Reference under Section 18(1) of MSMED Act would override Arbitration Agreement between parties

In the matter of Bajaj Electricals Limited versus Chanda S. Khetawat & Anr. (Arbitration Application No. 2/2022) decided by the Hon’ble Bombay High Court on 16.01.2023.

FACTS: The applicant, Bajaj Electricals Limited, issued Purchase Orders (POs) for procurement of certain goods, in favour of the respondents, who are proprietors of M/s. Windson International. The Respondents issued various invoices against the supplies made to the applicant. After certain disputes arose between the parties under the POs, the applicant invoked the arbitration clause contained in the POs and issued a notice under Section 21 of the A&C Act to the respondents. After the receipt of the arbitration notice, the respondents filed a claim before the Micro and Small Enterprises Facilitation Council (Facilitation Council) under the MSMED Act. The respondents raised a claim against the applicant for the amounts outstanding against the invoices.

Bajaj Electricals contended before the High Court that once arbitration has been invoked by issue of notice under Section 21 of A&C Act, the subsequent reference of the dispute for conciliation and arbitration under Sections 18(2) and 18(3) of the MSMED Act cannot invalidate the Section 11 application filed under the A&C Act.

OBSERVATIONS: To appreciate the controversy in the present matter, the Hon’ble Bombay High Court examined Section 18 of the MSMED Act which provides that Section 18(1) of the MSMED Act provides that any party to a dispute between a buyer and supplier regarding the amount payable for goods or services supplied, may make a reference to the Facilitation Council. Under Section 18(2), the Council shall either itself conduct conciliation proceedings in the matter or it may seek the assistance of any institution or centre. Section 18(3) provides that where the conciliation is not successful, the Council may either itself take up the dispute for arbitration or refer the same to any institution or centre for arbitration.

The Bench also observed the other provisions of the MSMED Act, such as Section 15 which casts an obligation on the buyer to make payment for the goods or services provided by the supplier, within the stipulated period. Also, Section 18 which is a special provision for making reference to the Facilitation Council, to adjudicate the dispute between the parties.

It was then observed that in view of the non obstante clauses contained in Sections 18(1) and 18(4) of the MSMED Act, once the statutory mechanism under Section 18(1) is triggered by any party, it would override any other agreement independently entered into between the parties. Hence, once reference under Section 18(1) of the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act) is made and the Facilitation Council is in the process of commencing arbitration under Section 18(3), the application under Section 11 of the Arbitration and Conciliation Act, 1996 (A&C Act) seeking appointment of arbitrator cannot be allowed merely because the parties had entered into an arbitration agreement.