The Punjab and Haryana High Court has ruled that even in the absence of an arbitration agreement between the parties, the matter can be referred to arbitration under Section 18 of the Micro, Small and Medium Enterprises Development Act, 2006 (“MSMED Act”).

The Court reiterated that the MSMED Act being a Special Act shall prevail over the Arbitration and Conciliation Act, 1996 (“Arbitration Act”). The Court held that even if there was an agreement between the parties for resolution of disputes by arbitration, if a seller was covered under the MSMED Act, the agreement between the parties would have to be ignored in view of the mechanism provided under the MSMED Act.

M/s Goyal Plywood LLP (“the respondent”) supplied goods to M/s SGM Packaging Industries (“the petitioner”). After the petitioner failed to clear its dues, the respondent filed a claim before the Facilitation Council under the MSMED Act. The Facilitation Council, thereafter, appointed a Sole Arbitrator and referred the parties for arbitration.

The petitioner filed a petition before the Punjab and Haryana High Court under Section 14 of the Arbitration Act read with Section 151 of the Code of Civil Procedure, 1908, seeking termination of the mandate of the Sole Arbitrator.

The petitioner submitted before the Punjab and Haryana High Court that the matter was referred for arbitration without any appropriate procedure of conciliation being followed under the MSMED Act.

The petitioner contended that it had filed an application under Section 12 of the Arbitration Act before the Sole Arbitrator seeking the required declaration from the Arbitrator regarding his independence and impartiality. The petitioner added that it had raised an objection in the said application that there was no arbitration agreement existing between the parties and thus the matter could not be referred to arbitration. The petitioner averred that the said application was dismissed by the Sole Arbitrator.

The respondent averred that it was registered under the MSMED Act and that it had approached the Facilitation Council for redressal of its grievances regarding non-payment of the outstanding dues by the petitioner . The respondent contended that the petitioner was intimated by the Facilitation Council regarding the same and that the petitioner was advised to pay the outstanding amount to settle the dispute. The respondent averred that after the petitioner failed to pay the outstanding amount, the Facilitation Council passed an order referring the matter to the Sole Arbitrator. The respondent added that the petitioner had failed to challenge the said order of the Facilitation Council referring the matter to the Arbitrator and that the arbitral proceedings were maintainable under the MSMED Act. 

The Court observed that in view of the decision of the Supreme Court in the case of M/s Silpi Industries versus Kerela State Road Transport Corporation (2021), the MSMED Act being a Special Act shall prevail over the Arbitration Act and have an overriding effect.

The Court noted that Section 18 of the MSMED Act, that deals with reference of a dispute to a Micro and Small Enterprises Facilitation Council (MSEFC), starts with a non-obstante clause and therefore, the Court held that even in the absence of an arbitration agreement between the parties, the matter could be referred to arbitration under Section 18 of the MSMED Act.

By - C.George Thomas