Full Judgment Text
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* IN THE HIGH COURT OF DELHI AT NEW DELHI
Judgment reserved on: 16.12.2024
Judgment pronounced on:01.05.2025
+ O.M.P.(COMM.) 246/2022
SHRISTI INFRASTRUCTURE DEVELOPMENT ......Petitioner
Through: Mr. Vaibhav Gaggar, Adv.
versus
SCORPIO ENGINEERING PRIVATE LIMITED AND ANR.
......Respondents
Through: Mr. Satyam Dwivedi, Mr. Harshit
Prakash and Mr. Puja Jakhar,
Advs. for R-1.
CORAM:
HON’BLE MR. JUSTICE JASMEET SINGH
J U D G M E N T
: JASMEET SINGH, J
1. This is a petition filed under section 34 of the Arbitration and
Conciliation Act, 1996 (― 1996 Act ‖) seeking to challenge the Arbitral
Award dated 16.10.2019 (― Impugned Award ‖), whereby the petitioner
has been held to be jointly and severally liable along with respondent no.
2 to pay a sum of Rs. 6,56,84,982/- (Rs. 5,73,15,078/- towards claim no.
1 and Rs. 83,69,904/- towards claim no. 4) to respondent no. 1 along
with interest at the rate of 38.85% from the date of the award till the
actual payment is made.
Digitally Signed
By:MAYANK
Signing Date:01.05.2025
16:59:42
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FACTUAL MATRIX AS PER THE PETITIONER
2. The petitioner is a leading civil engineering, construction and
infrastructure development public limited company, registered under the
Companies Act, 1956 having its registered office at Plot No. X - l, 2 and
3, Block - Ep, Sector- V, Salt Lake City, Kolkata- 700091.
3. Respondent no. 1 is a private limited company registered under the
Companies Act, 1956 having its registered office at No. 132, Wheeler
Road, Cox Town, Bangalore, Karnataka – 560005 and is engaged in the
business of bulk material handling systems. Respondent no. 2, formerly
known as India Power Corporation (Haldia) Limited is a public limited
company registered under the Companies Act, 1956, having its
registered office at Plot No. X - l, 2 and 3, Block - Ep, Sector- V, Salt
Lake City, Kolkata- 700091. Respondent no. 2 is the owner of a 3x150
MW Thermal Power Plant in Haldia, Purba - Medinipur, West Bengal.
4. In the year 2010, respondent no. 2 invited bids through a tender for the
engineering, procurement, transportation, supply to site and insurance of
main plant equipment and accessories along with balance of plants
(BOP) equipment and accessories in connection with the establishment
of the 3x150 MW Thermal Power Plant in Haldia, Purba - Medinipur,
West Bengal (― plant ‖). In response to the said tender, BF Infrastructure
Limited (― BFIL ‖) submitted its proposal. BFIL was appointed as the
EPC Contractor for the plant of respondent no. 2.
5. Thereafter, in the year 2012, respondent no. 2 invited bids for designing,
engineering, manufacturing, supply, erection, and commissioning of a
Coal Handling Project (― project ‖) pertaining to the plant. Respondent
Digitally Signed
By:MAYANK
Signing Date:01.05.2025
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no. 1 in response, approached the respondent no. 2 and submitted its bid
for the project. Thereafter, a contract came to be executed between
respondent no. 1, respondent no. 2 and BFIL. The contract price for the
project was finalized at Rs 47,50,00,000/-, out of which Rs
43,00,00,000/- was towards purchase price and the remaining amount of
Rs. 4,50,00,000/- was for the services rendered. The said contract
contained the arbitration clause being clause 29 of the GCC which reads
as under:
“29.0 ARBITRATION
29.1 In the event of any dispute or difference arising out of
the execution of the Order/Contract or the respective rights
and liabilities of the parties or in relation to interpretation
of any provision by the Seller/Contractor in any manner
touching upon the Order/Contract, such dispute or
difference shall (except as to any matter the decision of
which is specifically provided for therein) be referred to the
arbitration of the person appointed by the competent
authority of the Purchaser.
Subject as aforesaid, the provisions of Arbitration and
Conciliation Act, 1996 (India) and statutory modifications
or reenactments thereof and the rules made there under and
for the time being in force shall apply to the arbitration
proceedings under this clause. The venue of arbitration
shall be at NOIDA/New Delhi/Delhi.”
6. Thereafter, in the year 2013, BFIL, acting on behalf of respondent no. 2,
invited quotations for design, engineering, manufacturing/procurement,
transportation, unloading, site storage, erection, testing, commissioning,
Digitally Signed
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and performance guarantee testing of equipment and items for the
project. The petitioner submitted its quotation, which was approved by
BFIL. Accordingly, BFIL issued two Letter(s) of Intent in favour of the
petitioner, both dated 10.12.2013. On 20.12.2013, respondent no. 2
issued a Purchase Order in favour of respondent no. 1, for designing,
engineering, manufacturing, inspecting, testing and supplying, including
transportation and transit insurance, of all equipment/items for the
project including mandatory spares and structural components
(technological and non-technological) for a consideration of Rs
43,00,00,000/-.
7. Thereafter, respondent no. 2 also issued a Work Order to respondent no.
1 for unloading, storing, providing security from fabrication,
transporting from works to site and within site, erection, testing,
commissioning, conducting PG test for the project in accordance with
the technical specification, discussions, etc. for a consideration of Rs.
4,50,00,000/-.
8. On 20.12.2013, complying with the directions of respondent no. 2 and
BFIL, the petitioner also re-issued identical Purchase order and Work
order in favour of respondent no. 1.
9. Pursuant thereto, on 06.06.2014, a Tripartite Agreement was executed
between BFIL, respondent no. 2, and the petitioner, whereby BFIL
assigned all its rights, obligations, and liabilities arising under the
previous agreements in favour of respondent no. 2. Consequently, BFIL
ceased to be the EPC Contractor for the project. Upon such substitution,
the petitioner commenced coordination directly with respondent no. 2
for execution of the work with respect to the project, in accordance with
the Purchase Order dated 10.12.2013. Further, the petitioner became the
Digitally Signed
By:MAYANK
Signing Date:01.05.2025
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EPC contractor for the project which was formally done by a Supply
contract being executed between the petitioner and respondent no. 2 on
03.07.2015, whereby respondent no. 2 transferred the obligations of
BFIL to the petitioner, which had been assigned to respondent no. 2
under the Tripartite Agreement dated 06.06.2014.
10. Soon after, certain disputes arose between the parties, the respondent
no.1 invoked arbitration vide legal notice dated 14.04.2017, however, it
is stated that the said notice was only delivered to the respondent no. 2
and not to the petitioner.
11. Thereafter, respondent no. 1 filed a petition under section 11 of the 1996
Act, being Arb. P. No. 406/2017 and sought appointment of a sole
arbitrator for adjudication of disputes between the petitioner and
respondent nos. 1 and 2. Vide order dated 18.07.2017, the learned Sole
Arbitrator came to be appointed and the Arbitral Award came to be
passed on 16.10.2019.
12. Aggrieved, the petitioner has filed the present petition.
IMPUGNED AWARD
13. The learned Sole Arbitrator passed the impugned award in favor of the
respondent no. 1, by allowing its claim nos. 1 and 4. Rest other claims of
the respondent no.1 and the counter claim(s) of respondent no. 2 were
rejected by the learned Sole Arbitrator.
