Resolving the Conundrum Between the MSMED Act, 2006 and the Arbitration and Conciliation Act, 1996

Posted On - 17 November, 2022 • By - Renjith Nair


The Micro, Small, and Medium Enterprises Development Act, 2006 (MSMED Act) was enacted to ensure timely and smooth flow of credit to small and medium enterprises while promoting, developing and enhancing the competitiveness of micro, small and medium enterprises. This came at a time when the Arbitration and Conciliation Act, 1996 (Arbitration Act) had already been in operation for a decade. The Arbitration Act provides for alternate means of dispute resolution which rests upon the tenet of mutual agreement between parties to submit their dispute to arbitration foremost, and party autonomy.

The MSMED Act, however, provides for a dispute resolution mechanism by reference of a dispute pertaining to delay or failure to make payments to the Micro and Small Enterprises Facilitation Council (MSEFC). Upon reference of dispute to the MSEFC, section 18 of the MSMED Act mandates the MSEFC to conduct conciliation, and where the conciliation remains unsuccessful, to take up the dispute for arbitration. Therefore, it creates a provision for statutory arbitration, even when the agreement between the parties does not provide for arbitration. It is pertinent to note that the MSMED Act provides that once the dispute is referred to arbitration, the provisions of the Arbitration Act apply to the dispute as if the arbitration was in pursuance of an arbitration agreement under the Arbitration Act.

Issues: Interplay between the MSMED Act and the Arbitration Act

This gave rise to various issues such as- (a) whether the provisions of the MSMED Act prevail over the Arbitration Act?; (b) whether the dispute resolution mechanism under the MSMED Act will prevail over the dispute resolution agreed upon by the parties in a separate agreement?; and (c) in the absence of an arbitration agreement between the parties, can a statutory provision under Section 18 of the MSMED Act compel a party to resolve the disputes through the Arbitration Act?

Section 24 of the MSMED Act provides that the provisions of sections 15 to 23 will prevail over any other law, to the extent of any inconsistency with the same. While this seeks to address potential conflicts or discrepancies between the provisions of the Arbitration Act and the MSMED Act, there have been varying views taken by the high courts on the issue.

The Bombay High Court in Steel Authority of India and Anr v. MSEFC had held that an independent arbitration agreement between the parties does not cease to have effect by virtue of the non-obstante clause in section 18 of the MSMED Act. The effect of an overriding provision is only to the extent of inconsistency, and there is no inconsistency between an arbitration conducted by the MSEFC under section 18 and arbitration conducted under an independent clause since both are governed by the provisions of the Arbitration Act. It was further held that since the parties had entered into an independent arbitration agreement, the MSEFC cannot proceed with the arbitration itself.

However, in various judgements such as Bharat Heavy Electricals Limited v. State of U.P., The Chief Administrator Office COFMOW v. MSEFC of Haryana, Principal Chief Engineer v. M/s Manibhai and Brothers, the courts have held that the provisions of the MSMED Act will prevail over the independent arbitration clause. The Supreme Court of India (SC) has also considered this question previously in Principal Chief Engineer v. Manibhai & Brothers (Sleeper) and more recently in M/s. Silpi Industries, etc. v. Kerala State Road Transport Corporation & Anr. etc. (Silpi Industries case), and held that regardless of the existence of an arbitration agreement, a party protected under the provisions of the MSMED Act is entitled to invoke the provisions of MSMED Act and the parties would be bound by the same.

Supreme Court’s view

Recently, in Gujarat State Civil Supplies Corporation Ltd. v. Mahakali Foods Pvt. Ltd. & Anr. while dealing with a batch of appeals, the SC had another occasion to consider issues regarding the interplay between the MSMED Act and the Arbitration Act. The questions that arose before the SC for consideration include-

(i)   Whether the provisions of MSMED Act would override the provisions of the Arbitration Act?

(ii)  Whether a party who is covered under the MSMED Act, will be precluded from making a reference to the MSEFC merely by virtue of the existence of an independent arbitration agreement?

(iii) Whether the MSEFC who has conducted the conciliation proceedings, can also act as the arbitrator in spite of the bar contained under the Arbitration Act?

The SC in light of the legislative history and objects of both the statutes, and in line with the judgements pronounced by it and various high courts, held that the MSMED Act will have precedence over the Arbitration Act, since it is a special law. The court relied upon its judgement in Silpi Industries case and observed that MSMED Act governs specific nature of disputes arising between specific categories of persons, to be resolved by following a specific process through a specific forum. Further, the MSMED Act is also enacted subsequently. It also held that Chapter V (section 15 to 23) will have overriding effect over any other law for the time being in force, including the Arbitration Act, by virtue of section 24 of the MSMED Act, as well as the non-obstante clauses under section 18.

Furthermore, the SC has observed that “a private agreement between the parties cannot obliterate the statutory provisions.” It held that a party to a dispute covered under the MSMED Act, in whose favour a substantial right has been created, cannot be precluded from availing a remedy under the MSMED Act merely because an independent arbitration agreement exists between the parties. Once the statutory mechanism under the MSMED Act is triggered, it would override any private agreement by virtue of section 24 and section 18.

Relying upon the non-obstante provisions under section 18 and 24, the SC also held that the bar contained under the Arbitration Act, i.e., the conciliator shall not act as an arbitrator in any arbitral proceedings in respect of a dispute that is subject of conciliation proceedings, is superseded. Accordingly, the MSEFC which acted as a conciliator in a dispute between the parties is entitled to act as an arbitrator, notwithstanding the bar under section 80 of the Arbitration Act.

Our thoughts

This judgement of the SC provides considerable clarity on the issue of precedence between the MSMED Act and the Arbitration Act. While taking into account the principles of statutory interpretation, such as general laws do not prevail over special laws, and harmonious interpretation of statutes, the judgement of the SC facilitates the elimination of any conflicts or inconsistencies that may arise between the two statutes. Since the MSMED Act has been enacted for the benefit of micro, small and medium enterprises, it would enable suppliers to avail benefits of the specific provisions under the MSMED Act, over the generic nature of the Arbitration Act.

Authors: Renjith Nair, Altamash Qureshi and Paridhi Rastogi

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