Telangana High Court: MSMED Act Takes Precedence Over Arbitration Agreements

Telangana High Court: MSMED Act Takes Precedence Over Arbitration Agreements

The Telangana High Court, Justice B. Vijaysen Reddy's, has ruled that the MSMED Act, 2006, supersedes the Arbitration and Conciliation Act, 1996. The court emphasized that despite the existence of an arbitration agreement between parties, if the seller qualifies under the MSMED Act, it retains the right to pursue resolution through the designated authority for its claims.

The applicant, engaged in electricity production in Gurha, Bikaner, Rajasthan, sought to procure refractories for its power plant from the respondent, a Chennai-based manufacturer of refractory products. Despite issuing a work order and subsequent amendments, the applicant claimed that the respondent failed to complete the agreed-upon work within the specified timeframe, causing delays in the plant's commissioning. Moreover, the applicant alleged that the poor workmanship of the respondent resulted in damages to the refractory lining, necessitating a temporary shutdown for repairs. Dissatisfied with these developments, the applicant approached the Telangana High Court and filed an application under Section 11(6) of the Arbitration and Conciliation Act, 1996 (the Arbitration Act) to appoint a sole arbitrator as per Clause 16 of the Work Order.

In response, the respondent opposed the arbitration application, citing ongoing proceedings under Section 18 of the Micro, Small, and Medium Enterprises Development Act, 2006 (MSMED Act) before the Micro and Small Enterprises Facilitation Council (MSEFC), Chennai. The respondent argued that delays were not solely attributable to them and pointed to payment delays, changes in quantities, and pending mechanical activities on the applicant's part. Additionally, the respondent contended that the applicant proceeded with repair work without allowing them an opportunity to rectify the damages under warranty.

The respondent asserted that the arbitration application should be dismissed as statutory proceedings under the MSMED Act were already underway to recover outstanding amounts from the applicant.

The Telangana High Court, referencing the Supreme Court's ruling in Silpi Industries and Others v. Kerala State Road Transport Corporation, explored the interaction between the MSMED Act and the Arbitration Act. The Supreme Court had emphasized that the MSMED Act prevails over the Arbitration Act, being a special statute with overriding effect compared to the general provisions of the Arbitration Act. The High Court affirmed that even if parties have an arbitration agreement, if a seller falls under the purview of the MSMED Act, they retain the right to approach the competent authority for resolution of their claims, superseding any contractual agreements.

Highlighting that the respondent had already initiated proceedings before the MSEFC to resolve disputes, the High Court underscored the importance of allowing counterclaims by buyers before the Facilitation Council to avoid conflicting decisions and simultaneous proceedings.

Addressing the applicant's argument regarding the purported difference in the cause of action between their claim and the respondent's counterclaim, the High Court concluded that both stemmed from disputes arising from the fulfillment of obligations under the work order. It stressed the need to reconcile the statutory obligations under the MSMED Act with the dispute resolution mechanisms outlined in the Arbitration Act.

Consequently, the High Court dismissed the applicant's application under Section 11(6) of the Arbitration and Conciliation Act, 1996.