Karnataka High Court
M/S Bharath Heavy Electricals Limited vs Karnataka Micro And Small Enterprises on 4 June, 2019
Author: B.Veerappa
Bench: B. Veerappa
1
IN THE HIGH COURT OF KARNATAKA AT BENGALURU
DATED THIS THE 4TH DAY OF JUNE, 2019
BEFORE
THE HON'BLE MR. JUSTICE B. VEERAPPA
WRIT PETITION No.2223/2017(GM-RES)
BETWEEN:
M/S BHARATH HEAVY ELECTRICALS LIMITED,
A COMPANY UNDER THE COMPANIES
ACT,1956,REGISTERED OFFICE:
BHEL HOUSE,SIRI FORT,
NEW DELHI-110 049.
AND ITS LOCAL OFFICE AT
PRERANA BHAVAN,
BHEL FACTORY,PIPLANI,
BHOPAL-462022.
REPRESENTED BY AGM (STE)
SHRI NEERAJ DAVE
BHEL-BHOPAL
... PETITIONER
(BY SRI KEERTI KUMAR D. NAIK, ADVOCATE)
AND:
1. KARNATAKA MICRO AND SMALL ENTERPRISES
FACILITATION COUNCIL,
BANGALORE,
NO.49,2ND FLOOR, SOUTH BLOCK,
KHANIJA BHAVAN,
RACE COURSE ROAD,
2
BANGALORE-560 001.
REP BY ITS ADDITIONAL DIRECTOR(MSME)
2. KARNATAKA CNC TECH PRIVATE LIMITED
A COMPANY UNDER THE COMPANIES ACT,1956,
REGISTERED OFFICE:D-103,
INDUSTRIAL ESTATE,
RAJAJINAGAR,
BENGALURU-560 010.
REP BY ITS MANAGING DIRECTOR.
... RESPONDENTS
(BY SRI D.R. RAVISHANKAR, ADVOCATE FOR
SRI K. M. PRAKASH, ADVOCATE FOR R2;
R1 IS SERVED BUT UNREPRESENTED)
****
THIS WRIT PETITION IS FILED UNDER ARTICLES 226
AND 227 OF THE CONSTITUTION OF INDIA PRAYING TO
QUASH THE ORDER DATED 9.11.2016 IN CASE NO.39/2015
AS PER ANENXURE-A PASSED BY THE RESPONDENT-1.
THIS WRIT PETITION COMING ON FOR PRELIMINARY
HEARING THIS DAY, THE COURT MADE THE FOLLOWING:-
ORDER
The petitioner filed the present writ petition to quash the impugned order dated 9.11.2016 made in Case No.39/2015 as per Annexure-A passed by the 1st 3 respondent dismissing the application filed by the petitioner under Section 8 of the Arbitration and Conciliation Act.
2. It is the case of the petitioner that he has issued several purchase orders to Respondent No.2 for supply of governing assemblies mentioned therein in the years 2012 and 2013. In terms of the Purchase Orders, it was agreed that the purchase orders would be governed by BHEL Bhopal's Standard Terms and Conditions of enquiry. It is further case of the petitioner that the Respondent No.2 breached the contract terms in the year 2016 and did not complete the works as per the purchase orders and instead filed an application before the Micro and Small Enterprises Facilitation Council (MSEFC) at Bangalore, with a prayer to direct the petitioner to pay the Respondent No.2 a sum of Rs.5,77,00,341/- along with interest with a false allegation that the Respondent No.2 has duly completed its scope of work under the purchase orders. The petitioner filed its detailed objections and an application under Section 8 of 4 the Arbitration and Conciliation Act, 1996 before the 1st respondent contending that as per Clause 23 of the standard terms and conditions of the enquiry, it was required that the dispute be referred to arbitration and the present dispute being a subject matter of the arbitration agreement, it was prayed that the MSEFC refer the parties to arbitration.
3. It was further contended that the petitioner had already served a notice of arbitration regarding the purchase order on 4.10.2016 and had in the notice given an explicit calculation of losses suffered by the petitioner due to breach of contract by Respondent NO.2 amounting to Rs.514 lakhs. The 1st respondent considering the application and the objections by the impugned order 9.11.2016 dismissed the application filed by the petitioner under Section 8 of the Arbitration and Conciliation Act.
Hence, the present writ petition is filed for the reliefs sought for.
