Telangana High Court
M/S.Naolin Infrastructure Pvt.Ltd vs M/S.Air Transport Corporationassam ... on 15 July, 2024
Author: T. Vinod Kumar
Bench: T. Vinod Kumar
THE HON'BLE SRI JUSTICE T. VINOD KUMAR
ARBITRATION APPLICATION No. 196 of 2023
ORDER:
1. The present Arbitration Application is filed under Section 11(5) of the Arbitration and Conciliation Act, 1996 (hereinafter 'the Act, 1996') for appointment of a sole arbitrator to resolve the disputes between the parties.
2. Heard Mr. A. Rajashekar Reddy, learned counsel for petitioner, Mr. Sricharan Telaprolu, learned counsel for the respondent and perused the record.
3. The applicant herein had entered into a 'Rate Contract (Work Order)' for transportation of material to PGCILNER project in Arunachal Pradesh with the respondent herein vide W.O.No. WO/NIPL/PGCIL-ARP/21-22/012, AMDT 3 dated 07.03.2022.
4. It is the case of the applicant herein that disputes arose as the respondent herein had failed to comply with the terms of the work orders; that as the applicant had suffered major setbacks to its tender contract with the principal contractor PGCIL, due to delays in delivery of consignments by the Respondent herein, it had issued 2 a legal demand notice for damages dated 15.03.2023; and that thereafter though an exchange of correspondences prevailed between the parties, the respondent herein had raised a counterclaim through its legal notice dated 23.04.2023.
5. Since there were clear disputes between the parties the applicant herein had issued the notice dated 30.06.2023 nominating Mr. S.M. Rafee, Retired Principal District & Sessions Judge, as sole arbitrator to resolve the disputes between the parties. It is contended that the respondent herein had issued a reply notice dated 28.07.2023 refusing to refer the disputes to arbitration. Thus, the instant arbitration application is filed seeking appointment of a sole arbitrator to resolve the disputes between the parties.
6. Per contra, learned counsel for the respondent herein contends that the instant arbitration application is not maintainable as the respondent herein is registered under The Micro, Small and Medium Enterprises Development Act, 2006 (for short 'the Act, 2006') with registration No. UDYAM-AS-03-000383. It is further contended that the respondent herein vide its notice dated 07.10.2022 had invoked the provisions of the Act, 2006, and thus 3 the instant proceedings cannot be sustained as the provisions of the Act, 2006 had an overriding effect on private arbitration agreements entered into by the parties.
7. Learned counsel for the respondent further submits that, pursuant to the notice dated 07.10.2022, it had made a reference to the Micro and Small Enterprises Facilitation Council (for short 'the Facilitation council') created under Section 18 of the Act, 2006 on 08.08.2023. Hence, it is contended that though the work order dated 07.03.2022 contains an arbitration clause, the same cannot preclude the respondent herein from its statutory right to avail speedy and efficacious dispute resolution provided under the Scheme of the Act, 2006. In conclusion the respondent herein contends that the applicant can make his claim if any under the scheme of Section 18 of the Act, 2016. [In support of his contentions reliance is placed on the decision in Gujarat State Civil Supplies Corporation Ltd. and Ors. Vs. Mahakali Foods Pvt. Ltd. (Unit 2) and Ors 1].
8. I have taken note of their respective contentions. 1 (2023) 6 SCC 401 4
9. At the outset it is to be noted that when an agreement contains a covenant to resolve the disputes by referring to Arbitration, the powers of the High Court under Section 11 of the Act, 1996 are extremely limited, and the court is ordinarily to relegate parties to arbitration (See: Vidya Drolia v. Durga Trading Corpn2). However, since a preliminary issue with respect to maintainability of the reference under Section 11(5) of the Act, 1996 is raised the same shall be dealt with first.
