Gujarat High Court: Parties Must Approach the MSME Council for Disputes Covered under MSME Act; No Room for Appointment of an Arbitrator

Gujarat High Court: Parties Must Approach the MSME Council for Disputes Covered under MSME Act; No Room for Appointment of an Arbitrator

The High Court of Gujarat has reiterated that the petition under Section 11 of the Arbitration and Conciliation Act, 1996 (A&C Act) for the appointment of the arbitrator by the Court would not be maintainable if the dispute is covered under the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act, 2006) and the provisions of the act are invoked.

The single judge Justice Biren Vaishav while placing reliance on the decision passed in the case of M/S Samrat Furnaces Pvt. Ltd. vs. State of Gujarat held that the provisions of MSMED Act prevail over the A&C Act and the resolution of dispute covered under the MSMED Act has to be in terms of Section 18 of the Act only and the procedure for the appointment of arbitrator under the A&C Act would have to give way to the special mechanism provided under the MSMED Act.

The brief background of the case is that the parties had entered into an agreement dated 20 August, 2018 whereby the petitioner placed upon the respondent orders for purchase of insulation kits and similar products. The agreement provided for an arbitration clause. However, it was claimed that respondent being and MSME was covered under the MSMED Act of 2006.

Subsequently, certain dispute arose between the parties regarding the total weight of the items delivered under the purchase orders, consequently, the petitioner demanded the return of the advance deposit.

On refusal of the respondent to return the amount, the petitioner issued a notice of arbitration and requested it to mutually appoint the arbitrator, however, by that time the respondent had already made a reference to facilitation council under Section 18 of the MSMED Act.

When the respondent failed to reply to its notice of arbitration, the petitioner aggrieved by the same approached the Court for the appointment of arbitrator under Section 11 of the A&C Act.

The petitioner submitted that the agreement between the parties contained an arbitration clause and the Court should refer the parties to arbitration.

Furthermore, the petitioner pleaded that the nature of the dispute between the parties was such that it did not fell within the rubric of dispute contemplated under Section 17 of the MSMED Act, therefore, the reference under Section 18 would be of no consequence.

The Court while referring to the case of Samrat Furnaces Pvt. Ltd. vs. State of Gujarat, (2020) wherein it was observed that petition under Section 11 of the A&C Act for the appointment of the arbitrator by the Court would not be maintainable if the dispute is covered under the MSMED Act, 2006 and the provisions of the act are invoked.

The Court further cited that in terms of Section 18(3), if the conciliation fails, the parties would be relegated to arbitration and the arbitration would continue as if were an arbitration pursuant to an agreement under Section 7 of the A&C Act, however, the A&C Act starts applying at this stage and not before.

Thus, the Court held that the parties must approach the MSME Council as there was no room for the appointment of the arbitrator when the dispute is covered under the MSMED Act in the present case.

Accordingly, the Court dismissed the petition and granted petitioner the liberty to approach the Council for the redressal of its grievances.