54. I have heard the learned counsel for the parties to the lis.
5. Sri Keerthi Kumar D. Naik, learned counsel for the petitioner contended that the impugned order passed by the 1st respondent dismissing the application filed by the petitioner under Section 8 of the Arbitration & Conciliation Act is erroneous and contrary to the material on record and cannot be sustained. He would further contend that the purchase orders issued to and accepted by the respondent, all contain a term that it is governed by BHEL Bhopal's Standard terms and conditions of enquiry. Arbitration clause is at clause 23 of standard terms and conditions of enquiry, which requires that any dispute arising from the purchase orders to be referred to arbitration of the sole arbitrator as provided for in the purchase orders. The parties being bound by the arbitration clause, the reference by MSEFC to the Arbitration Centre at Bangalore is bad in law and is not in accordance with the Arbitration and 6 Conciliation Act, 1996. He would further contend that when there is an independent arbitration agreement between the parties, the MSEFC has no jurisdiction under Section 18 of the Micro, Small and Medium Enterprises Development Act, 2006 ('MSMED Act' for short) to enter upon reference for the purpose of arbitration as the independent arbitration agreement serves the same purpose of arbitration as the arbitration that would be entered upon under the provisions of Section 18 of the MSMED Act. The same has not been considered by the 1st respondent. Therefore he sought to allow the writ petition.
6. Per contra, Sri D.R. Ravishankar, learned counsel for the Respondent No.2 sought to justify the impugned order and contended that in view of the specific provisions of Section 18(3) and 18(4) of the MSMED Act, the impugned order passed is justified and this Court cannot interfere exercising the powers under Articles 226 and 227 of the Constitution of India.
77. In support of his contentions, he would submit that this Court issued notice and granted interim prayer on the basis of judgment of the High Court of Judicature at Bombay in the case of M/s Steel Authority of India Limited v. MSEFC made in Writ Petition No.2145/2010 dated 27.8.2010, where the Division Bench of Bombay High Court held that under the provisions of Section 18 of the MSMED Act, the dispute can be referred to arbitration being conducted as per the Arbitration Act. The said judgment has been considered by the Division Bench of Gujarat High Court in the case of Principal Chief Engineer v. M/s Manibhai and Brothers reported in AIR 2016 Guj. 151, wherein the Gujarat High Court held that in view of the provisions of Sections 18(3) and 18(4) of the MSMED Act, the application filed under Section-8 of the Arbitration Act cannot be entertained. The said order of the Division Bench of the Gujarat High Court has been confirmed by the Hon'ble Supreme Court in Diary No.16845/2017 on 8 5.7.2017. The aforesaid judgment of the Apex Court is relied upon by the Bombay High Court in the later decision in the case of Gujarat State Petronet Limited, Gujarat v. Micro and Small Enterprises Facilitation Council, Thane and others reported in AIR 2018 Bombay 265.
Therefore despite independent arbitration agreement between the petitioner and the respondent No.2, respondent No.1 -MSEFC has jurisdiction to entertain the reference made under Section-18 of the MSMED Act.
Therefore he sought to dismiss the writ petition.
8. Having heard the learned counsel for the parties, it is undisputed fact that the 2nd respondent filed petition before the 1st respondent under Section 18 of the MSMED Act for recovery of Rs.3,44,88,707/- towards principal and Rs.2,32,11,633/- as interest for the delay period, in total Rs.5,77,00,340/- from the present petitioner - company.
It is also not in dispute that during the pendency of the proceedings, the present petitioner filed an application 9 under Section-8 of the Arbitration & Conciliation Act for arbitration. The 1st respondent considering the entire materials, recorded a finding as under:
13. The petitioner had objected for referring the matter to the sole arbitrator i.e, the office of the respondent company and prays this Council to reject the application filed by the respondent under Section 8 of the A & C Act.
14. Under Section 18(4) of the MSMED Act, 2006, the Micro & small Enterprises Facilitation Council has jurisdiction to act as an Arbitrator or Conciliator-
"notwithstanding anything contained in any other law for the time being in force, the MSEFC or the centre providing alternate dispute resolution services shall have jurisdiction to act as an Arbitrator or Conciliator under this section in a dispute between the supplier located within its jurisdiction and a buyer located anywhere in India".10
15. Therefore as per this provision council has got right to conciliate and if conciliation fails, it can arbitrate the dispute and provisions of Arbitration and Conciliation Act, 1996 shall then apply to the disputes as if the arbitration was in pursuance of an arbitration agreement referred to in subsection (1) of section 7 of that act. Section 18(4) clearly says that notwithstanding anything contained in any other law for the time being in force as per this act, this council shall have jurisdiction to act as Arbitrator and Conciliator. This section also clearly says that only if conciliation fails then this council can take up the matter for arbitration or it can refer it to any institution.
