Council overrides arbitration agreement under MSMED Act

council overrides MSMED act

The Supreme Court recently observed in the judgment of Gujarat State Civil Supplies Corporation v Mahakali Foods Pvt Ltd (delivered on 31 October 2022) that despite the existence of an independent arbitration agreement, any reference made to the facilitation council is maintainable in respect of the parties governed by the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act). The express bar contained in section 80 of the Arbitration and Conciliation Act cannot stop the facilitation council acting as an arbitrator if the council has initiated conciliation proceedings under section 18(2) of the MSMED Act.

The appellant (Gujarat State Civil Supplies Corporation) had challenged the award made by the facilitation council at Bhopal before the commercial court in Ahmedabad. The said award was passed under the Arbitration and Conciliation Act, 1996. The appellant, thereafter, filed an appeal before the Gujarat High Court and the same was dismissed.

The dispute revolved around the contention that the recourse of referring to the facilitation council would be available to parties only in the event of there being no clause in the contract that states that the resolution of a dispute shall be done by way of arbitration.

The Supreme Court observed that “No party to a dispute with regard to any amount due under the MSMED Act would be precluded from making a reference to the Micro and Small Enterprises Facilitation Council, though an independent arbitration agreement exists between the parties”. The Supreme Court further clarified that the provisions of chapter V of the MSMED Act in this regard would override the provisions of the Arbitration and Conciliation Act, 1996, and the proceedings before the facilitation council acting as an arbitrator would be governed by the provisions of the said act.

The Supreme Court further observed that while interpreting a statute, if two interpretations are possible, one which enhances the object of the act should be preferred to one which would frustrate it. If the Supreme Court accepts the submission that the party to a dispute covered under the MSMED Act, 2006, cannot obtain the remedy available under section 18 of the act when an independent arbitration agreement between the parties exists, the very purpose of enacting the MSMED Act would be frustrated.

The Supreme Court also noted that any party who was not the “supplier” as per the definition contained in the MSMED Act, 2006, on the date of entering into a contract cannot seek any benefit as the “supplier” under the said act. Any registration obtained subsequently would apply only to the supply of goods and services subsequent to the registration.

The dispute digest is compiled by Numen Law Offices, a multidisciplinary law firm based in New Delhi & Mumbai. The authors can be contacted at Readers should not act on the basis of this information without seeking professional legal advice.