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Arbitration Proceedings under MSMED Act, 2006
Introduction
The Hon’ble Supreme Court has dealt with the arbitration proceedings under MSMED Act, 2006 in two cases i.e. M/s Silpi Industries Vs Kerala State Road Transport Corporation[1] and Khyaati Engineering Vs. Prodigy Hydro Power Pvt. Ltd[2], decided together on 26 June 2021.
Facts
The first case involved a contract between Silpi Industries (a "seller" under the MSMED Act) and Kerala State Road Transport Corporation (a "buyer" under the MSMED Act), in which the buyer awarded the seller a contract for the supply of thread rubber for tire repair. The vendor was to receive 90% payment upon delivery of the material, with the remaining 10% contingent on the ultimate performance report.
The second case concerned a contract between Khyaati Engineering Appellant (declared to be a "seller" under the MSMED Act) and Prodigy Hydro Power Pvt. Ltd (declared to be a "buyer" under the MSMED Act), in which the seller was awarded the work of supplying and installing hydro-mechanical equipment for two 3 MW Baner-II SHP units. The seller claimed to have finished the project but the buyer refused to make the payment stating the seller violated the terms and conditions of the contract. As a result, the buyer used the contract's arbitration clause, selected its own arbitrator, and petitioned the Hon'ble High Court of Madras ("MHC") for the appointment of a second arbitrator when the seller failed to do so.
In both cases, the sellers were the Appellants and the purchasers were the Respondents before the Supreme Court of India.
Decision of SC
The court had to deal with the issue of whether the Indian Limitation Act, 1963, is applicable to arbitration procedures brought under Section 18(3) of the Micro, Small, and Medium Enterprises Development. The Supreme Court agreed, holding that the Limitation Act would apply to arbitration procedures brought under the MSMED Act. The Apex Court based its decision on the phrase used in Section 18(3) of the MSMED Act, which states that the provisions of the 1996 Act would apply to the dispute as if it were arbitrated in accordance with an agreement referred to in Sub-section (1) of Section 7 of that Act. Because the arbitrations under the MSMED Act are to be conducted under the provisions of the 1996 Act, which provides in Section 43 that the Limitation Act shall apply to arbitrations as it does to court proceedings, the SC noted that the Limitation Act would also apply to arbitration proceedings initiated under the MSMED Act.
In the Second Case, the Supreme Court ruled that the referral to conciliation under the MSMED Act was made after the contract was signed and the supply was made, after examining the facts and circumstances. The court noted that the petitioner had not registered itself under the MSMED Act and so it cannot seek benefits arising from the act. In these circumstances, the Hon'ble Court concluded that the MHC was correct in choosing the second arbitrator since the proceedings could not be regulated by the MSMED Act and instead had to be governed by the parties' arbitration agreement.
Conclusion
The Hon'ble Court has clarified the situation that occurs when a seller is protected by the MSMED Act and their agreements additionally include a separate arbitration provision. The question then becomes which arbitration forum should be used, the one established under the MSMED Act or the Adhoc arbitration to be established as stated in the arbitration clause. The Supreme Court's authoritative statement in this ruling resolves this problem. Another significant point that was resolved in these instances is that in order to profit from the MSMED Act's provisions, the company must be registered under the Act on the date of signing the agreement that gave rise to the issues.
[1] CIVIL APPEAL NOS.1570-1578 OF 2021.
[2] CIVIL APPEAL NOS.1620-1622 OF 2021.
(This Article Does Not Intend To Hurt The Sentiments Of Any Individual Community, Sect, or Religion, Etcetera. This Article Is Based Purely On The Authors Personal Views And Opinions In The Exercise Of The Fundamental Right Guaranteed Under Article 19(1)(A) And Other Related Laws Being Force In India, For The Time Being. Further, despite all efforts made to ensure the accuracy and correctness of the information published, White Code VIA Mediation and Arbitration Centre Foundation shall not be responsible for any errors caused due to human error or otherwise.)
- Introduction
- Facts
- Decision
