The Supreme Court recently passed a common judgment in two civil appeals – Silpi Industries etc v Kerala State Road Transport Corporation & Anr, and Khyaati Engineering v Prodigy Hydro Power Pvt Ltd – addressing issues pertaining to the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act).
The issues addressed were:
(1) Whether the provisions of the Limitation Act, 1963, apply to arbitration proceedings initiated under section 18(3) of the MSMED Act; and
(2) Whether a counterclaim is maintainable in such arbitration proceedings.
With respect to the limitation issue, the Supreme Court observed that, as per section 18(2) of the MSMED Act, when any party has a dispute with regard to any amount due under section 17 of the act, a reference is made to the Micro and Small Enterprises Facilitation Council, and if conciliation is not successful, then the council shall either take up the dispute for arbitration itself or refer it to an alternate dispute resolution institution for arbitration.
The provisions of the Arbitration and Conciliation Act, 1996, will also be applicable as if the arbitration was in pursuance of an arbitration agreement between the parties under subsection (1) of section 7 of the act. The division bench held that since section 43 of the Arbitration and Conciliation Act itself makes it clear that the Limitation Act applies to arbitrations as it applies to court proceedings, it will also be applicable to the arbitration proceedings under section 18(3) of the MSMED Act.
With respect to the second issue, the court held that since section 18(3) of the MSMED Act states that the Arbitration and Conciliation Act shall apply to the dispute as if the arbitration was in pursuance of an arbitration agreement referred to in section 7(1) of the Arbitration and Conciliation Act. Since there is a provision for filing a counterclaim and set-off under section 23(2A) of the Arbitration and Conciliation Act, there is no reason to curtail the rights of making a counterclaim or set-off in the proceedings before the facilitation council.
The division bench further examined that if a counterclaim made by the buyer in the proceedings arising out of claims made by the seller were not allowed, it may lead to parallel proceedings before various fora.
A seller may approach the facilitation council for claims, but if there is no separate agreement between the parties for arbitration, the buyer may approach the civil court for claims against the seller. If there is an agreement between the parties for arbitration in the event of a dispute, the parties may seek the appointment of an arbitrator, which may result in conflicting findings by various fora.
The Supreme Court held that on a harmonious construction of section 18(3) of the MSMED Act, and section 7(1) and section 23(2A) of the Arbitration and Conciliation Act, a counterclaim is maintainable before the statutory authorities under the MSMED Act.
The division bench further held that the MSMED Act, being a special statute, will have an overriding effect vis-a-vis the Arbitration and Conciliation Act, which is a general act.
If a party is covered by the MSMED Act, they can certainly approach a competent authority to make their claims, even if there is an arbitration agreement between the parties.
However, to seek the benefit of the provisions under the MSMED Act, the seller should have been registered under the provisions of the act on the date of entering into the contract.
The dispute digest is compiled by Numen Law Offices, a multidisciplinary law firm based in New Delhi & Mumbai.
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