed that a non-signatory may be bound by an arbitration agreement if it was the common intention of the parties that this should be so. The Court set out a fact-specific test, asking, among other things:

● Are the signatory and non-signatory part of the same corporate group?

● How deeply was the non-signatory involved in negotiating or performing the contract?

● Does the transaction form part of a composite arrangement involving multiple related entities?

● Can a clear mutual intention to bind the non-signatory be inferred from the parties' conduct?

However, this doctrine evolved in the context of private corporate groups – parent companies, subsidiaries and affiliates making up a single economic unit. Applying it mechanically to State Governments and their instrumentalities could be a category error. Public bodies are governed not only by contract and company law, but also by constitutional principles, statutory schemes, administrative law and jurisprudential norms. Any extension of the Group of Companies reasoning to State-linked societies must therefore be carefully calibrated, rather than imported wholesale.

Registered Societies As State Instrumentalities

Bodies like JEPC occupy a hybrid position. On the one hand, JEPC is an autonomous society registered under the Societies Registration Act, with its own governing body and the capacity to contract in its own name. On the other, it functions essentially as an implementation arm of the State Government, tasked with carrying out centrally sponsored education schemes. Senior officials sit on its governing body, its funds come from the public exchequer, and it operates in line with government policy.

The Supreme Court's Article 12 jurisprudence provides useful tools to evaluate such entities. Decisions starting from Ramana Dayaram Shetty v. International Airport Authority of India (AIR 1979 SC 1628) have looked at whether there is deep and pervasive State control, whether the entity is financially dependent on the State, what functions it performs, and whether those functions are of a public character. A related line of authority considers how the State may properly be impleaded. In Gopesh Chandra Das v. Chief Secretary to the Government of Assam (1989) 2 GLR 377), the issue was whether naming the Chief Secretary as a defendant was effectively sufficient to bring the State on record. While the trial court insisted that the State itself must be named, the appellate court took a more practical approach, treating the Chief Secretary as having been sued in his representative capacity. That pragmatic spirit is relevant when courts face technical objections about how exactly the State has been described or joined.

Legitimate Expectation, Estoppel And Fairness

The Supreme Court, in State of Jharkhand v. Brahmputra Metallics Ltd., Ranchi (2023) 10SCC 634), used the doctrine of legitimate expectation to remind governments that they are expected to act fairly when they deal with citizens and businesses. If the State has:

● set up a society to implement its programmes,

● funded that society entirely from public money, and

● directed it to procure goods and services from micro and small enterprises,

then it is difficult for the State later to wash its hands of the payment chain. Its conduct creates a legitimate expectation that the procurement structure it designed will operate in a fair and timely manner.

The related principle of estoppel prevents a party from “approbating and reprobating” – it cannot enjoy the advantages of a given legal position while disowning the liabilities that accompany it. When the State treats a society as its implementing agency for all operational purposes, it may, in some cases, be estopped from denying that close relationship when micro enterprises seek to enforce unpaid dues.

Practical Takeaways For Msme Suppliers

For micro and small enterprises, these principles are not abstract theories; they shape how a claim should be framed and pursued. A few working rules follow:

1. Begin with the Actual Buyer

The first respondent in any MSME reference should normally be the entity named as “buyer” in the contract or purchase order. If the documents show a registered society as the purchaser, that society must be joined. The mere fact that the State stands in the background, or has more resources, is not by itself a legal basis to sue the government directly.

2. Joinder of the State Needs Concrete Material

Bringing the State Government on record in addition to the society is not a matter of routine. The claimant must place material showing more than general supervision or budgetary support. What helps is evidence that, in respect of that very contract, government departments were actually taking decisions or issuing directions – for example, in relation to tender terms, approval of rates, clearance of bills, or termination.

3. Build the Evidentiary Record from Day One

Suppliers should, as a matter of practice, retain all material which indicates that the society is functioning as an arm of the State: government resolutions, policy circulars, directions addressed to the society, minutes of meetings chaired by government officials, and correspondence in which officers describe the project as a government project. These documents can later support an argument based on legitimate expectation or estoppel if joinder of the State is sought.

4. Use the MSMED Act's Protective Tools
   Section 19 of the MSMED Act provides a strong statutory safeguard. If the buyer wishes to challenge an award made in favour of the supplier, it must first deposit 75% of the award amount. This requirement applies equally to government-linked bodies. In practice, it deters frivolous or purely delaying challenges and improves the bargaining position of the MSME once it has secured an award from the Facilitation Council or the arbitral tribunal.

Indian courts have not hesitated to disregard the corporate veil when it is used to sidestep genuine liabilities or work an injustice. The same approach is called for when the State conducts its commercial dealings through registered societies and similar bodies in MSME disputes. The separate legal identity of such entities is important, but it cannot become a convenient shield against legitimate claims of small suppliers.

As more matters involving bodies like JEPC come before Facilitation Councils and the High Courts, the principles on joinder and identification of the proper party in MSME arbitration will keep developing case by case. One point, though, is already fairly settled in principle: procedure and legal form are meant to serve justice, not to stifle it. Where the facts show that a State-created body functions in substance as an arm of the government, courts and tribunals are entitled – and indeed expected – to look past the description in the cause title and fasten responsibility on the party that truly controls the transaction.

Mr. Jog Singh is an Advocate at Supreme Court Of India and also a former Judicial Member of the Central Administrative Tribunal (CAT) And Securities Appellate Tribunal (SAT) Mumbai. Views are personal.

[This article is intended for informational purposes only and does not constitute legal advice. Please consult with qualified legal counsel for guidance on your specific situation.]