10. Before discussing relevant precedents, it is necessary to note the statutory provisions of the Act, 2006. Section 17 of the Act, 2006 mandates that the buyer shall be liable to pay the amounts with interest for any goods supplied or services rendered by the supplier. Section 18 (1) which begins with a non obstante clause provides that a reference pertaining to any amount due under section 17 of the Act, 2006 can be made to the Facilitation Council by any party to a dispute. Sub section (2) to (5) therein contemplate the procedure to be adopted by the Facilitation Council while resolving disputes. While so Section 24 of the Act, 2006 2 (2021) 2 SCC 1 : (2021) 1 SCC (Civ) 549 5 contemplates that the Sections 15 to 23 of the Act, 2006 shall have an overriding effect on any other law, for anything inconsistent with the provisions therein.
11. From a conspectus of the aforesaid provisions it is to be understood that even a buyer can make a reference to the Facilitation Council under Section 18 of the Act, 2006 when the disputes pertain to the payment of amount under section 17 of the Act, 2006.
12. The Hon'ble Supreme Court in Silpi Industries and Ors. Vs. Kerala State Road Transport Corporation and Ors 3, observed that as the Act, 2006 was a special legislation, it would prevail over the Act, 1996 which was a general legislation. The Hon'ble Supreme Court had observed that parallel proceedings cannot be instituted before various forums for disputes relating to Section 17 of Act, as there was a risk of contradictory/conflicting decisions emerging. The Apex Court had further observed that in cases where the opposite party was a seller, and he had initiated proceedings before the Facilitation Council it was appropriate for the buyer to file his 3 (2021) 18 SCC 790 6 counter claim, rather than permitting him to initiate parallel proceedings under the section 11 of the Act, 1996. The relevant observations are as under:
"20. From a reading of Section 18(3) of the 2006 Act it is clear that when the conciliation initiated Under Sub-section (2) of Section 18 of the said Act is not successful, the Council shall either itself take up the dispute for arbitration or refer to any institution for arbitration. Further Section 18(3) of the said Act also makes it clear that the provisions of 1996 Act are made applicable as if there is an agreement between the parties Under Sub-section (1) of Section 7 of the 1996 Act. Section 23 of the 1996 Act deals with the statement of claim and defence. Section 23(2A), which gives a right to Respondent to submit a counter claim or plead set-off with regard to claims within the scope of the arbitration agreement, is brought into Statute by Amending Act 3 of 2016. If we look at the Statement of Objects and Reasons of the Amending Act, same is also enacted to provide for speedy disposal of cases relating to arbitration with least court intervention. Clause 11 of the Bill, by which Sub-section (2A) was proposed to be inserted, states that Sub-section (2A) was intended to give an opportunity to the Respondent, in support of his case, to submit counter-claim or a set-off if such counterclaim or set-off falls within the scope of arbitration agreement. When Section 18(3) makes it clear that in the event of failure by the Council Under Section 18(2) if proceedings are initiated Under Section 18(3) of the 1996 Act(sic 2006), the provisions of 1996 Act are not only made applicable but specific mention is made to the effect as if the arbitration was in pursuance to an arbitration agreement referred to in Sub-section (1) of Section 7 of the 1996 Act. When there is a provision for filing counter-claim and set-
off which is expressly inserted in Section 23 of the 1996 Act, there is no reason for curtailing the right of the Respondent for making counter-claim or set-off in proceedings before the Facilitation Council.
21. It is also further to be noted that if we do not allow the counter- claim made by the buyer in the proceedings arising out of claims made by the seller, it may lead to parallel proceedings before the various fora. On one hand, in view of beneficial legislation, seller may approach the Facilitation Council for claims, in the event of failure of payment by the buyer under provisions of 2006 Act, at the same time, if there is no separate agreement between the parties for any arbitration in a given case, buyer may approach the civil court for making claims against the seller, or else if there is an agreement between the parties for 7 arbitration in the event of dispute between the parties, parties may seek appointment of arbitrator. At the same time if the seller is covered by definition under micro, small and medium enterprises, seller may approach the Facilitation Council for making claims under the provisions of Micro, Small and Medium Enterprises Development Act, 2006. In such event, it may result in conflicting findings, by various forums.