16. Therefore it is clear that this council has got statutory right to conciliate the dispute and arbitrate the dispute if conciliation fails. The Council has given opportunity to both the parties to settle the matter amicably by conciliation. But as per the documents produced before the Council it is clear that no settlement was arrived between the parties. Therefore the conciliation before the Council is taken as failed. As per the provisions of the Act, the matter is referred to Arbitration. It is resolved to refer the case to the Arbitration Centre 11 at Bengaluru, which is an initiative of the Hon'ble High Court of Karnataka.
9. The 1st respondent ultimately dismissed the application filed by the present petitioner under Section 8 of the Conciliation Act, 1996. Learned counsel for the petitioner relying upon the judgment of the Division Bench of Bombay High Court in the case of M/s Steel Authority of India Limited stated supra contended that in the petition filed under Section 18 of the MSMED Act, when there is a issue of reference to arbitration, Section 8 of the Arbitration and Conciliation Act can be referred and can be considered by the 1st respondent. The said judgment has been referred to by the Division Bench of Gujarat High Court in the case of Principal Chief Engineer v. M/s Manibhai and Brothers reported in AIR 2016 Guj. 151 and held that in view of the provisions of Section 18 of the MSMED Act, the application filed under Section 8 of the Arbitration Act is not maintainable. The said judgment 12 has been affirmed by the Supreme Court in Diary No.16845/17 on 5.7.2017. Based on the said judgment, the Bombay High Court in the case of Gujarat State Petronet Ltd. v. Micro and Small Enterprises Facilitation Council, Thane reported in AIR 2018 Bombay 265 held at paragraphs 12, 13,14,15,16, 18, 19, 20 and 24 held as under:
12. In Steel Authority of India Ltd., AIR (2012) BOM 178 (supra), there was an agreement between the buyer and the seller and clause 22 of the agreement contained the arbitration clause. The supplier invoked clause 22 of the agreement and proposed to appoint Justice C.P. Sen (Retired) as Arbitrator to settle the dispute through arbitration.
The buyer, however, in pursuance of clause 23 of the general conditions of contract, appointed one Mr. S.K. Gulati as an Arbitrator for resolving the disputes between the parties. The Arbitrator appointed by the buyer issued notices to the parties asking them to submit their claim. However, the supplier, instead of filing claim before the 13 Arbitrator, objected the arbitration stating that the matter may be either referred to Justice C.P. Sen (Retired) or it should go before the Micro and Small Enterprises Facilitation Council established under the 2016 Act. The buyer declined to enter into another mode of settlement of dispute before the Council, since it had already appointed an Arbitrator. The supplier went ahead and filed a reference under Section 18 of the 2016 Act. The buyer raised an objection before the Council objecting its jurisdiction. The Council, however, decided to proceed with the matter. The buyer approached the approached the High Court questing the jurisdiction of the Council. The Division Bench of this Court, in paragraph 11, held as under:
"11. Having considered the matter, we find that Section 18(1) of the Act, in terms allows any party to a dispute relating to the amount due under Section 17 i.e. an amount due and payable by buyer to seller; to approach the facilitation Council. It is rightly contended by Mrs. Dangre, the learned Addl. Government Pleader, that there 14 can be variety of disputes between the parties such as about the date of acceptance of the goods or the deemed day of acceptance, about schedule of supplies etc. because of which a buyer may have a strong objection to the bills raised by the supplier in which case a buyer must be considered eligible to approach the Council. We find that Section 18(1) clearly allows any party to a dispute namely a buyer and a supplier to make reference to the Council. However, the question is; what would be the next step after such a reference is made, when an arbitration agreement exists between the parties or not. We find that there is no provision in the Act, which negates or renders an arbitration agreement entered into between the parties ineffective. Moreover, Section 24 of the Act, which is enacted to give an overriding effect to the provisions of Section 15 to Section 23 including Section 18, which provides for forum for resolution of the dispute 15 under the Act-would not have the effect of negating an arbitration agreement since that section overrides only such things that are inconsistent with Section 15 to Section 23 including Section 18 notwithstanding anything contained in any other law for the time being in force.
Section 18(3) of the Act in terms provides that where conciliation before the Council is not successful, the Council may itself take the dispute for arbitration or refer it to any institution or centre providing alternate dispute resolution and that the provisions of the Arbitration and Conciliation Act, 1996 shall thus apply to the disputes as an arbitration in pursuance of arbitration agreement referred to in Section 7(1) of the Arbitration and Conciliation Act, 1996. This procedure for arbitration and conciliation is precisely the procedure under which all arbitration agreements are dealt with. We, thus find that it cannot be said that because Section 18 provides for a forum of arbitration an 16 independent arbitration agreement entered into between the parties will cease to have effect. There is no question of an independent arbitration agreement ceasing to have any effect because the overriding clause only overrides things inconsistent therewith and there is no inconsistency between an arbitration conducted by the Council under Section 18 and arbitration conducted under an individual clause since both are governed by the provision of the Arbitration Act, 1996."
