2017 (9) TMI 2004 - HC - Indian Laws

Reference of the disputes to Delhi International Arbitration Centre (DIAC) for initiating arbitration proceedings - Resolution of disputes between BHEL and respondent No. 2 (DRIPLEX) by conciliation not possible - disputing parties had also entered into an arbitration agreement - whether MSEFC could (u/Section 18 (3) of The Micro, Small and Medium Enterprises Development Act, 2006) refer the disputes for arbitration under the aegis of DIAC, considering that the disputing parties had also entered into an arbitration agreement? HELD THAT - It is at once clear that the provision of Section 18(3) of The Micro, Small and Medium Enterprises Development Act, 2006, do not leave any scope for a non-institutional arbitration. In terms of Section 18 (3) of the Act, it is necessary that the arbitration be conducted under aegis of an institution -either by MSEFC or under the aegis of any Institution or Centre providing alternate dispute resolution services for such arbitration . It is apparent from the plain reading of clause 30 (1) of arbitration agreement, that the DRIPLEX and BHEL had agreed to refer disputes to an arbitrator appointed by BHEL and this in material variance with the provisions of Section 18(3) of the Act. In this view, the contention that there is no conflict between the arbitration agreement and Section 18(3) of the Act, is not persuasive. The arbitration clause under the GCC provides for an arbitration by an arbitrator to be appointed by BHEL, which is repugnant to an institutional arbitration - Section 24 of the Act contains an non-obstante provision and, expressly provides that the provisions of Section 15 to 23 of the Act will have an overriding effect. Thus, the provisions of Section 18(3) of the Act cannot be diluted and must be given effect to notwithstanding anything inconsistent, including the arbitration agreement in terms of section 7 of the A C Act. In BHEL v. State of U.P. others 2014 (2) TMI 1420 - ALLAHABAD HIGH COURT , a Division Bench of the Allahabad High Court had considered the case where the agreement between the disputing parties contained an arbitration clause, however, the MSEFC had decided to arbitrate the disputes under Section 18(3) of the Act. BHEL was also the petitioner in that case and, had approached the Court seeking that the proceedings before Uttar Pradesh State Micro and Small Enterprises Facilitation Council be set aside and the said Council be directed to decide BHEL's objection under Section 8 of the A C Act - The Punjab and Haryana High Court in The Chief Administrative, COFMOW 2015 (1) TMI 1493 - PUNJAB AND HARYANA HIGH COURT had rejected the contention that provisions of Section 18 (3) of the Act for referring the disputes to arbitration would apply only where there was no arbitration agreement between the parties. BHEL had proceeded on the basis that if the conciliation proceedings failed, the disputes would be referred to arbitration under the Act and, thus, they cannot be permitted to assail the orders passed by MSEFC under Section 18(3) of the Act. It was not BHEL's case, as is apparent from its replies filed before MSRFC, that reference to arbitration would necessarily have to be as per the agreement between the parties and not under the Act. Thus, they cannot be permitted to agitate this issue in these proceedings. The petitions are dismissed with costs quantified at ₹ 25,000/- in each case.

Summary

Issues Involved:
1. Jurisdiction of MSEFC to refer disputes to DIAC for arbitration despite an existing arbitration agreement between the parties.
2. Applicability and interpretation of Section 18(3) of The Micro, Small and Medium Enterprises Development Act, 2006.
3. Conflict between the arbitration agreement in the General Conditions of Contracts (GCC) and Section 18(3) of the Act.
4. Overriding effect of Section 24 of the Act on existing arbitration agreements.
5. Estoppel of BHEL from raising jurisdictional objections at a later stage.

Issue-wise Detailed Analysis:

1. Jurisdiction of MSEFC to Refer Disputes to DIAC for Arbitration:
BHEL challenged the orders passed by MSEFC, arguing that MSEFC lacked jurisdiction to refer disputes to DIAC for arbitration as the parties had an existing arbitration agreement. The court examined whether MSEFC could override this agreement and refer disputes to DIAC under Section 18(3) of the Act. BHEL contended that MSEFC should refer disputes to arbitration per the existing agreement, not to DIAC. The respondents argued that Section 18(3) of the Act allows MSEFC to refer disputes to any institution for arbitration, overriding any existing arbitration agreement.

2. Applicability and Interpretation of Section 18(3) of the Act:
The court analyzed Section 18(3) of the Act, which states that if conciliation fails, MSEFC can either arbitrate the disputes itself or refer them to any institution providing alternate dispute resolution services. The court noted that Section 18(3) does not leave room for non-institutional arbitration and mandates that arbitration be conducted under the aegis of an institution, either by MSEFC or another designated institution.

3. Conflict Between Arbitration Agreement in GCC and Section 18(3) of the Act:
The court found a clear conflict between the arbitration clause in the GCC, which allowed BHEL to appoint the arbitrator, and Section 18(3) of the Act, which mandates institutional arbitration. The court held that the arbitration clause in the GCC was repugnant to the statutory framework of Section 18(3), which requires arbitration to be conducted by an institution or center providing alternate dispute resolution services.

4. Overriding Effect of Section 24 of the Act:
Section 24 of the Act was discussed, which provides that the provisions of Sections 15 to 23 of the Act have an overriding effect over any other inconsistent law. The court concluded that Section 18(3) of the Act must be given effect to, notwithstanding any arbitration agreement, due to the non-obstante clause in Section 24. This ensures that the statutory framework for dispute resolution under the Act prevails over any private arbitration agreement.

5. Estoppel of BHEL from Raising Jurisdictional Objections:
The court noted that BHEL had not raised any objections to MSEFC's jurisdiction to refer disputes to arbitration under Section 18(3) of the Act in its initial replies. Consequently, BHEL was estopped from raising such objections at a later stage. The court highlighted that BHEL's replies indicated an acceptance that disputes would be referred to arbitration under the Act if conciliation failed.

Conclusion:
The court dismissed BHEL's petitions, affirming MSEFC's jurisdiction to refer disputes to DIAC for arbitration under Section 18(3) of the Act. The court emphasized the overriding effect of the Act's provisions over any inconsistent arbitration agreements and upheld the statutory framework designed to expedite dispute resolution for Micro and Small Enterprises. The petitions were dismissed with costs quantified at ?25,000/- in each case.