22. In second set of cases it is clear that when the seller approached the Facilitation Council making certain claims against the buyer, buyer after his appearance, has approached the High Court Under Section 11(6) of the 1996 Act for appointment of arbitrator on the ground that there is an agreement between the parties for arbitration. Though it was pleaded before the High Court by the Appellant that it has already approached the Facilitation Council and proceedings are pending, the Respondent as well contest the proceedings and also lay its counter-claim, the High Court has rejected such plea on the ground that the 2006 Act primarily deals with the claims of the seller only. The High Court has held that as the buyer cannot make counter-claim, the proceedings cannot be proceeded with before the Council under 2006 Act and accordingly ordered by appointing second arbitrator.
23. The obligations of the buyer to make payment, and award of interest at three times of the bank rate notified by Reserve Bank in the event of delay by the buyer and the mechanism for recovery and reference to Micro and Small Enterprises Facilitation Council and further remedies under the 2006 Act for the party aggrieved by the awards, are covered by Chapter V of the 2006 Act. The provisions of Section 15 to 23 of the Act are given overriding effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force. From the Statement of Objects and Reasons also it is clear that it is a beneficial legislation to the small, medium and micro sector. The Arbitration and Conciliation Act, 1996 is a general law whereas the Micro, Small and Medium Enterprises Development Act, 2006 is a special beneficial legislation which is intended to benefit micro, small and medium enterprises covered by the said Act. The Act of 2006 contemplates a statutory arbitration when conciliation fails. A party which is covered by the provisions of 2006 Act allows a party to apply to the Council constituted under the Act to first conciliate and then arbitrate on the dispute between it and other parties. There are fundamental differences in the settlement mechanism under the 2006 Act and the 1996 Act. The first difference is, the Council constituted under the 2006 Act to undertake mandatory conciliation before the arbitration which is not so under the 1996 Act. Secondly, in the event of failure of conciliation under the 2006 Act, the Council or the centre or institution is identified by it for arbitration. The 1996 Act allows resolution of disputes by agreed forum. The third difference is that, in the event of award in favour of seller and 8 if the same is to be challenged, there is a condition for pre-deposit of 75% of the amount awarded. Such is not the case in the 1996 Act. When such beneficial provisions are there in the special enactment, such benefits cannot be denied on the ground that counter-claim is not maintainable before the Council. In any case, whenever buyer wish to avoid the jurisdiction of the Council, the buyer can do on the spacious plea of counter-claim, without responding to the claims of the seller. When the provisions of Sections 15 to 23 are given overriding effect Under Section 24 of the Act and further the 2006 Act is a beneficial legislation, we are of the view that even the buyer, if any claim is there, can very well subject to the jurisdiction before the Council and make its claim/counter claim as otherwise it will defeat the very objects of the Act which is a beneficial legislation to micro, small and medium enterprises. Even in cases where there is no agreement for resolution of disputes by way of arbitration, if the seller is a party covered by Micro, Small and Medium EnterprisesDevelopment Act, 2006, if such party approaches the Council for resolution of dispute, other party may approach the civil court or any other forum making claims on the same issue. If two parallel proceedings are allowed, it may result in conflicting findings. At this stage, it is relevant to notice the judgment of this Court in the case of Edukanti Kistamma (Dead) through LRs. v. S. Venkatareddy (Dead) through LRs. and Ors. (2010) 1 SCC 756 where this Court has held that a special Statute would be preferred over general one where it is beneficial one. It was explained that the purport and object of the Act must be given its full effect by applying the principles of purposive construction. Thus, it is clear that out of the two legislations, the provisions of MSMED Act will prevail, especially when it has overriding provision Under Section 24 thereof. Thus, we hold that MSMED Act, being a special Statute , will have an overriding effect vis -à-vis Arbitration and Conciliation Act, 1996, which is a general Act. Even if there is an agreement between the parties for resolution of disputes by arbitration, if a seller is covered by Micro, Small and Medium Enterprises Development Act, 2006, the seller can certainly approach the competent authority to make its claim. If any agreement between the parties is there, same is to be ignored in view of the statutory obligations and mechanism provided under the 2006 Act. Further, apart from the provision Under Section 23(2A) of the 1996 Act, it is to be noticed that if counter-claim is not permitted, buyer can get over the legal obligation of compound interest at 3 times of the bank rate and the "75% pre- deposit" contemplated Under Sections 16 and 19 of the MSMED Act.