13. Similar question fell for consideration before the Apex Court in M/S Manibhai and Bros (Sleeper) (supra). In this case, the supplier being a registered Small-scale Entrepreneur approached the Council under Section 18 of the MSMED Act claiming the outstanding amount of Rs. 1,19,07,858/- with interest against the buyer. The Council initially resorted to conciliation proceedings and thereafter, declared the award. The award was challenged by the buyer by way of filing special civil application before the learned Single Judge of the Gujarat High Court. The same was dismissed and thereafter 17 letters patent appeal was filed before the Division Bench of the same Court. The letters patent appeal was allowed only on the ground that the buyer has already moved an application under Section 8 of the Arbitration Act 1996 and, no order was passed on the said application. The Division Bench, accordingly, remanded the matter to the Council. The Council again rejected the buyer's application under Section 8 of the Arbitration Act, 1996 and, therefore, the buyer approached the High Court by way of first appeal.
14. The argument, similar to the present one, was advanced before the Division Bench of the Gujarat High Court that once there is an arbitration agreement in existence, the dispute is required to be referred for arbitration and thus, the application under Section 8 of the Arbitration Act, 1996 could not have been dismissed. The Division Bench of the Gujarat High Court followed the decision of the Allahabad High Court in the case of Paper and Board Convertors v. U.P. State Micro and Small Enterprise in writ petition No. 24343 of 2014 reported in 2014(6) ALJ 89 and held that the Council has jurisdiction to act as an arbitrator or conciliator in a dispute between the parties and the 18 Council has only one of the two courses of action open to it: either to conduct an arbitration itself or to refer the parties to a centre or institution providing alternate dispute resolution services stipulated in sub-section (3) of Section 18 of the MSMED Act. Consequently, the Division Bench of the Gujarat High Court did not find any error in the decision of the Council in not entertaining the buyer's application under Section 8 of the Arbitration Act, 1996. The Division Bench of the Gujarat High Court also referred to the decision of the Nagpur Bench of this Court in Steel Authority of India Ltd. AIR 2012 BOM 178 (supra) and expressed inability to agree with it. The relevant discussion is contained in paragraph 7.0. to 8.0. which reads as under:
"7.0 Identical question came to be considered by the Division Bench of the Allahabad High Court in the case of Paper and Board Convertors (supra). While interpreting the very provision of Section 18 of the Act, 2006, in para 12, the Division Bench has observed and held as under:19
12. The non-obstane provision contained in subsection (1) of Section 18 and again in subsection (4) of Section 18 operates to ensure that it is a Facilitation Council which has jurisdiction to act as an arbitrator or Conciliator in a dispute between a supplier located within its jurisdiction and a buyer located anywhere in India.
The Facilitation Council had only one of the two courses of action open to it:
either to conduct an arbitration itself or to refer the parties to a centre or institution providing alternate dispute resolution services stipulated in sub- section (3) of Section 18.
7.1. After observing as above, the Division Bench of the Allahabad High Court has set aside the order passed by the Facilitation Council directing the parties to place its version before the sole arbitrator in terms of the rate contract agreement and restored the proceedings back to the Council and 20 directed the Council to act in accordance with the provisions of sub-section (3) of Section 18 and either conduct the arbitration itself or refer the arbitral proceedings to any institution or centre providing alternate dispute resolution services.
8.0 Now, so far as reliance placed upon the decision of the Division Bench of the Bombay High Court in the case of Steel Authority of India Ltd. (supra) relied upon by Shri Patel, learned advocate for appellant, for the reasons stated above provision of Act 2006 referred herein above and the Act 2006 being Special Act under which the parties are governed, we are not in agreement with the view taken by the Division Bench of the Bombay High Court and we are in complete agreement with the view taken by the Division Bench of the Allahabad High Court in the case of Paper and Board Convertors (supra).21
15. The decision of the Division Bench of the Gujarat High Court in Manibhai And Brothers (Sleeper) AIR 2016 GUJ 151(Supra) was challenged before the Apex Court by filing Diary No. 16845 of 2017. These proceedings came to be disposed of by the Division Bench of the Hon'ble Apex Court by its order dated 5th July, 2017, which reads as follows:
"We have given our thoughtful
consideration to the submissions
advanced before us yesterday and
today.