14. As regards, the claim no. 1, a sum of Rs. 5,73,15,078/- was awarded in
favor of the respondent no. 1, towards outstanding amounts of supplies
and service, to be paid by the petitioner and respondent no. 2 jointly and
severally under the ‗Group of Companies‘ doctrine.
Digitally Signed
By:MAYANK
Signing Date:01.05.2025
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15. As regards, the claim no. 4, being towards keeping the bank guarantee(s)
alive, a sum of Rs. 83,69,904/- was awarded in favor of respondent no. 1
towards the cost incurred by the respondent no. 1 for keeping the bank
guarantees alive.
16. In addition, the Arbitrator awarded interest at the rate of 38.85% on the
principal amount of Rs 6,56,84,982/- (Rs. 5,73,15,078/- + Rs.
83,69,904/-) from the date of the impugned award till the actual date of
payment. It further directed the petitioner and respondent no. 2 to pay
the awarded sum within 6 weeks, failing which the petitioner and
respondent no. 2 would pay the awarded sum at the rate of 2% higher
than the current rate of interest prevalent on the date of award and from
the date of award to the date of payment.
SUBMISSIONS ON BEHALF OF THE PETITIONER
17. At the outset, it is stated that the appointed arbitrator lacked inherent
jurisdiction to adjudicate any claim arising under the Micro, Small and
Medium Enterprises Development Act, 2006 (― MSMED Act ‖). As such,
the Impugned Award is without jurisdiction and is null and void in law.
18. In this regard, reliance is placed upon the judgment passed by the
Hon‘ble Gujarat High Court in Principal Chief Engineer v.
Manibhaiand Brothers (Sleeper) and Another , 2016 SCC OnLine Guj
10012, to state that section 18 of the MSMED Act, being a special
provision, overrides any other law for the time being in force, including
the 1996 Act. Therefore, in case of disputes governed by the MSMED
Act, the procedure prescribed under section 18 alone is applicable and
must be mandatorily followed.
Digitally Signed
By:MAYANK
Signing Date:01.05.2025
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19. It is stated that section 18 of the MSMED Act prescribes a specific
mechanism for resolution of disputes, whereby the Facilitation Council
or a Centre providing alternate dispute resolution services appointed by
the Facilitation Council is empowered to adjudicate disputes by itself
taking the matter for arbitration or refer it to any other institution for
arbitration in accordance with the provisions of the 1996 Act. In view of
the statutory mandate under Section 18(3) of the MSMED Act, the
jurisdiction of the Council cannot be ousted by way of a mutually agreed
arbitration clause between the parties.
20. It is further stated that the petitioner was not a signatory to the
agreement dated 20.12.2013, and therefore, no privity of contract existed
between the petitioner and respondent nos. 1 and 2. Consequently, the
petitioner could not have been impleaded as a party to the arbitration
proceedings by invoking the Arbitration Clause. Further, the petitioner is
not a Group Company of respondent no. 2. In this regard, reliance is
placed on the judgment of the Hon‘ble Supreme Court, in Cox and
Kings Ltd. v. SAP India Pvt. Ltd. and Another , 2023 SCC OnLine SC
1634, to state that the Hon‘ble Supreme Court has laid down the test and
requirements for treating an entity as a ‗group company‘, however in the
present petition, none of those parameters are satisfied. Despite the
absence of any common directors, promoters, or any such association
between the petitioner and respondent no. 2, the arbitrator erroneously
applied the ‗Group of Companies‘ doctrine to bring the petitioner within
the scope of arbitration.
21. The Arbitrator has failed to consider the categorical finding of the
auditor, who stated that no evidence was found to suggest that the
petitioner was a group company of the respondent no. 2. Additionally,
Digitally Signed
By:MAYANK
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the process and flow of the transactions for supply and services shows
that the payment of any outstanding to respondent no. 1 was to be done
by respondent no. 2.
22. In addition, after holding that the petitioner was a group company of the
respondent no. 2, Arbitrator erroneously went on to hold that the
petitioner was working as an agent of the respondent no. 2. It is stated
that in terms of section 230 of the Indian Contract Act, 1872, the agent
cannot be held to be personally liable and cannot be proceeded against
when the acts done were on the instructions of the principle.
23. It is further submitted that the claims and allegations in the Statement of
Claims filed by respondent no. 1 are solely directed against respondent
no. 2, with no specific allegation or averment made against the
petitioner. The alleged acts and omissions—such as changes in the
layout plan, encashment of bank guarantees, and delays—have all been
attributed to respondent no. 2 alone. In the absence of any pleading
against the petitioner and without any reasoning in the impugned award,
the petitioner cannot be held liable.
24. It is further stated that the petitioner was neither a party to any of the
correspondences related to the performance of the contract, nor did it
participate in any meetings concerning the same.
25. Further, the interest awarded at the rate of 38.85% under section 16 of
the MSMED Act could not have been granted as the benefit of section
16 is applicable only where arbitration is conducted institutionally under
section 18 of the MSMED Act. As the present arbitration is an ad hoc
proceeding, such a high rate of interest could not have been granted in
law.
Digitally Signed
By:MAYANK
Signing Date:01.05.2025
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26. As regards, the amount of 5,73,15,078 is concerned, it is stated that the
same is awarded without any evidence. In support of the said contention,
the petitioner submitted that during the course of arbitral proceedings,
the respondent no. 1 provided various invoices claiming certain
amounts, however the same were never approved by the petitioner.
Respondent no. 1 failed to submit any document, such as
acknowledgments or approvals from the petitioner, to support its claim.
Despite this, the awarded amount is based on the said invoices, without
questioning their validity or seeking corroborative evidence.
27. As of today, respondent no. 2 has been admitted to CIRP by order dated
02.01.2024 passed by the learned NCLT, Kolkata. Respondent no. 1
submitted its claim for the entire award amount, which was admitted by
the Resolution Professional on 01.05.2024.
SUBMISSIONS ON BEHALF OF RESPONDENT NO. 1
28. Per contra , it is stated that the present petition is not maintainable, as it
has been filed during the pendency of an earlier section 34 petition,
resulting in two section 34 petition(s) before the same Court challenging
the same Arbitral Award. The first section 34 petition filed by the
petitioner continues to remain pending in defect, with objections yet to
be removed even after a lapse of three years from its filing. In an attempt
to circumvent the limitation period and revive a time-barred challenge,
the petitioner has deliberately chosen to file a second petition under
section 34 of the 1996 Act.
29. Even otherwise, the impugned Award was passed on 16.10.2019, and
the present petition was filed only on 16.05.2022, after an inordinate
delay of approximately 1320 days. The statutory limitation period of 90
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days in filing the present petition expired on 14.01.2020, and even the
outer limit of 120 days as prescribed under section 34 (3) of 1996 Act,
lapsed on 13.02.2020. Since the delay far exceeds the maximum period
permissible under law, this Hon‘ble Court is barred from entertaining
the present petition. In this regard, the petitioner has blamed their
counsel(s) at every stage.
