The Calcutta High Court has clarified that the Micro, Small & Medium Enterprises Development Act, 2006 (MSME Act) does not prevent parties from opting for independent arbitration under the Arbitration and Conciliation Act, 1996, based on an arbitration clause in their agreement.
Case Background
The case involved Gita Refractories Pvt Ltd, an MSME, which filed an application under the Arbitration Act to resolve a commercial dispute with Tuaman Engineering Ltd. The petitioner argued that Section 18 of the MSME Act, which provides for alternative dispute resolution through the MSME Facilitation Council, is optional. The respondent contested this and pointed out procedural deficiencies in the petitioner's application.
Key Legal Issues
The primary issue revolved around the interpretation of Section 18 of the MSME Act. Section 18 allows MSMEs to refer disputes to the Facilitation Council for mediation and arbitration. The petitioner contended that this route was not mandatory, citing the use of the word “may” in the statute, which indicates that parties are free to seek alternative remedies, including arbitration under the Arbitration Act. The court was asked to determine whether MSMEs are restricted from pursuing independent arbitration if an arbitration clause exists.
Court Observations
Justice Sabyasachi Bhattacharyya, presiding over the case, emphasized that Section 18(1) of the MSME Act does not compel parties to use the dispute resolution mechanism under the Act. Instead, it offers an optional pathway for dispute resolution. If an MSME chooses not to submit to the Facilitation Council’s jurisdiction, it is free to pursue arbitration based on the agreement's arbitration clause.
The court further observed that the MSME Act does not create any substantive rights or obligations but provides an alternative to court proceedings. In this case, the petitioner had a broader dispute that extended beyond the recovery of dues for goods supplied, which falls under Section 17 of the MSME Act. The petitioner sought relief for the respondent's failure to accept goods procured under the agreement, seeking damages for the same. This expanded the scope of the dispute beyond what Section 18 addresses, allowing the petitioner to seek remedies under the Arbitration Act.
Ruling on Procedural Issues
The respondent argued that the petitioner had not complied with procedural guidelines, including the High Court’s Practice Directions related to Commercial Courts. However, the court held that the procedural objections were premature. Since the petitioner had only applied for the appointment of an arbitrator under Section 11 of the Arbitration Act, more stringent procedural requirements applicable to substantive claims did not apply at this preliminary stage.
Conclusion
The court concluded that the MSME Act does not restrict MSMEs from opting for independent arbitration if their agreement contains an arbitration clause. The petitioner’s application was allowed, and Mr. Reetobroto Kumar Mitra was appointed as the sole arbitrator to resolve the dispute. This judgment reaffirms that the MSME Act provides an optional dispute resolution mechanism, not an obligatory one, and arbitration under the Arbitration Act remains valid and enforceable.
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