Bombay High Court: Facilitation Council has no Jurisdiction to Conduct Arbitration under MSMED Act for Dispute Arising out of Works Contracts

Bombay High Court: Facilitation Council has no Jurisdiction to Conduct Arbitration under MSMED Act for Dispute Arising out of Works Contracts

The Bombay High Court by its single judge Justice Manish Pitale, set aside an arbitral award passed by the Facilitation Council by invoking statutory arbitration under Section 18(3) of the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act), while observing that the Council could not have exercised jurisdiction to conduct arbitration in a dispute arising under a works contract.

In the present case, National Textile Corporation Ltd- petitioner, floated a tender for Works Contract. The respondent, Elixir Engineering Pvt Ltd, was the successful bidder, and thereafter, contracts were executed between the parties, leading to issuance of various work orders.

The Respondent was not satisfied with the final payments under the contracts/work orders and on 4th December, 2013, it sent a letter to the Petitioner-Corporation raising claims under various heads, including idling charges, loss of profit and drawing charges. The parties met in December, 2013 for resolving the disputes, but on 24th December, 2013, the Respondent issued notice to the Petitioner raising claims under various heads.

On 28th January, 2014 and 17th February, 2014, the Respondent made applications under Section 18 of the MSMED Act before the Facilitation Council. On 10th July, 2014, the Petitioner received notice from the Facilitation Council, indicating that the Council was entertaining the applications submitted by Respondent.

In this backdrop, the Petitioner issued a communication to the Facilitation Council, stating that it would be invoking the Arbitration Clause under the General and Commercial Conditions governing the contracts between the parties and requested the Facilitation Council to keep its proceedings in abeyance.

On 30th July, 2014, the Petitioner invoked the Arbitration Clause under the General and Commercial Conditions governing the contract and appointed a specific individual as its nominee on the Arbitral Tribunal. This fact was informed to the Facilitation Council and on 21st August, 2014, the Petitioner issued notice to the Respondent about appointment of the nominee of the Petitioner and further asked Respondent not to proceed before the Facilitation Council.

On 28th February, 2017, the Petitioner filed written statements, specifically raising issue of jurisdiction before the Facilitation Council, in view of the arbitration clause in the General and Commercial Conditions governing the contracts/work orders. The said stand of the Petitioner was opposed by Respondent and eventually by the impugned awards, the Facilitation Council partly allowed the claims of Respondent.

Aggrieved by the said awards, the Petitioner Corporation filed the petition before the High Court.

The Petitioner submitted before the Court that the arbitral award was passed without jurisdiction, since a works contract is not amenable to the provisions of the MSMED Act. Since the dispute between the parties arose in relation to the works contracts, the Facilitation Council had no jurisdiction to undertake statutory arbitration under Section 18(3), it pleaded.]

The issue that came for consideration before the High Court was whether the provisions of the MSMED Act would be applicable to the case of the Respondent, in the context of the arbitration proceedings conducted by the Facilitation Council.

The Court on pursual of the contracts/ work orders executed between the parties, concluded that the contracts in question were indeed works contracts.

To which the Court remarked that works contract is not amenable to the provisions of the MSMED Act, and therefore the MSMED Act could not have been invoked by the Respondent.

The Court placed reliance on the judgment of the Bombay High Court in M/s. P. L. Adke vs. Wardha Municipal Corporation/Council (2021), where it was ruled that a works contract is not amenable to the provisions of the MSMED Act. The High Court in P. L. Adke (2021) had discerned that a works contract being a composite contract, is indivisible and it cannot be deconstructed into its elements of supply of goods and services.

The Court stated, “the judgment in the case of M/s. P. L. Adke Vs. Wardha Municipal Corporation/ Council, it is held that the provisions of the MSMED Act could not have been invoked by Respondent No. 1. This clearly shows that the initiation of the statutory arbitration under the provisions of the MSMED Act on the part of Respondent No. 1 in the context of contracts in question before the Facilitation Council, was a stillborn exercise and that the Facilitation Council could not have exercised jurisdiction to conduct the arbitration proceedings.”

The judge was of the view that the impugned awards were passed without jurisdiction and rendered the impugned awards to be patently illegal.

Furthermore, with respect to Petitioner’s contention that the award was passed in violation of public policy of India since no reasons were stated in the award, the Court, on perusing the award, observed that although the Facilitation Council had referred to the submissions made on behalf of the parties, but the discussion was not satisfactory. Further, the most significant aspect pertaining to the jurisdiction of the Facilitation Council was itself not dealt with in an appropriate manner, the Court stated.

The Court discerned that, the Facilitation Council had also not considered the fact that the contracts/work orders specifically provided that, there shall be no payment for drawings and yet it had granted the claims of Respondent under the said head.

Therefore, the Court found substance in the contention raised on behalf of the Petitioner that the impugned awards were against public policy of India.

Thus, based on the facts and observations the Court concluded that the MSMED Act could not have been invoked by the Respondent and set aside the award.