30. It is further stated that the petitioner in the present petition has raised
grounds that were never raised before the learned Arbitrator. In this
regard, reliance is placed upon the judgment passed by the Hon‘ble
Supreme Court in Union of Indiav. Susaka (P) Ltd and Others. 2017
SCC OnLine SC 1436 to state that no new legal or factual objections can
be raised for the first time under a petition filed under section 34, which
were never raised before the Arbitrator.
31. It is stated that the petitioner, having directly issued work and purchase
order(s) to the respondent no. 1, allowed the petitioner the right to levy
liquidated damages, which shows that the petitioner clearly acted with
full interest in the business transaction. It cannot now claim to be a mere
agent of the respondent no. 2. Reliance is placed on Tashi Delek
Gaming Solutions Ltd. and Another v. State of Karnataka and Others ,
(2006) 1 SCC 442, where the Hon‘ble Supreme Court held that an agent
with an interest in the contract can also be held liable.
32. It is stated thatwhile the petitioner takes the shelter of section 230 of the
Indian Contract Act, 1872, being the agent of respondent no. 2, the
petitioner has on the other hand admitted being an independent
contractor. Even otherwise, section 231 of the Indian Contract Act, 1872
presupposes the existence of an agency relationship, which is not the
case between the petitioner and respondent no. 2.
Digitally Signed
By:MAYANK
Signing Date:01.05.2025
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33. It is stated that the respondent no. 1 raised invoices against the work and
purchase orders issued by the petitioner against which payments were
made by the petitioner to respondent no. 1.
ANALYSIS AND CONCLUSION
34. I have heard the learned counsel for the parties and perused the material
and documents placed on record.
Scope of Section 34 of the 1996 Act
35. The courts in a catena of judgments have held that the jurisdiction of a
court under Section 34 of the 1996 Act, is narrowly circumscribed. The
provision does not envisage an appellate review of the arbitral award on
merits; rather, it permits judicial intervention only on limited and
specific grounds. These include incapacity of a party, invalidity of the
arbitration agreement, procedural irregularities, denial of a fair hearing,
and the award being in conflict with the public policy of India, inter alia.
The court is not empowered to reappreciate evidence or substitute its
own view for that of the arbitral tribunal. As consistently reiterated by
the Supreme Court, Section 34 embodies the principle of minimal
judicial interference, thereby preserving the finality and efficacy of
arbitral awards. In this regard, reliance is placed on the following
judgments passed by the Hon‘ble Supreme Court: (1) Associate
Builders v. Delhi Development Authority , (2015) 3 SCC 49; (2) Delhi
Airport Metro Express (P) Ltd. v. Delhi Metro Rail Corporation
Limited , (2022) 1 SCC 131; (3) Oil and Natural Gas Corporation Ltd.
v. Saw Pipes Ltd., (2003) 5 SCC 705; (4) McDermott International Inc.
v. Burn Standard Co. Ltd. and Others , (2006) 11 SCC 181; (5)
SsangYong Engineering and Construction Company Limited v.
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National Highways Authority of India (NHAI) (2019) 15 SCC 131 and
(6) Hindustan Zinc Ltd. v. Friends Coal Carbonisation (2006) 4 SCC
445.
36. Before proceeding further, it is pertinent to mention that the matter was
listed for clarification on 17.04.2025, wherein it was stated by the
petitioner that the petitioner had not filed any statement of defense
before the learned Arbitrator. In the absence of a statement of defense
filed before the learned Arbitrator, the statement(s) made by the
respondent no. 1 in its statement of Claim have not been traversed.
Keeping that in mind, I have to examine whether the impugned award
suffers from any infirmity as contemplated under section 34 of the 1996
Act.
37. The preliminary objection raised by respondent no. 1 is that this court
cannot entertain the present petition in light of another petition filed by
the petitioner under section 34 of the 1996 Act, pending in defects.
38. The objection of the respondent no. 1 is outrightly rejected. To my mind,
the earlier petition filed by the petitioner was nothing more than a mere
submission of a bundle of documents, without any effective steps being
taken to bring it before this Court for adjudication. The petition was
neither listed for hearing nor was any substantial action pursued by the
petitioner to have the matter entertained. At best it can be said that the
filing of the earlier petition was a non-est filing. However, no benefit of
limitation will accrue to the benefit of the petitioner from that filing.
39. It is a settled law that the courts ought not to be constrained by mere
technicalities when substantive justice is at stake. Procedural rules are
designed to aid the cause of justice, not to obstruct it. While such rules
ensure discipline and uniformity in litigation, they are not intended to
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defeat a legitimate claim or defense solely on the ground of a technical
lapse, particularly when no prejudice is caused to the other side. In this
regard, the Hon‘ble Full Bench of this Court vide judgment dated
07.02.2025 passed in FAO(OS)(COMM) 70/2024 titled Pragati
Construction Consultants v. Union of India andAnr. inter aliaheld as
under:
“95. In this regard, it needs no emphasis that procedural
defects cannot be allowed to triumph the substantive rights
of a party, particularly since in view of our aforesaid
observations, Section 34 of the A&C Act is the only remedy
for a party aggrieved by an Arbitral Award. The said right,
therefore, should not be negated on procedural
technicalities and hence, for describing an application
under Section 34 of the A&C Act as non-est, a more liberal
view in favour of the party filing the same should be taken.
Mere procedural errors or defects, thus, would not render
the filing of an application under the Section 34 of the A&C
Act to be treated as a non-est filing. Even in general law,
objections like the pleadings not being properly signed on
each and every page, or there being a defect in the affidavit,
or verification, are treated as procedural and curable
defects.Stand alone, therefore, they cannot be treated as
defects which would make an application filed under
Section 34 of the A&C Act to be declared as non-est. It is
only cumulatively, and that too only after the Court finds
that the above defects have been left by the petitioner while
filing the application under Section 34 of the A&C Act with
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a mala fide intent of only stopping the period of limitation
from running, without there being an actual initial intention
of having the application listed before the Court for
hearing, the Court may still find the application so filed to
be non-est. Needless to state, it would surely depend on the
facts and circumstances in each case; and there cannot be a
straight jacket formula to determine whether any of the
above-mentioned defects or combination thereof or how
many such defects would render an application filed under
Section 34 of the A&C Act to be declared as non-est.”
(emphasis supplied)
40. It is true that once a procedural right crystallizes into a vested legal right
in favour of a party, such as by way of limitation or waiver, the court is
required to recognize it. Yet, short of such vesting, procedural deviations
should not become a tool to thwart justice.
41. As regards the delay in filing the present petition, the arbitral award was
received by the petitioner on 13.01.2020 and the present petition came to
be filed on 16.05.2022. The period of limitation of 90 days under section
34 of the 1996 Act ended on 13.04.2020. However, in para 5 (iii) of the
Suo Motu Writ Petition (C) 3/2020 passed by the Hon‘ble Supreme
Court, it has been held that ― In cases where the limitation would have
expired during the period between 15.03.2020 till 28.02.2022,
notwithstanding the actual balance period of limitation remaining, all
persons shall have a limitation period of 90 days from 01.03.2022. In
the event the actual balance period of limitation remaining, with effect
from 01.03.2022 is greater than 90 days, that longer period shall
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apply”. Hence, the present petition is within the limitation period. The
present petition filed is within 90 days from 01.03.2022.
