Madras High Court Held Arbitration Valid even if Arbitration under MSMED Act is declared Non-Maintainable

In accordance with the Micro, Small, and Medium Enterprises Development Act of 2006 (MSMED Act), the state government has established the ‘Facilitation Council’ or ‘MSEFC’ to address complaints about late payments. Such authority is provided under Section 18 of the MSMED Act[1], which authorizes the Facilitation Council to commence Arbitration upon reference to an arbitrator’s capacity.

In the recent arbitration case of M/s. Deetech Projects Pvt. Ltd. versus M/s. Batliboi Environmental Engineering Ltd.[2], the Madras High Court held that arbitration survives even if the arbitration under the MSMED Act is declared non-maintainable.

Analysing the Judgment

The parties, in this case, had entered into a Consortium Agreement, and upon disagreements, the petitioner referred the case to the Facilitation Council under the MSMED Act. The Council issued an order stating that the case of not maintainable before it. Therefore, the Petitioner invoked the arbitration provision. Since the Respondent refused the appointment of the arbitrator suggested by the Petitioner, a petition was filed in the Madras High Court to appoint an arbitrator under Section 11(4)(a) of the Arbitration and Conciliation Act.[3]

The Court held that if the dispute is referred to the Facilitation Council under the MSMED Act and the Facilitation Council renders a decision on the merits, such a decision will be res judicata and preclude the establishment of arbitral procedures in the same dispute. In addition, the bench determined that Section 18(3) of the MSMED Act contains a legal fiction whereby an arbitration agreement per Section 7 of the Arbitration and Conciliation Act is statutorily imported when a dispute is referred to the Facilitation Council for arbitration or to any institution or centre for such arbitration.

In this case, therefore, the Court held that since there was no proof of novation of the Agreement containing the arbitration clause, and since the Facilitation Council declined jurisdiction to hear the matter because of the non-maintainability of the petition, the arbitration clause in the Consortium Agreement remains intact. Therefore, the Petitioner can invoke arbitration. In furtherance of this, the Court appointed a Sole Arbitrator in the matter, as under Section 11 of the Arbitration and Conciliation Act.

[1] Section 18, Micro, Small and Medium Enterprises Development Act, 2006.

[2]M/s. Deetech Projects Pvt. Ltd. v. M/s. Batliboi Environmental Engineering Ltd., Arb.O.P.(Comm.Div.) No.200 of 2022.

[3] Section 11(4)(a), Arbitration and Conciliation Act, 1996.