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Micro, Small and Medium Enterprises Development Act, 2006 (MSME Act) Vs. The Sanctity of A Contract

Micro, Small and Medium Enterprises Development Act, 2006 (MSME Act) Vs. The Sanctity of A Contract (Arbitration Agreement)

Petition filed by Mr. Navkiran Singh, Advocate and Mr. Navratan Singh, Advocate, CWP 15528/2016 for quashing of the order of the Micro, Small and Medium Enterprises (MSME) Facilitation Council Of Haryana dated 06.07.2016 Justice R.S. Malik passed order dated 03.08.2016:-

“Learned counsel for the petitioner places reliance on the Arbitration clause 10.1 at page 40 of the paper-book, to contend, inter alia, that once the parties had agreed to the arbitration clause under the Indian Arbitration and Conciliation Act, 1996, the impugned order could not have been passed by the respondent authorities, referring the matter to arbitrator under the provisions of Micro, Small and Medium Enterprises Development Act, 2006. Thus, the impugned order is an order without jurisdiction.

Notice of motion for 10.11.2016.”

Facts of the case: A dispute had arisen between Petitioner and Respondent with regard to the execution of the contract and the alleged non-payment of contractual due. The contract between the parties specifies an Arbitration Clause in Article 10 and says that in case of any dispute, difference arising between the parties, shall be settled by Arbitration in accordance with the rules of Arbitration and the Arbitration Proceedings shall be regulated by and governed by Indian Arbitration and Conciliation Act, 1996. So both the parties having been bound by the contract, the Complainant to the MSME Facilitation Council under section 18 of Micro, Small and Medium Enterprises Development Act, 2006 (MSME Act) violated the Arbitration Agreement.

Petitioner through his Counsel appeared before the said Council and filed reply raising various objections including that the petition before the Council was not maintainable as there existed a prior contract between the parties, specifically providing for an Arbitration Clause. However, the MSME Council in the meeting held on 01.06.2016 decided to refer the case to their Arbitrator appointed under the MSME Act. Hence, the Civil Writ Petition was filed before Hon’ble High Court of Punjab and Haryana for quashing the said order.

The Grounds for seeking Quashing are as follows:

  • The overriding effect of the Section 24 of MSME Act is limited in scope and extends only to inconsistencies and does not override the arbitration clause. (Order dated 27.08.2010 in M/S Steel Authority of India v. Micro, Small Enterprises Facilitation Council CWP 2145/2010 in the High Court of Judicature at Bombay relied.)

  • Interpretation of MSMED Act must be done in manner which is harmonious and has a purposive construction. In situations where there exists an independent Arbitration Agreement between the parties, the MSMED Act should not be allowed to negate such Arbitration Agreements.

  • Since parties themselves agreed upon Arbitration and Conciliation Act, 1996 so they are bound by the contract and cannot opt out of the same. Principle of Estoppel would apply against Respondent.

  • The impugned order is prejudicial to the Petitioner as rate of interest which the buyer is liable to pay under MSMED Act will be compound interest at three times (3X) of the bank rate notified by the Reserve Bank whereas as per the Arbitration and Conciliation (Amendment) Act, 2015, the buyer is liable to an award that carries interest at the rate of two percent higher (2%↑) than the current rate of interest.

  • The MSME Facilitation Council erred in not deciding the preliminary objections dated 26.05.2016 filed by petitioner before passing the impugned order.

  • Impugned order is bereft of any reasons and non-speaking.

Full copy of the order is available here.

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