MSME Forum
42. At the outset, the plea taken by the petitioner is that the Arbitral Award
is liable to be set aside since the learned Arbitrator lacked the inherent
jurisdiction to entertain and adjudicate claims under the MSMED Act,
rendering the Impugned Award null and void in law. Further, section
18(3) of the MSMED Act mandates that disputes under the MSMED
Act must be referred to and resolved exclusively through the Facilitation
Council, which alone is empowered to act as an arbitrator itself or refer
the dispute to the adjudicating authority. Accordingly, any contractual
arbitration clause cannot override this statutory mechanism.
43. To my mind, the argument raised by the petitioner is misconceived. In
this regard, it is pertinent to mention section 18 of the MSMED Act
which reads as under:
“18. Reference to Micro and small Enterprises Facilitation
Council
(1) Notwithstanding anything contained in any other law for
the time being in force, any party to a dispute may, with
regard to any amount due under section 17, make a
reference to the Micro and Small Enterprises Facilitation
Council.
(2) On receipt of a reference under sub-section (1), the
Council shall either itself conduct conciliation in the matter
or seek the assistance of any institution or centre providing
alternate dispute resolution services by making a reference
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to such an institution or centre, for conducting conciliation
and the provisions of sections 65 to 81 of the Arbitration
and Conciliation Act, 1996 (26 of 1996) shall apply to such
a dispute as if the conciliation was initiated under Part III
of that Act.
(3) Where the conciliation initiated under sub-section (2) is
not successful and stands terminated without any settlement
between the parties, the Council shall either itself take up
the dispute for arbitration or refer it to any institution or
center providing alternate dispute resolution services for
such arbitration and the provisions of the Arbitration and
Conciliation Act, 1996 (26 of 1996) shall then apply to the
dispute as if the arbitration was in pursuance of an
arbitration agreement referred to in sub-section(1) of
section 7 of that Act.
(4) Notwithstanding anything contained in any other law for
the time being in force, the Micro and Small Enterprises
Facilitation Council or the center providing alternate
dispute resolution services shall have jurisdiction to act as
an Arbitrator or Conciliator under this section in a dispute
between the supplier located within its jurisdiction and a
buyer located anywhere in India.
(5) Every reference made under this section shall be
decided within a period of ninety days from the date of
making such a reference.”
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44. Section 18 of the MSMED Act provides that if there is an arbitration
agreement between the parties being Micro andSmall Enterprises, then
any of the party may under section 18 of MSMED Act approach the
Facilitation Council and thereafter the mechanism envisaged under
section 18 of MSMED Act will follow, however, in the present case, the
respondent no. 1 did not choose to approach the Micro and Small
Enterprises Facilitation Council under section 18(1) of MSMED Act and
hence, the mechanism envisaged under section 18 has not been triggered.
The provisions of Section 18 of MSMED Act will only be triggered if
the party, regardless of the arbitration clause, approaches the Micro and
Small Enterprises Facilitation Council under section 18 of MSMED Act.
45. Section 18 (1) of the MSMED Act uses the phrase that ― any party to a
dispute may…..make a reference to the Micro and Small Enterprises
Facilitation Council. ‖ The use of the word ―may‖ is significant and has
consistently been interpreted by courts to indicate a discretionary, rather
than a mandatory process. This means that although the Facilitation
Council offers a specialized forum for MSMEs, it is not the only forum
available. Parties are free to pursue remedies either under the arbitration
clause in their contract or under general law, without being bound to first
approach the Council. In this regard, the Hon‘ble Bombay High Court in
Porwal Sales v. Flame Control Industries , 2019 SCC OnLine Bom
1628 inter alia held as under:
“26. In the present case, it is not in dispute that the
respondent has so far not raised any claim against the
petitioner and the jurisdiction of the Felicitation Council
has not been invoked by either the respondent or the
petitioner. It thus cannot be accepted that the provisions of
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subsection (4) of Section 18 of MSMED Act are attracted in
any manner in the absence of any reference being made to
the Facilitation Council. When there are no proceedings
before the Facilitation Council, it is difficult to accept the
submission as urged on behalf of the respondents that
provisions of Section 18 of the MSMED Act are attracted in
the facts of the present case.
27. In any event, sub-section (4) of Section 18 cannot be
read as a provision creating an absolute bar to institution
of any proceedings other than as provided under section
18(1) of the MSMED Act, to seek appointment of an arbitral
tribunal. If the argument as advanced on behalf of the
respondent that Section 18(4) creates a legal bar on a party
who has a contract with a Small Scale Enterprise, to take
recourse to Section 11 under the Arbitration and
Conciliation Act, 1996 for appointment of an arbitrator,
then the legislation would have so expressly provided,
namely that in case one such party falls under the present
Act, the arbitration agreement, as entered between the
parties would not be of any effect and the parties would be
deemed to be governed under the MSMED Act in that
regard. However, subsection (4) of Section 18 of the
MSMED Act does not provide for such a blanket
consequence in the absence of any reference made by a
party to the Facilitation Council. Also if Section 18 is read
in the manner the respondent is insisting, it would lead to a
two-fold consequence - firstly, it would amount to reading
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something in the provision which the provision itself does
not provide, which would be doing a violence to the
language of the provision; secondly such interpretation in a
given situation would render meaningless an arbitration
agreement between the parties and it may create a situation
that the party who is not falling within the purview of
Section 17 and Section 18(1) would be foisted a remedy,
which the law does not actually prescribe. Further sub-
section (1) uses the word “may” in the context of a dispute
which may arise between the parties under Section 17. In
the present context, the word “may” as used in sub-section
(1) of Section 18 cannot be read to mean “shall” making it
mandatory for a person who is not a supplier (like the
petitioner) to invoke the jurisdiction of the Facilitation
Council. Thus, the interpretation of sub-section (4) of
Section 18 as urged on behalf of the respondent of creating
a legal bar against the petitioner to file a petition under
section 11 of the Arbitration and Conciliation Act cannot be
accepted.”
(emphasis supplied)
46. The act of respondent no. 1 choosing to file a petition under section 11 of
the 1996 Act, instead of approaching the Micro and Small Enterprises
Facilitation Council under section 18 of the MSMED Act, cannot per se
be termed as legally incorrect or impermissible. This is because the
scheme of the MSMED Act does not render the mechanism under
Section 18 mandatory or exclusive. Rather, it offers an additional and
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beneficial forum for registered micro or small enterprises to resolve their
disputes though the Facilitation Council, at their discretion.
47. Therefore, it cannot be said that the appointed arbitrator lacked inherent
jurisdiction to adjudicate the disputes between the parties.
On Merits
48. In the arbitral proceedings, the respondent no. 1 had raised a total of 12
claims in its statement of claim(s), out of which, only two—being, Claim
No. 1 i.e. towards the outstanding payment payable to respondent no. 1
and Claim No. 4 i.e. towards the cost incurred by the respondent no. 1 in
keeping the Bank Guarantees alivehas been allowed. While allowing
Claim No. 1, as regards the petitioner, the learned Arbitrator was of the
view that the petitioner, though not a signatory to the arbitration
agreement, was nonetheless bound by it under the ‗Group of Companies‘
doctrine on the ground that it is a group company of respondent no. 2. In
addition, the Arbitrator observed that the petitioner acted like an agent of
respondent no. 2 in the underlying transactions (appointed for the
purpose of approving the invoices at the behest of the Respondent no. 2).
