Arbitration Agreement Exisitng between the Parties does not Override Reference to Facilitation Council Under MSMED Act

The Supreme Court of India recently observed in the judgement of Gujarat State Civil Supplies Corporation v. Mahakali Foods Pvt. Ltd.1(delivered on 31.10.2022) that despite the existence of an independent Arbitration agreement, any reference made to Facilitation Council is maintainable in respect of the parties governed by the Micro, Small and Medium Enterprises Development Act, 2006. The express bar contained in Section 802 of the Arbitration and Conciliation Act cannot stop the Facilitation Council to act as an arbitrator if the Council has initiated Conciliation proceedings under Section 18(2)3 of the MSMED Act.

The brief facts were that the Appellant (Gujarat State Civil Supplies Corporation) had challenged the award made by the Facilitation Council at Bhopal before the Commercial Court, Ahmedabad. The said award was passed under the Arbitration and Conciliation Act, 1996 and was confirmed by the Commercial Court, Ahmedabad. The Appellant thereafter, filed an appeal before the Gujarat High Court and the same was dismissed.

The epicenter of the dispute revolved around the contention raised by the Appellants that the recourse of referring to Facilitation Council would be available to parties only in the event of an arbitration clause being absent from the contract which 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, 2006 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 the 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 Arbitration and Conciliation Act, 1996.

The Supreme Court further observed that while interpretating a statute, if two interpretations are possible, the one which enhances the object of the Act should be preferred than the one which would frustrate the object of the Act. If the Supreme Court accepts the submission that the party to a dispute covered under the MSMED Act, 2006 cannot avail 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, 2006 would get frustrated.

Another note-worthy observation made by the Supreme Court in the present matter dealt with the status of a party as a Supplier under the MSMED Act, 2006. The Supreme Court 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 contract cannot seek any benefit as the ‘supplier’ under the MSMED Act, 2006. If any registration is obtained subsequently the same would have an effect prospectively and would apply to the supply of goods and rendering services subsequent to the registration.

By - C. George Thomas

  1. 2022 SCC OnLine SC 1492.
  2. The conciliator shall not act as an arbitrator or as a representative or counsel of a party in any arbitral or judicial proceeding in respect of a dispute that is the subject of the conciliation proceedings.
  3. Notwithstanding anything contained in any other law for the time being in force, any party to a dispute may make a reference to the Micro and Small Enterprises Facilitation Council and the Council shall conduct conciliation in the matter.