Arbitration Agreement Not A Bar For Referring Parties To Facilitation Council Under MSMED Act: Andhra Pradesh High Court

The Single Bench of Justice R. Raghunandan Rao held that even if the arbitration agreement between the parties provides for a different method of constituting an Arbitral Tribunal, the party can be referred to the Facilitation Council under Section 18 of the MSMED Act for recovery of its dues.

The petitioner M/s. Dalapathi Constructions is registered as an Enterprise under the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act). The petitioner entered into a construction contract with the respondent-M/s. Undavalli Constructions. Since the construction contract could not be executed, the parties entered into a Memorandum of Understanding (MoU) whereby the respondent agreed to pay a certain sum of money to the petitioner as consideration for the plant and machinery handed over to the respondent.

After the respondent failed to make the payment, the petitioner filed an application before the Micro and Small Enterprises Facilitation Council (MSEFC), Andhra Pradesh for recovery of its dues, which was rejected by the MSEFC. Against this, the petitioner filed a writ petition before the Andhra Pradesh High Court.

The petitioner M/s. Dalapathi Constructions submitted before the High Court that it is an Enterprise falling within the ambit of the MSMED Act, and thus the MSEFC was required to consider the claims made by the petitioner for recovery of the money due on account of sale of goods or supply of services.

The respondent M/s. Undavalli Constructions averred that in view of the arbitration clause contained in the agreement between the parties, the claim of the petitioner is required to be referred to an arbitrator. Thus, the respondent contended that the claims made by the petitioner cannot be referred to the MSEFC under the provisions of the MSMED Act.

Section 18(1) of the MSMED Act provides that a party to a dispute may make a reference to the Micro and Small Enterprises Facilitation Council (MSEFC). Under Section 18(2), the MSEFC shall either itself conduct conciliation proceedings in the matter or it may seek the assistance of any institution or centre. Section 18(3) provides that where the conciliation initiated under Section 18(2) is not successful, the MSEFC may either itself take up the dispute for arbitration or refer the matter to any institution or centre for arbitration. Additionally, Section 18(3) provides that the provisions of the Arbitration and Conciliation Act, 1996 (A&C Act) shall then apply to the dispute as if the arbitration was in pursuance of an arbitration agreement referred to in Section 7(1) of the A&C Act.

The High Court ruled that once a Memorandum of the Enterprise is registered with the prescribed authority, the said enterprise would be entitled to the benefits of the MSMED Act, and it would be entitled to approach the MSEFC under Section 18 of the MSMED Act for recovery of its dues along with interest, as specified in Section 17 of the MSMED Act. The Court added that in the event the conciliation initiated under Section 18 is not successful, the MSEFC can either take up the dispute for arbitration or refer it to any institution or centre for such arbitration, and the provisions of the A&C Act shall then apply to the dispute as if the arbitration was in pursuance of the arbitration agreement as referred to in Section 7 (1) of the A&C Act.

The Court observed that the arbitration clause incorporated in the agreement between the parties and the provisions of Section 18 of the MSMED Act, both require that the dispute between the parties should be referred to arbitration

The Bench held that on a conjoint reading of the provisions of Section 18 of the MSMED Act and Section 7 of the A&C Act, it is evident that a reference to the MSEFC under the MSMED Act for conciliation and subsequent arbitration, if required, is not barred on account of the presence of an arbitration agreement between the parties which provides for a different method of constituting an Arbitral Tribunal.

The Court, thus allowed the writ petition and directed the MSEFC to consider the claim of the petitioner in accordance with law.

Case Title: M/s. Dalapathi Constructions versus The State of Andhra Pradesh & Ors.

Dated: 05.08.2022 (Andhra Pradesh High Court)

Counsel for the Petitioner: Mr. S. Ram Babu

Counsel for the Respondents: Mr. Ashok Returi

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