Based on these findings, the Arbitrator held that petitioner was jointly
and severally liable, along with respondent no. 2, for the awarded
amount. In this regard, relevant findings of the Arbitrator are as under:
“65. It is evident that it was the Respondent no.1 who had
directed the Claimant to deal with the Respondent no.2 for
the purpose of approval of the invoices and the Claimant
dealt with the Respondent no 2. pursuant to such directive.
In fact the Respondent no.2 was only an agent of the
Respondent no.1, appointed for the purposes of checking
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invoices and clearing them. Accordingly, the Respondent
no.1 must bear responsibility for the Respondent no.2‟s
actions particularly when the Respondent no.2 was
appointed for the purpose of approving the invoices at the
behest of the Respondent no.1 and consequently the invoices
approved by the Respondent no.2 bind the Respondent no.1
and it is responsible for such payment. Besides, the above,
the office address of the Respondent no.1 and 2 is the same,
which establishes without doubt that the Respondents are
group companies. Since the Respondent no.2 at the instance
of the Respondent no.1 started dealing with the Claimant
for the clearance of invoices, it is evident that the present
dispute is covered by the above judgment m Mahanagar
Telephone Nigam.
In Mahanagar Telephone Nigam v. Canara Bank (2019 (10)
SCALE 619), the Hon'ble Supreme Court held that a party
who is not a signatory to the arbitration agreement can be
bound by an arbitration agreement and subject to the
arbitration proceedings under the 'group of companies'
doctrine where the conduct of the parties show the intention
of tile parties to bind the non-signatory party as well. The
court held that this doctrine would apply particularly when
the funds of one company are used to financially support
other companies of the same group.”
49. Further, as regards the claim no. 4, the arbitrator was of the view that the
contract between the parties was extended for a period of 14 months plus
1 month of grace period and due to the change in plan and scope of work
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by the Respondent no.2 as a result of which the respondent no. 1 had to
incur extra cost in keeping the bank guarantees alive. The operative
portion reads as under:
“75. In the absence of relevant bank statements, the
Financial Expert was unable to comment upon the
utilization of advances directly. However, the Financial
Expert has relied upon the financial ledgers provided by the
Claimant and noted that the entire amount of advance has
been utilized by the Claimant on the project The said
adjustment has been depicted on the face of every invoice
and settled in each invoice as evident from the supporting
vouchers. The date wise utilization is as under:
S.
No.
Date of
Receipt
Advance
Remarks Utilization Utilization Remarks Date
received
10% received of Rs.
41.90 crores on
Utilized towards
invoices raised on
Shristi for supplies
08.02.1
1.
4,19,00
1,45,59,
submission of
Advance bank
31.03.15
4
000
190
guarantee
Utilized towards
invoices raised on
Shristi for supplies
10% received of Rs.
08.02.1
2.
45,00,00
1,52,77,
4.5 crores Advance
30.09.15
4
0
170
bank guarantee
from 2015-16
Utilized towards
invoices raised on
Shristi for supplies
5% received of Rs.
27.08.1
3.
25,04,77
41.90 crores
performance
90,79,382
31.03.16
4
7
for sale invoices
01.10.2015-
31.03.2016
Transferred to
Shristi services
11.11.1
4.
30,00,00
5% received of Rs.
13,57,617
41.90 crores
account for
utilization towards
31.03.16
4
0
services
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Being 10% advance
Rs. 905078 and 5%
09.12.1
5.
1,04,40,4
5% received of Rs.
Rs/ 452539
recovered from
services bills during
13,57,617
41.90 crores
31.03.16
4
46
15-16
Utilized towards
invoices raised on
Shristi for supplies
for invoices during
24.12.1
6.
50,04,77
5% received of Rs.
2,90,53,07
31.01.17
4
7
41.90 crores
1
2016-17
Utilized towards
invoices raised on
Shristi for services
raised during 2016-
5% of contract price
25.04.1
7.
25,28,10
of Rs. 4.50 crores
19,09,287
31.03.17
5
0
plus Service tax
17
Tot
6,98,78,1
al
6,98,78,10
00 0
The Financial Expert has also noted that the payment of
advance has been secured against bank guarantees of Rs.
6.98 crores and the last such renewal was valid up to
15.04.2019. The Financial Expert has noted that though the
advances have been provided by the Respondent no. 1, their
utilization/adjustments, have been carried out on the face of
the invoices raised on the Respondent no.2. From the
review of financial ledger, it appears that none of the
advances has been utilized for payment to sub-vendors.
In my view, the claim towards bank guarantees is being
allowed in favour of the Claimant as detailed below.
However the said sum of Rs. 6.98 Crores has already been
adjusted in the figure of Rs. 5, 73,15,078/- found due from
the Respondent no.2.
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It has been proved by the Claimant that the contract
between the parties was extended beyond the original 14
months plus 1 month grace period due to the change in plan
and scope of work by the Respondent no.1 as a result of
which the Claimant had to incur extra cost in keeping the
bank guarantees alive. Thus, the Claimant's claim for Rs.
83,69,904/- towards cost incurred by the Claimant for
keeping the bank guarantees alive during the extended
period is being allowed in favour of the Claimant as per the
documents placed on record by the Claimant.”
50. In the present case, the petitioner has primarily challenged the impugned
Award under the following heads:
I. Group of Companies Doctrine
51. It is contended that the petitioner was not a signatory to the agreement
containing the arbitration clause and thus lacked any privity of contract
with the respondent(s). Further, the petitioner was wrongly impleaded in
the arbitral proceedings despite there being no basis to invoke the ‗Group
of Companies‘doctrine, especially in the absence of any corporate,
managerial, or functional nexus with respondent no. 2.
52. I find no merit in the said submission of the petitioner.
53. The law is well settled regarding the ‗Group of Companies‘ doctrine.
The Hon‘ble Supreme Court in Cox and Kings Ltd. v. SAP India Pvt.
Ltd ., 2023 SCC OnLine SC 1634, observed that if a non-signatory party
actively participates in the execution of a contract and its actions are
consistent with those of other members of the group, it may create the
impression that the non-signatory is effectively a party to the contract,
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including the arbitration agreement. Based on this perception, the other
party may reasonably conclude that the non-signatory is indeed a
legitimate party to the contract, thereby binding it to the arbitration
agreement. The operative portion reads as under:
“96. An arbitration agreement encapsulates the commercial
understanding of business entities as regards to the mode
and manner of settlement of disputes that may arise between
them in respect of their legal relationship. In most
situations, the language of the contract is only suggestive of
the intention of the signatories to such contract and not the
non-signatories. However, there may arise situations where
a person or entity may not sign an arbitration agreement,
yet give the appearance of being a veritable party to such
arbitration agreement due to their legal relationship with
the signatory parties and involvement in the performance of
the underlying contract. Especially in cases involving
complex transactions involving multiple parties and
contracts, a non-signatory may be substantially involved in
the negotiation or performance of the contractual
obligations without formally consenting to be bound by the
ensuing burdens, including arbitration.
…..