We are satisfied, that the
interpretation placed by the High Court on Section 18 of the Micro, Small and Medium Enterprises Development Act, 2006, in the impugned order, with reference to arbitration proceeding is fully justified and in consonance with the provisions thereof.
Having affirmed the above, we are of the view, that all other matters dealt with in the impugned order are not relevant for the adjudication of the 22 present controversy, and need not be examined.
The special leave petition is dismissed in the above terms. Pending applications stand disposed of."
16. The above order of the Apex Court apparently shows that the Apex Court approved the view of the Gujarat High Court in Manibhai and Brothers (Sleeper) (supra) and the Allahabad High Court in Paper and Board Convertors 2014 (6) ALJ 89 (supra). In that view of the matter, the submission of Mr. Kane, learned counsel for the petitioner, that the reference made by respondent No. 3 and entertained by respondent No. 1 - MSEFC is not maintainable in view of the independent arbitration agreement between the parties cannot be entertained and the same is liable to be rejected.
18. Section 18(1) of the MSMED Act provides for reference to the Facilitation Council of a dispute with regard to any amount due under Section 17. Sub-section (2) of Section 18 contemplates of conduct of conciliation either by council itself or by seeking assistance of any institution or centre providing alternate dispute resolution services. For 23 purpose of such conciliation proceedings, the provisions of Sections 65 to 81 of the Arbitration and Conciliation Act, 1996 are applicable. Subsection (3) thereof, makes a provision for arbitration if the conciliation proceedings between the parties are not successful and stand terminated without any settlement either by the Council itself or by reference to any institution or centre providing alternate dispute resolution services. To such arbitration, the provisions of Sections 65 to 81 of the Arbitration and Conciliation Act, 1996 are made applicable.
19. A plain reading of sub-sections (2) and (3) of Section 18 of the MSMED Act makes it clear that is is obligatory for the Council to conduct conciliation proceedings either by itself or seek assistance of any institute or centre providing alternative dispute resolution services. The provisions of Sections 65 to 81 of the Arbitration Act 1996 are made applicable to conciliation proceedings. In the event, the conciliation proceedings are unsuccessful and stand terminated, the Council can either itself take up the dispute for arbitration or refer it to any institution or centre proving alternate dispute resolution services for such arbitration. The 24 provisions of Arbitration Act 1996, in its entirety, are made applicable as if the arbitration was in pursuance of the arbitration agreement referred to in sub-section(1) of Section 7 of the Arbitration Act, 1996.
20. It is thus evident that sub-section (2) and sub- section (3) of the MSMED Act vests jurisdiction in the Council to act as conciliator as well as arbitrator. The question is in view of the provisions of Section 80 of the Arbitration Act 1996, the Council which has conducted the conciliation proceedings is prohibited from acting as arbitrator. As stated earlier, certain provisions of Arbitration Act 1996 including Section 80 are specifically made applicable to conciliation proceedings contemplated by Section 18(2) of the MSMED Act. Whereas provisions of Arbitration Act 1996, in its entirety, are made applicable to the arbitration and conciliation proceedings contemplated by sub- section (3) of Section 18 of the MSMED Act.
24. We, accordingly, dispose of the petition by passing the following order:
1. We hold that the despite independent arbitration agreement between the 25 petitioner and respondent No. 3, respondent No. 1 - MSEFC has jurisdiction to entertain reference made by respondent No. 3 under Section 18 of the MSMED Act.
2. Clause 2 of the operative part of the impugned order i.e."Arbitration proceeding be initiated U/s 18(3) of MSMED Act 2006 and that this council shall act as an Arbitrator Tribunal" is quashed and set-aside and respondent No. 1 - MSEFC is directed to refer the dispute between the petitioner and respondent No. 3 to any institution or centre providing alternate dispute resolution services for arbitration.
Respondent No. 1 - MSEFC shall take necessary steps as expeditiously as possible and, in any case, within a period of four weeks from the date of receipt of this order.
3. Rule is, accordingly, made absolute in the above terms.
2610. In view of the aforesaid reasons, the impugned order passed by the 1st respondent dismissing the application filed by the petitioner under Section 8 of the Arbitration & Conciliation Act, is in accordance with law.
The reasons assigned and the conclusion arrived at by the 1st respondent in the impugned order are just and proper.
The petitioner has not made out any ground to interfere with the impugned order, in exercise of powers under Article 227 of the Constitution of India.
Accordingly, the writ petition is dismissed.
Sd/-
JUDGE Gss/-