M/S. Silpi Industries & ors. v. Kerala State Road Transport Corporation & ors.

Facts of the case

In the present case, several appeals before the Supreme Court were heard together owing to the common issues arising from the appeals.

In the first set of appeals (Civil Appeal Nos. 1570-1578 of 2021), the Appellants were given purchase orders to supply thread rubber for tyre rebuilding in pursuance of the tender invited by the Respondent no.1, Kerala State Road Transport Corporation. According to the terms agreed by the parties, the Appellants were to receive 90% of the total purchase price on the supply of materials while the remaining 10% was to be paid by the Respondents based on the final performance report. The Appellants alleged that the Respondent illegally refused the payment of the 10% balance amount, and hence, they approached the Industrial Facilitation Council under the Micro, Small, and Medium Enterprises Development Act, 2006 (MSMED) for the purpose of conciliation. Since conciliation was rendered unsuccessful, the Appellants thereafter referred their claims to arbitration under the Arbitration and Conciliation Act, 1996, where the award was rendered in favor of the Appellants. The Respondents initially referred an application for setting aside of the award under Section 34 of the Arbitration and Conciliation Act, and when the application was dismissed, they filed an appeal before the High Court of Kerala. The High Court allowed the appeal and upheld the maintainability of the counter claims made by the Respondent. The Appellants referred an appeal against this decision of the High Court.

In the second set of appeals (Civil Appeal Nos. 1620-1622 of 2021), the contract entered between the Appellant and Respondent stipulated the supply and installation of hydro-mechanical equipment. The Appellant had filed a Claim Petition before the Micro and Small Enterprises Facilitation Council constituted under the MSMED Act, alleging that the Respondent refused to tender payment despite the completion of the contract on the part of the Appellant. The Respondent, thereafter, filed an application before the Madras High Court under Section 11(6) of the Arbitration and Conciliation Act for the appointment of a second arbitrator. This application was allowed by the High Court on the grounds that the proceeding cannot be continued under the MSMED Act due to the inability of the buyer to make a counter claim. An appeal was referred to by the Appellants against this order.

Issue involved in the case

Whether a counter claim is maintainable in an arbitration proceeding initiated under Section 18(3) of the Micro, Small, and Medium Enterprises Development Act, 2006?

Arguments Advanced

The Appellants in the first set of appeals, contended that a cohesive reading of Chapter V of the MSMED Act portrays that ‘conciliation and arbitration, is referable to the claims of the supplier only.’ They further contended that since the legislation intends to protect the supplier, allowing the buyer’s counter claim would expand the scope of the legislation. The Respondents in the second set of appeals also conferred with the argument and further contended that the word ‘any party’ in Section 18 of the MSMED Act implies the supplier alone, and thus, there arises no jurisdiction to entertain a plea of counter claim. They also contended that the Appellants in second set of appeals cannot submit their claim before the Council constituted under the MSMED Act since the supply of goods and services by the Appellants occurred prior to their registration under the said Act.

The Respondent in the first set of appeals and the Counsel for the Appellant in the second set of appeals, while arguing in favour of the maintainability of the counter claim, submitted that although the Act is a beneficial legislation, the buyer’s plea of a counter claim cannot be denied. A denial of the counter claim of the buyer, would also affect the beneficial purpose of the legislation as the buyer can bypass its obligations of payment of pre-deposit and compound interest as provided under the Act, thus hampering the rights of the seller. They further contended that, as per the MSMED Act, on the failure of the conciliation process, the provisions of the Arbitration and Conciliation Act should be made applicable to further proceedings as if there was an agreement between the parties as per Section 7(1) of the Arbitration and Conciliation Act.

Judgment & Reasoning

The Supreme Court engaged in a concurrent analysis of the provisions of the MSMED Act and the Arbitration and Conciliation Act owing to the applicability of the provisions of the Arbitration and Conciliation Act to arbitration proceedings under Section 18(3) of the MSMED Act. The court drew attention to Section 23 of the Arbitration and Conciliation Act, which provided the respondent the right to submit a counter claim or a plea off set off. Since there is an explicit provision providing for a right of counter claim under the Arbitration and Conciliation Act, the provisions of which are applicable to arbitration under the MSMED Act, the Supreme Court refused to curtail the Respondent’s right and allowed for the filing of a counter claim or set off in the arbitration proceeding before the Council.

The court while arriving at a decision pointed out the ‘beneficial provisions’ of the MSMED Act and held that such benefits accrued cannot be denied solely on the basis of non-maintainability of a counter claim before the Council. The conciliation and arbitration proceedings under the MSMED Act are statutorily mandated. The court thus held that even though there was an agreement between the parties, the same was to be ignored in lieu of the mandatory statutory provisions. For this purpose, the court relied on the ratio of Edukanti Kistamma (Dead) through LRs v. S. Venkatareddy (Dead) through LRs, to hold that a special statute like the MSMED Act will find prevalence over the Arbitration and Conciliation Act in order to protect the beneficial provisions of the legislation such as the payment of pre-deposit which the buyer can otherwise avoid.

The court also observed that a refusal to entertain the counter claim of the buyer would defeat the purposive legislation and cause a multiplicity of proceedings as a parallel suit could be initiated by the parties under any civil court. Thus, the Supreme Court adopted a harmonious construction of Section 18(3) of the MSMED Act and Sections 7(1) and 23(2A) of the Arbitration and Conciliation Act and upheld the maintainability of counter claims in arbitration proceedings under the MSMED Act.

However, the Supreme Court observed that although counter claim and set-off are maintainable before the Council, the relief cannot be claimed by the Appellant in the second set of appeals. The court observed that the supply of goods and services by the Appellant to the Respondent was done prior to the Appellant’s registration under Section 8 of the MSMED Act. Thus, the Appellant would not be entitled to the beneficial provisions of the Act by a subsequent act of registration post the supply of goods. Thus, owing to an arbitration agreement between the parties, the Supreme Court upheld the view of the Madras High Court and allowed for the appointment of a second arbitrator.

Author(s)

Doyna Panja

Student at NUJS, West Bengal