24. For the aforesaid reasons and on a harmonious construction of Section 18(3) of the 2006 Act and Section 7(1) and Section 23(2A) of the 1996 Act, we are of the view that counter-claim is maintainable before the statutory authorities under MSMED Act." 9
(emphasis supplied)
13. Further, the Hon'ble Supreme Court in Gujarat State Civil Supplies Corporation Ltd's case (supra) while reiterating the aforesaid position of law, had postulated the following salient features on the interplay between the Act, 1996 and the Act, 2006:
"34. The upshot of the above is that:
(i) Chapter-V of the MSMED Act, 2006 would override the provisions of the Arbitration Act, 1996.
(ii) No party to a dispute with regard to any amount due Under Section 17 of the MSMED Act, 2006 would be precluded from making a reference to the Micro and Small Enterprises Facilitation Council, though an independent arbitration agreement exists between the parties.
(iii) The Facilitation Council, which had initiated the Conciliation proceedings Under Section 18(2) of the MSMED Act, 2006 would be entitled to act as an arbitrator despite the bar contained in Section 80 of the Arbitration Act.
(iv) The proceedings before the Facilitation Council/institute/centre acting as an arbitrator/arbitration tribunal Under Section 18(3) of MSMED Act, 2006 would be governed by the Arbitration Act, 1996.
(v) The Facilitation Council/institute/centre acting as an arbitral tribunal by virtue of Section 18(3) of the MSMED Act, 2006 would be competent to Rule on its own jurisdiction as also the other issues in view of Section 16 of the Arbitration Act, 1996.
(vi) A party who was not the 'supplier' as per the definition contained in Section 2(n) of the MSMED Act, 2006 on the date of entering into contract cannot seek any benefit as the 'supplier' under the MSMED Act, 2006. If any registration is obtained subsequently the same would have 10 an effect prospectively and would apply to the supply of goods and rendering services subsequent to the registration."
(emphasis supplied)
14. Therefore, on a conspectus of the position of law as laid down in the case of Silpi Industries's case (supra) and Gujarat State Civil Supplies Corporation Ltd's case (supra), it is clear that a reference to arbitration under section 11 of the Act, 1996 cannot be made when the opposite party is a seller under the Act, 2006 and the disputes pertain to or arise out of the transactions contemplated under section 17 of the Act, 2006.
15. In the facts at hand, it is to be seen that the respondent herein had issued a letter dated 07.10.2022 calling forward the applicant to clear the arrears in freight dues to an amount of Rs. 83,42,321/-. It appears that pursuant to the aforesaid notice the applicant herein had issued a legal notice dated 15.03.2023 terminating the work order and also demanding damages to an amount of Rs. 1,62,72,059/-. In reply to the same the respondent herein had issued the legal notice dated 23.04.2023 raising several breaches committed by the work order due to non-payment of freight dues. Subsequently the applicant and the respondent herein issued the 11 arbitration notice dated 30.06.2023 and refusal notice dated 28.07.2023 respectively. It appears that thereafter, the parties herein had simultaneously approached parallel forums i.e., the applicant herein had filed the instant application on 18.10.2023, whereas the respondent herein had made a reference under section 18 of the Act, 2006 on 08.08.2023 for resolution of interconnected disputes.
16. In light of the settled position of law, taking into consideration that the respondent herein is a seller under the Act, 2006 and since a reference under Section 18 of the Act, 2006 has already been initiated before the Facilitation Council, this Court is of the view that present arbitration application is not maintainable.
17. Needless, to say that no prejudice would be caused to the applicant herein as it is open for him to file a counter-claim/make a reference before the Facilitation Council in terms of the law laid down by the Hon'ble Supreme Court in Silpi Industries's case (supra) and Gujarat State Civil Supplies Corporation Ltd's case (supra).
18. Accordingly, this arbitration application is dismissed. 12
19. Pending miscellaneous petitions if any shall stand closed. No order as to costs.
___________________ T. VINOD KUMAR, J Date: 15.07.2024 VSV/MRKR