The Delhi High Court, in a recent judgment, ruled that if the Facilitation Council under the Micro, Small, and Medium Enterprises Development Act, 2006 (MSMED Act) fails to initiate mediation under Section 18, the court has the authority to appoint an arbitrator under Section 11(6) of the Arbitration and Conciliation Act, 1996 (Arbitration Act). Justice Jasmeet Singh delivered this verdict in the case of M/S Vallabh Corporation v. SMS India Pvt. Ltd.
Background of the Case
The dispute originated when the respondent, SMS India Pvt. Ltd., issued a Letter of Intent for civil and associated work for constructing the New Flash Butt Weld Engineering Workshop at Sabarmati. The revised Letter of Intent was issued on November 14, 2018. Subsequently, on August 6, 2023, the petitioner, M/S Vallabh Corporation, requested the respondent to release outstanding payments amounting to Rs. 37,20,31,671 under both the Purchase Order and Service Order. Attempts at resolution failed, prompting the petitioner to invoke arbitration on February 29, 2024. The petitioner suggested five names for the Sole Arbitrator, but the respondent did not respond.
Petitioner's Argument
The petitioner contended that the mediation process under Section 18 of the MSME Act had already been attempted but failed. Since the Facilitation Council did not take further steps, the petitioner was left with no choice but to approach the court under Section 11(6) of the Arbitration Act. The petitioner relied on the precedent set in Microvision Technologies (P) Ltd. v. Union of India, 2023.
Respondent's Counterarguments
The respondent argued that the petitioner had the option to either approach the court under Section 11 of the Arbitration Act or continue with the MSME Act process. It contended that once a petitioner initiates proceedings under the MSME Act, it must be taken to completion. The respondent further claimed that the petitioner had not made adequate follow-ups after referring the matter to the Facilitation Council.
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Court's Observations
Justice Jasmeet Singh examined Section 18 of the MSME Act, which states that upon receiving a reference, the Facilitation Council must either mediate the dispute or refer it to a mediation service provider under the Mediation Act, 2023. If mediation is unsuccessful, the Council must either arbitrate the dispute itself or refer it to an alternative dispute resolution institution.
The Supreme Court, in Gujarat State Civil Supplies Corpn. Ltd. v. Mahakali Foods (P) Ltd., (2023), ruled that the MSME Act overrides the Arbitration Act to ensure timely payments to micro and small enterprises. However, the Supreme Court also recognized that the Arbitration Act is not inconsistent with the MSME Act and can be applied when the Facilitation Council fails to act.
Key Takeaways from the Judgment
- The petitioner contacted the MSME Facilitation Council on May 16, 2024, for mediation under Section 18 of the MSME Act. However, the Council did not respond by July 16, 2024, or thereafter.
- The Delhi High Court Mediation and Conciliation Centre attempted mediation on January 27, 2025, but failed.
- Given the Council’s inaction, the court ruled in favor of appointing an arbitrator under Section 11(6) of the Arbitration Act.
Final Decision
The court allowed the petition and appointed Justice Rekha Palli (Retd.) as the Sole Arbitrator. The arbitration proceedings will be conducted under the aegis of the Delhi International Arbitration Centre (DIAC), and the arbitrator’s fees will follow DIAC’s 2018 fee structure. The arbitrator must submit a declaration under Section 12 of the Arbitration Act before proceeding.
The court emphasized that all claims, counterclaims, and objections regarding arbitrability would be determined by the arbitrator. The parties must approach the arbitrator within two weeks of the ruling.
Case Title: M/S VALLABH CORPORATION versus SMS INDIA PVT LTD
Case Number:ARB.P. 1119/2024
Judgment Date: 17/03/2025
For Petitioner: Mr. Ramesh Singh, Sr. Adv. with Ms. Monisha Nanda, Mr. Rajul Shrivastav, Advs.
For Respondent: Mr. Sujoy Datta, Mr. Surekh Kani Baxy, Mr. Aarsheya Sharda, Advs.