123. The participation of the non-signatory in the
performance of the underlying contract is the most
important factor to be considered by the Courts and
tribunals. The conduct of the non- signatory parties is an
indicator of the intention of the non- signatory to be bound
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by the arbitration agreement. The intention of the parties to
be bound by an arbitration agreement can be gauged from
the circumstances that surround the participation of the
non-signatory party in the negotiation, performance, and
termination of the underlying contract containing such
agreement. The UNIDROIT Principle of International
Commercial Contract, 2016 [UNIDROIT Principles of
International Commercial Contracts, 2016, Article 4.3.]
provides that the subjective intention of the parties could be
ascertained by having regard to the following
circumstances:
(a) preliminary negotiations between the parties;
(b) practices which the parties have established between
themselves;
(c) the conduct of the parties subsequent to the conclusion
of the contract; (d) the nature and purpose of the contract;
(e) the meaning commonly given to terms and expressions
in the trade concerned; and
(f) usages.
…..
127.…. [T]he Courts or tribunals should closely evaluate
the overall conduct and involvement of the non-signatory
party in the performance of the contract. The nature or
standard of involvement of the non-signatory in the
performance of the contract should be such that the non-
signatory has actively assumed obligations or performance
upon itself under the contract. In other words, the test is to
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determine whether the non- signatory has a positive, direct,
and substantial involvement in the negotiation,
performance, or termination of the contract. Mere
incidental involvement in the negotiation or performance of
the contract is not sufficient to infer the consent of the non-
signatory to be bound by the underlying contract or its
arbitration agreement. The burden is on the party seeking
joinder of the non-signatory to the arbitration agreement to
prove a conscious and deliberate conduct of involvement of
the non- signatory based on objective evidence.
…..
132. We are of the opinion that there is a need to seek a
balance between the consensual nature of arbitration and
the modern commercial reality where a non-signatory
becomes implicated in a commercial transaction in a
number of different ways. Such a balance can be adequately
achieved if the factors laid down under Discovery
Enterprises [ONGC Ltd. v. Discovery Enterprises (P) Ltd.,
(2022) 8 SCC 42 : (2022) 4 SCC (Civ) 80] are applied
holistically. For instance, the involvement of the non-
signatory in the performance of the underlying contract in a
manner that suggests that it intended to be bound by the
contract containing the arbitration agreement is an
important aspect. Other factors such as the composite
nature of transaction and commonality of subject-matter
would suggest that the claims against the non-signatory
were strongly interlinked with the subject-matter of the
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tribunal‟s jurisdiction. Looking at the factors holistically, it
could be inferred that the non-signatories, by virtue of their
relationship with the signatory parties and active
involvement in the performance of commercial obligations
which are intricately linked to the subject-matter, are not
actually strangers to the dispute between the signatory
parties.
…..
H. Conclusions
170. In view of the discussion above, we arrive at the
following conclusions:
170.1. The definition of “parties” under Section 2(1)(h)
read with Section 7 of the Arbitration Act includes both the
signatory as well as non-signatory parties;
170.2. Conduct of the non-signatory parties could be an
indicator of their consent to be bound by the arbitration
agreement;
170.3. The requirement of a written arbitration agreement
under Section 7 does not exclude the possibility of binding
non- signatory parties;”
(emphasis supplied)
54. Thus, whether the arbitrator has rightly invoked the ‗Group of
Companies‘ doctrine is to be seen from factors such as mutual intent,
relationship between the signatories and non-signatories, commonality of
subject matter, composite nature of transactions and performance of the
contract.
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55. In the present case, the arbitration clause is encapsulated in the General
Terms and Conditions in consonance with the agreement executed
between the respondent nos. 1, 2 and BFIL, in the year 2012. The
petitioner was not a party to the said contract and the petitioner only
became a party in the year 2013 by way of Letter(s) of Intent dated
10.12.2013 issued by the BFIL for the purpose of design, manufacturing,
and commissioning of equipment for the complete project on behalf of
respondent no. 2. As per the contract executed between the BFIL and the
petitioner, the petitioner was to conduct a reliability test of equipment
and items for complete Coal Handling System Package. In addition, the
petitioner was also appointed for the purposes of checking invoices and
clearing them (Ref. Para 65 of the Impugned Award). Thereafter, BFIL
exited the said contract and assigned all its rights, liabilities, and
obligations in favor of respondent no. 2 by way of the Tripartite
Agreement dated 06.06.2014. It is an admitted position that BFIL was
appointed as an EPC Contractor by the respondent no. 2. Since, BFIL
exited the project, the rights and liabilities of the BFIL was transferred in
favor of the petitioner by way of Supply Contract dated 03.07.2015.
56. Admittedly, the role of the petitioner was to issue purchase and work
order(s) to respondent no. 1 and also to check the invoices raised by
respondent no. 1 and thereafter, recommending payments of the invoices
raised to the respondent no. 2. The petitioner played a pivotal role in the
overall execution of the project, even though it was not originally a party
to the contract(s) between respondent nos. 1, 2, and BFIL. The petitioner
was responsible for issuing the purchase and work orders that formed the
basis for the invoices raised by the involved parties. Following this, the
petitioner reviewed and verified the invoices to ensure their
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completeness. Only after the petitioner‘s clearance of these invoices did
respondent no. 2 proceed with the release of payments to respondent no.
1. In my view, considering the role, obligations and responsibilities of
the petitioner, the petitioner is indeed a veritable party to the contract(s).
On this basis, the learned arbitrator has rightly concluded that the
petitioner is a group company of respondent no. 2. Therefore, I find no
infirmity in the said finding.
57. The petitioner had the opportunity to file a written statement and lead
evidence to demonstrate that it was not a veritable party to the contract
and had no active role in the performance of the contractual obligations.
However, the petitioner chose not to file any evidence or defense during
the arbitral proceedings. Having failed to do so, the petitioner cannot
now be permitted to raise these issues for the first time in a petition
under Section 34 of the 1996 Act.
II. Allegation(s) only against Respondent No. 1
58. As regards the contention raised by the petitioner that the claims of
respondent no. 1 were solely against respondent no. 2, I am of the view
that the learned arbitrator has rightly invoked the ‗Group of Companies‘
doctrine to fasten liability upon the petitioner as well. The arbitrator,
after appreciating the material on record and the conduct of the parties,
has correctly concluded that the petitioner, though not a signatory to the
arbitration agreement, was closely involved in the negotiation and
performance of the underlying contract.
59. The petitioner did not avail the opportunity to rebut the presumption
arising from the application of the ‗Group of Companies‘ doctrine by
participating in the arbitral proceedings. In such circumstances, the
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petitioner cannot be permitted to raise, for the first time, factual disputes
or contest the arbitrator's findings at the stage of proceedings under
section 34 of the 1996 Act.
III. Agent
60. Another line of contention that has been raised by the petitioner is that
the Arbitrator after determining that the petitioner is a group company of
respondent no. 2, went on to hold that the petitioner was acting as an
agent of respondent no. 2. Therefore, the petitioner cannot be held liable
for the amount(s) under the impugned award as in light of section 230 of
the Indian Contract Act, 1872, the petitioner (agent) cannot be held liable
for the acts of its principle.
