In M/s. Bafna Udyog v/s Micro & Small Enterprises, Facilitation Council, Satpur & Another, the issue of arbitration proceedings arising out of disputes under the Micro, Small & Medium Enterprises Development (MSMED) Act, 2006 has garnered attention. The dispute in question revolves around the failure of the Micro and Small Enterprises Facilitation Council (MSEFC) to act in accordance with the statutory framework prescribed for resolving disputes between MSMEs and buyers. The case highlights the procedural intricacies and limitations in invoking statutory arbitration under the Arbitration and Conciliation Act, 1996. This article discusses the legal context, the issues raised, and the implications of the judgment.
Background of the Case:
The petitioner in this case, a registered MSME, sought the appointment of an arbitrator due to the failure of the MSEFC to act on the dispute after conciliation proceedings had failed. The petitioner, a supplier, had a pending debt from the respondent, a buyer, amounting to ?92,41,072, as acknowledged by the buyer. Despite numerous attempts to resolve the dispute, including conciliation under the MSMED Act, the parties could not reach a settlement. The petitioner argued that since the conciliation had failed, it was entitled to invoke arbitration under the Arbitration and Conciliation Act, 1996, by seeking the court’s intervention for the appointment of an arbitrator.
The Role of MSEFC in MSMED Act Disputes:
The MSMED Act provides a specific dispute resolution mechanism for MSMEs, where disputes regarding amounts due to suppliers can be referred to the MSEFC. The council is first tasked with conducting conciliation efforts, and if these fail, it must either take the dispute forward to arbitration itself or refer it to an appropriate alternate dispute resolution (ADR) institution. The petitioner contended that due to the MSEFC’s failure to act, the matter should be taken up by an arbitrator, under the provisions of Section 11(6) of the Arbitration and Conciliation Act.
Legal Issue: Whether the Court Can Appoint an Arbitrator under Section 11(6)
The petitioner’s main argument was based on the failure of the MSEFC to act within the stipulated timeline of 90 days, as per Section 18(5) of the MSMED Act. Section 11(6) of the Arbitration and Conciliation Act provides for the appointment of an arbitrator by the court when a party or institution fails to perform its functions as required under an agreed procedure. However, the court observed that this provision applies only when there is an existing arbitration agreement between the parties, whether explicit or implied.
The court, however, found that in this case, there was no arbitration agreement between the parties, nor had the MSEFC entered into any reference that could trigger the provisions of the Arbitration and Conciliation Act. The court ruled that the procedure prescribed by the MSMED Act had not been followed, and without an arbitration agreement, the provisions of Section 11(6) of the Arbitration
and Conciliation Act could not be invoked.
The Court’s Judgment: Lack of Arbitration Agreement
The court dismissed the petition on the grounds that there was no arbitration agreement between the parties, either express or implied, to invoke Section 11(6) of the Arbitration and Conciliation Act. It also emphasized that the jurisdiction of the court under Section 11(6) could only be exercised when an arbitration agreement exists. In this case, since the statutory mechanism under the MSMED Act had not yet been properly invoked, the petition was premature.
Furthermore, the court also found that the MSEFC's failure to act did not automatically imply the termination of conciliation proceedings or give rise to an arbitration agreement. The procedure mandated by the MSMED Act requires the council to first conduct conciliation and only then refer the matter to arbitration if conciliation fails. Thus, the petitioner's request for arbitration was not in line with the legal framework.
The Impact of Statutory Arbitration Provisions:
The court’s decision reinforces the special statutory regime under the MSMED Act, which prioritizes conciliation and arbitration through the MSEFC, without the need for a separate arbitration agreement. The MSMED Act serves as a non-obstante clause, overriding other laws, including the Arbitration and Conciliation Act, in matters related to disputes between MSMEs and buyers.
However, the decision also clarifies that the failure of the council to act does not automatically confer jurisdiction on the court to appoint an arbitrator under Section 11(6) of the Arbitration and Conciliation Act unless an arbitration agreement is present. This distinction is crucial for businesses and legal practitioners navigating disputes under the MSMED Act, as it underscores the importance of following the statutory dispute resolution procedure.
Conclusion: Seeking Remedies within the Statutory Framework
In light of the judgment, it is clear that parties seeking arbitration in MSMED Act disputes must first exhaust the prescribed mechanisms before resorting to court intervention. The failure of the MSEFC to refer the dispute to arbitration does not, by itself, trigger the invocation of Section 11(6) of the Arbitration and Conciliation Act unless the procedural steps under the MSMED Act are fully followed.
The petitioner in this case was left to seek recourse through other legal remedies, but the decision serves as a significant reminder of the importance of adhering to statutory dispute resolution procedures. It also highlights the limitations of invoking general arbitration provisions when specific statutory mechanisms, such as those under the MSMED Act, apply.
Arbitration and Conciliation Act, 1996
Micro, Small and Medium Enterprises Development Act, 2006
