CAN ANY EXISTING ARBITRATION AGREEMENT OVERRULE SECTION 18 OF THE MSMED ACT?
An issue arises when there is an arbitration agreement between the parties to resolve any dispute which may arise. Will the arbitration agreement supersedes the statutory arbitration provision under the act?
Prima Facie if you look at it, any statutory provision will have supremacy over any agreement or a contract. An argument can be presented by citing section 24 of the act which provides that if there is any inconsistency with section 15 to 23, in this case, section 18, section 15 to 23 days have an overriding effect. But the presence of an arbitration agreement in itself does not imply that it is inconsistent with section 18.
Let’s take a look at various judgements which have tried to throw light on the conflicting issue
- Bharat Sanchar Nigam Ltd versus Maharashtra micro and small enterprises-
Section 18 merely provides for the form which follows the same arbitration and conciliation act, 1996.
There were two contracts between the parties where each contract had an arbitration clause stating that all the disputes between the parties will be resolved by arbitration. The respondent invokes the arbitration clause but they withdrew it later on. Thereafter, they filed a reference at the facilitation council. Against this, the petitioners approach to the Bombay High Court. The court was of the view that there is no provision in the act, which negates or renders an arbitration agreement entered into between the parties ineffective. Section 18 merely provides for a form which follows the same arbitration and conciliation act, 1996. In this case, parties already had an arbitration agreement but one of the parties made a reference under section 18 sub-section 1 to the facilitation council. The court held that as a reference has been made, they have to undergo the conciliation proceedings as mentioned in section 18 sub-section two but afterwards they have or they can invoke their own arbitration agreement.
- GET & D India Limited versus reliable engineering-
Any contractual clause cannot override the statutory provision.
Petitioner has hired the respondents to provide service for which respondents were not paid. Respondents approached the facilitation council where ultimately and the award was passed against the petitioners. Against the award, petitioners approached the Delhi High Court and challenged the validity of section 18 when an arbitration agreement is already in existence. The court taking a contrary view than that of the Bombay High Court held that the contractual clause cannot override the statutory provisions. Moreover, the act being a special one is for the benefit of the micro, small and medium enterprises.
- Bharat heavy electrical enterprise versus the micro and small enterprise and Others
Section 18 sub-section 3 of the MSMED act does not permit non-institutional arbitration.
The contract between parties ended due to civil unrest in Syria, thereafter, the petitioner in form DRIPLEX that they would not be needing their services. Thereafter, the petitioner did not pay DRIPLEX. DRIPLEX filed a complaint with the facilitation council. Petitioners agreed with the authority of the facilitation council for conciliation but they contended against the arbitration by the facilitation council. As per petitioners, the arbitration clause in their contract was not inconsistent with the act and both should be read in a harmonious manner. The Delhi High Court further discussing the same issue, interpreted section 18 and clarified that provision of section 18 subsection three does not permit non-institutional arbitration.
Though the Supreme Court of the land has still not settled the dispute but as per the majority of the High Court of India, section 18 subsection three will have supremacy over any arbitration agreement. But what one needs to keep in mind is that the arbitration under section 18 is only confined to unpaid dues. For other disputes, the arbitration agreement will prevail.
In view of delayed payments to micro and small enterprises, the provision of chapter 5 especially sections 18 is a welcome step. Moreover, 90 days limitation to complete both conciliation and arbitration (if required) promises a speedy remedy. Entrepreneurs can have their own arbitration clauses but as regards to the unpaid amount, if a reference has been made to the facilitation council, institutionalised arbitration by the facilitation council will have an overriding effect. Governments effort to digitalise the complaint filing system through its website Samadhan and My MSME app are quite praiseworthy and a great initiative to ease the hardships of these enterprises.
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.