Statutory arbitration under the MSME development act

Micro, Small & Medium Enterprises Development Act

Micro, Small, and Medium Enterprises (“MSME”) are governed under the Micro, Small & Medium Enterprises Development Act, 2006 (“Act”). The Act aims at the promotion and development of MSMEs. One of the important objectives of the Act is to protect MSMEs from buyers who default in their payments for goods bought or services taken. The Act aims to provide compensatory interest to MSMEs that remain unpaid.

Consent in traditional arbitration and under the Act

Section 7 of The Arbitration & Conciliation Act, 1996, defines an “arbitration agreement” as, “an agreement […] to submit to arbitration all or certain disputes which have arisen or which may arise […] in respect of a defined legal relationship [between parties], whether contractual or not.” ‘Consent’ is the most important aspect of traditional arbitration. It refers to the agreement of parties on various substantive and procedural aspects of a dispute. The arbitration agreement itself is entered into by parties’ mutual express or implied consent. The parties may mutually agree to settle any dispute that may arise between them by way of arbitration. Parties can also consent on how arbitrators are appointed and the number of arbitrators, the language of the arbitration, seat of arbitration, etc.

The Act is special legislation that provides special dispute resolution mechanisms and beneficial provisions to MSMEs. Under the Act, parties that purchase goods or avail of any services from an MSME are required to make payment within 45 days from the date of receipt of such services or goods. If there is a delay or default in the payment, the MSME has the right to approach the MSME Facilitation Council (“Council”) in respect of the default by the buyer. The Act provides for a compensatory rate of interest @ 24% per annum on delayed or defaulted payments.

When the Council receives a complaint from an MSME, it will send a notice to the buyer and attempt to resolve the dispute through conciliation under Part III of The Arbitration & Conciliation Act, 1996. If the buyer refuses to cooperate or the conciliation fails for any reason, the Council may itself act as an arbitration tribunal or refer the matter to an arbitral institution for the resolution of disputes through arbitration. The Council may refer disputes to arbitration, even if there is no written arbitration agreement between the parties. The parties are deemed by law to have consented to (a) conciliation; followed by (b) arbitration. Normally, parties cannot resort to arbitration unless there is a written arbitration agreement between them. Whereas, under the Act, the Council can refer a dispute to arbitration even without an express agreement between the parties. Thus, there is a difference in the manner of consent under a contract that contains an arbitration agreement and under the Act.

What if there is an arbitration agreement between a buyer and an MSME?

The Arbitration & Conciliation Act, 1996 is general procedural legislation governing arbitration. The Act, on the other hand, is a special legislation governing MSMEs that provides for arbitration of MSME disputes. It is now an established position that special legislation should be given preference over general legislation. Furthermore, contractual clauses, unless permitted by statute, cannot override statutory provisions. Based on these arguments, the Delhi High Court has held that when there is a conflict between a contractual arbitration and MSME arbitration, MSME arbitration will prevail (see, GE T&D India Ltd v Reliable Engineering Projects & Marketing, 2017 SCC Online 6978).

This was a case where the parties entered into two supply contracts, one of which had an arbitration agreement. On the complaint of the MSME, the Council – after hearing both parties – passed two awards. GE challenged the Council’s awards under section 34 of The Arbitration & Conciliation Act, 1996, on the ground that the arbitration was not conducted in terms of the procedure envisaged by the parties (“whether the dispute resolution prescribed under section 19 of the MSME Act, 2006 overrides the arbitration clause in the contract?”) This is a loophole in the Act.

However, in our considered opinion, this is not the case in every situation. A more correct proposition is: in cases where the provisions of the Act are invoked first (by a supplier of goods or services), the procedure under the Act would be applicable to the dispute; such application of the Act would include application of the compensatory rate of interest. Conversely, if arbitration is invoked first under the contract between the parties (by the buyer), the provisions of the Act may not be applicable. Thus, if a buyer is eager to avoid arbitration process under the Act, he may have to invoke arbitration before the supplier does so. At the time of this writing, there is no clarity, as yet, on the correct legal position.

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