61. I am unable to accept the said submission.
62. The argument of the petitioner is only in the alternative and is based on
mis reading of para 65 of the impugned award. A plain reading of para
65 of the impugned award makes it evident that the arbitrator has not
imposed liability on the petitioner on the ground that it was acting as an
agent of respondent no. 2. Since no liability has been fastened on the
petitioner on the ground of it being an agent, the reliance on section 230
of the Indian contract Act is misconceived. Rather, the arbitrator has
fastened liability on the petitioner by invoking the ‗Group of Companies‘
doctrine. The ‗Group of Companies‘ doctrine finding is a finding of fact
based on the pleading(s) and the argument(s) made before the arbitral
tribunal. In the absence of any material brought by the petitioner to show
otherwise, this court cannot interfere in the arbitral award. Additionally,
my attention has been drawn to the clause 5.3 of the Tripartite
Agreement dated 06.06.2014, executed between the petitioner,
respondent no. 2 and BFIL, whereby BFIL assigned all its rights,
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liabilities, and obligations in favor of respondent no. 2. Clause 5.3 of the
Tripartite Agreement reads as under:
― 5.3 No Partnership: No Party shall act as agent of the
other Party or have any authority to act for or to bind the
other party. ‖
63. Pursuant to the Tripartite Agreement, being executed between the
parties, the petitioner became the EPC Contractor, responsible for the
overall execution of the project, which was formally done by way of the
Supply Contract dated 03.07.2015.
64. Even otherwise, I am of the view that the issues raised by the petitioner
in the present proceedings are purely factual and pertain to the merits of
the dispute. Such issues fall squarely within the domain of the arbitral
tribunal and cannot be reagitated at the stage of a Section 34. It is evident
that the grounds raised in the present petition were neither urged nor
argued before the learned arbitrator. In this regard, the Hon‘ble Supreme
Court in MMTC Ltd. v. M/s. Vedanta Ltd 2019 SCC OnLine SC 220
inter alia held as under:
“11. As far as Section 34 is concerned, the position is well-
settled by now that the Court does not sit in appeal over the
arbitral award and may interfere on merits on the limited
ground provided under Section 34(2)(b)(ii) i.e. if the award
is against the public policy of India. As per the legal
position clarified through decisions of this Court prior to
the amendments to the 1996 Act in 2015, a violation of
Indian public policy, in turn, includes a violation of the
fundamental policy of Indian law, a violation of the interest
of India, conflict with justice or morality, and the existence
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of patent illegality in the arbitral award. Additionally, the
concept of the “fundamental policy of Indian law” would
cover compliance with statutes and judicial precedents,
adopting a judicial approach, compliance with the
principles of natural justice, and Wednesbury [Associated
Provincial Picture Houses v. WednesburyCorpn., (1948) 1
KB 223 (CA)] reasonableness. Furthermore, “patent
illegality” itself has been held to mean contravention of the
substantive law of India, contravention of the 1996 Act, and
contravention of the terms of the contract.
12. It is only if one of these conditions is met that the Court
may interfere with an arbitral award in terms of Section
34(2)(b)(ii), but such interference does not entail a review
of the merits of the dispute, and is limited to situations
where the findings of the arbitrator are arbitrary,
capricious or perverse, or when the conscience of the Court
is shocked, or when the illegality is not trivial but goes to
the root of the matter. An arbitral award may not be
interfered with if the view taken by the arbitrator is a
possible view based on facts. (See Associate Builders v.
DDA [Associate Builders v. DDA, (2015) 3 SCC 49 : (2015)
2 SCC (Civ) 204] . Also see ONGC Ltd. v. Saw Pipes Ltd.
[ONGC Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705];
Hindustan Zinc Ltd. v. Friends Coal Carbonisation
[Hindustan Zinc Ltd. v. Friends Coal Carbonisation, (2006)
4 SCC 445] ; and McDermott International Inc. v. Burn
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Standard Co. Ltd. [McDermott International Inc. v. Burn
Standard Co. Ltd., (2006) 11 SCC 181])”
(emphasis supplied)
65. Following the law laid down by the Hon‘ble Supreme Court in MMTC
Ltd. (supra), a Hon‘ble Division Bench of the Bombay High Court in
Azizur Rehman Gulam and Others v. Radio Restaurant and Others
2023 SCC OnLine Bom 2320 inter aliaheld as under:
“27….
B. Additionally, we must note that every ground of
challenge to the Arbitral Award in the present Appeal was
neither raised as a ground of defense before the Arbitral
Tribunal nor was taken as a ground of challenge to the
Arbitral Award in the Petition filed under Section 34. The
Hon'ble Supreme Court in the case of MMTC Ltd. v.
Vedanta Ltd.44 has specifically held as follows, viz.
“14. As far as interference with an order made under
Section 34, as per Section 37, is concerned, it cannot be
disputed that such interference under Section 37 cannot
travel beyond the restrictions laid down under Section
34. In other words, the Court cannot undertake an
independent assessment of the merits of the award and
must only ascertain that the exercise of power by the
Court under Section 34 has not exceeded the scope of
the provision. Thus, it is evident that in case an arbitral
award has been confirmed by the Court under Section 34
and by the Court in an appeal under Section 37, this
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Court must be extremely cautious and slow to disturb
such concurrent findings.”
28. What the Appellants have therefore sought to do in the
present Appeal is to effectively challenge the Arbitral
Award afresh on grounds never taken before. We find that
such a course of arguments, apart from being in the teeth of
the law laid down by the Hon'ble Supreme Court in the case
of MMTC Ltd. (Supra), if allowed, would infact unsettle the
entire scheme of Chapters VII, VIII and IX of the
Arbitration Act. Thus, equally on this ground alone, the
present Appeal must also fail.”
66. Further, the reliance placed by the respondent no. 1 on the judgment of
the Hon‘ble Supreme Court in Union of India (Railways) (supra) is well
placed where the Hon‘ble Supreme inter alia held as under:
“27. If a plea is available, whether on facts or law, it has to
be raised by the party at an appropriate stage in
accordance with law. If not raised or/and given up with
consent, the party would be precluded from raising such
plea at a later stage of the proceedings on the principle of
waiver. If permitted to raise, it causes prejudice to other
party. In our opinion, this principle applies to this case.”
(emphasis supplied)
67. To my mind, the arbitrator was never given the opportunity to consider
or adjudicate upon the defense of the petitioner as the petitioner did not
appear before the arbitral tribunal after the fifth hearing that has been
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duly recorded in para 66 of the impugned award. Para 66 of the
impugned award reads as under:
“66. Inexplicably the Respondent no.2 stopped appearing
th
before the Tribunal from the 5 hearing, dated 23.01.2018,
and the averments qua the Respondent no. 2 have remained
unanswered by both the respondents. The Respondent no.2
sent no communications to the Tribunal as to why it stopped
appearing. Thus, it is evident that the Respondent no.2‟s
absence is motivated and deliberate. Consequently, the
unrebutted averments and evidence adduced by the
Claimant qua the Respondent no.2 stands proved and the
Respondent no.2 is liable to pay the Claimant a sum of Rs.
5,73,15,078 as per report of the Financial Expert.”
68. Permitting the petitioner to raise such contentions for the first time in
these proceedings would amount to bypassing the arbitral process and
scuttling the very object and efficacy of arbitration. The petitioner,
having chosen not to raise these issues before the arbitrator, cannot now
be permitted to turn around and challenge the award on grounds that
were never part of the arbitral record. Additionally, none of the issues
are such that can hit at the root of the arbitral award.
IV. Interest
69. As regards, the interest component is concerned, the argument advanced
by the petitioner is that the award of interest at the rate of 38.85% under
section 16 of the MSMED Act is legally unsustainable, as the arbitration
was not conducted under section 18 of the MSMED Act. Since the
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arbitration was ad hoc, the benefit of interest under section 16 does not
apply.
70. I am unable to accept the said submission of the petitioner.
71. Section 16 of the MSMED Act is relevant and the same reads as under:
“Section 16 - Date from which and rate at which interest is
payable.
Where any buyer fails to make payment of the amount to the
supplier, as required under section 15, the buyer shall,
notwithstanding anything contained in any agreement
between the buyer and the supplier or in any law for the
time being in force, be liable to pay compound interest with
monthly rests to the supplier on that amount from the
appointed day or, as the case may be, from the date
immediately following the date agreed upon, at three times
of the bank rate notified by the Reserve Bank.”
72. In this regard, a coordinate bench of this court has already taken a view
in Indian Highways Management Company Limited vs SOWiL Limited
2021 SCC OnLine Del 5523 and the same is being reproduced below:
“29. …. Section 16 of the MSMED Act provides for payment
of interest on the amounts due to a supplier where the buyer
has failed to pay the amounts as required under Section 15
of the MSMED Act. Undisputedly, the buyer's obligation to
discharge its liability under Section 15 of the MSMED Act
and to pay interest under Section 16 of the MSMED Act
confers the right on “the supplier” to demand and recover
the said amount…..
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……
34. It is apparent from the above that the provisions of
Sections 15 and 16 of the MSMED Act confer substantive
rights and impose obligations, which are not contingent
upon recourse to any dispute resolution mechanism. Section
18 of the MSMED Act provides for a dispute resolution
mechanism in respect of any amount due under Section 17
of the MSMED Act. It is obvious that it may not be
necessary for a supplier to seek recourse to any proceedings
for recovery of the amounts that may be otherwise due to it,
if the buyer complies with its obligation under Sections 15
and 16 of the MSMED Act.
35. The import of the contentions advanced on behalf of
IHMCL is that the obligations of the buyer under Sections
15 and 16 of the MSMED Act are contingent upon the
supplier resorting to conciliation or the adjudicatory
process under Section 18 of the MSMED Act. The plain
language of Sections 15,16 and 17 of the MSMED Act, does
not support this proposition.
……
39…..During the course of submissions, it was contended on
behalf of the respondent that an award for interest under
Section 16 of the MSMED Act could be made in proceedings
under Section 18 of the MSMED Act but not by an Arbitral
Tribunal appointed in terms of the A&C Act. In such cases,
the Arbitral Tribunal was required to award reasonable
interest under Section 31(7)(a) of the A&C Act. This Court
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finds it difficult to accept this contention as it overlooks the
express provisions of Section 18(3) of the MSMED Act. The
provisions of the A&C Act are specifically applicable as
they would be in case of arbitration pursuant to an
arbitration agreement under Section 7(1) of the A&C Act.
However, in case of repugnancy between the provisions of
the A&C Act and the MSMED Act, the provisions of the
MSMED would prevail.
40. It is also relevant to refer to the decision in Snehadeep
Structures (P) Ltd. v. Maharashtra Small-Scale Industries
Development Corpn. Ltd. [Snehadeep Structures (P) Ltd. v.
Maharashtra Small Scale Industries Development
Corporation Ltd., (2010) 3 SCC 34 : (2010) 1 SCC (Civ)
603] The said case was rendered in the context of Interest
on Delayed Payments to Small Scale and Ancillary
Undertakings Act, 1993. In that case, the court held that
Interest on Delayed Payments to Small Scale and Ancillary
Undertakings Act, 1993 (referred to as the “Interest Act” in
short by the court) was a special legislation vis-à-vis to any
other legislation including the A&C Act and the contention
that the payment of interest would be governed by Section
31(7)(a) of the A&C Act, was rejected as erroneous. The
relevant extract of the said decision is set out below:
37. According to the learned counsel for the
respondent Corporation, the Arbitration Act treats
„appeals‟ and „applications‟ separately under two
distinct chapters: Chapters VII and IX respectively.
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It was also strenuously contended by the learned
counsel for the respondent that the Arbitration Act
contains specific provisions for awarding interest
and that Act being a special enactment will prevail
over the Interest Act. He relied on Jay Engg. Works
Ltd. v. Industry Facilitation Council [Jay Engg.
Works Ltd. v. Industry Facilitation Council, (2006) 8
SCC 677] to show that against the provisions of the
Interest Act, the provisions of Arbitration Act will
prevail, as the latter is a complete code in itself. The
Interest Act will apply only when the party prefers a
suit to arbitration.
38. The Preamble of the Interest Act sows that the
very objective of the Act was „to provide for and
regulate the payment of interest on delayed
payments to small-scale and ancillary industrial
undertakings and for matters connected therewith or
incidental thereto.‟ Thus, as far as interest on
delayed payment to small-scale industries as well as
connected matters are concerned, the Act is a
special legislation with respect to any other
legislation, including the Arbitration Act. The
contention of the respondent that the matter of
interest payment will be governed by Section 31(7)
of the Arbitration Act, hence, is erroneous. Section 4
of the Interest Act endorses the same which sets out
the liability of the buyer to pay interest to the
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supplier „notwithstanding anything contained in any
agreement between the buyer and the supplier or in
any law for the time being in force‟. Thus, the
Interest Act is a special legislation as far as the
liability to pay interest, or to make a deposit thereof,
while challenging an award/decree/order granting
interest is concerned.”
(emphasis supplied)
73. A perusal of the above judgment shows that section 15 and 16 are
substantive rights and are independent of section 18. In order to attract
the rigors of section 15 and 16, it need not be that dispute redressal
mechanism as provided under section 18 of the MSMED Act be
initiated. Interest as contemplated under section 16 can be granted under
ad-hoc arbitration.
74. To my mind, the purpose of section 16 is to encourage timely payment(s)
to medium and small-scale industries as their success/failure depends
upon timely payment(s). Hence the high rate of interest contemplated
under section 16 of the MSMED Act is a deterrent to prevent non-
payment of the dues to micro and small industries.
75. In this regard, point nos. (f) and (k) of the statement of objects and
reasons of the MSMED Act are relevant and the same reads as under:
“(f.) make provisions for ensuring timely and smooth flow
of credit to small and medium enterprises to minimise the
incidence of sickness among and enhancing the
competitiveness of such enterprises, in accordance with the
guidelines or instructions of the Reserve Bank of India;
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….
(k.) make further improvements in the Interest on Delayed
Payments to Small Scale and Ancillary Industrial
Undertakings Act, 1993 and making that enactment a part
of the proposed legislation and to repeal that enactment.”
76. A perusal of the said statement and object shows the basis/genesis for the
high interest rate as contemplated under section 16.
77. Hence, the challenge to the interest is without merit and the same is
rejected.
78. Consequently, I find no infirmity in the impugned Award dated
16.10.2019 and the same is upheld.
79. The present petition, along with any pending application(s), if any are
dismissed.
JASMEET SINGH, J
MAY 01, 2025 / priyesh
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