(Prayer: This original petition is filed under Section 34(2)(a)(iii) and (2)(b)(ii) of the Arbitration and Conciliation Act, 1996 seeking (a) to set aside the final order dated 11.7.2018 passed by the Micro Small Enterprises Facilitation Council in MSEFC/CR/78/2017, second respondent herein and (b) pass such further or other orders as this Hon'ble Court may deem fit and proper in the facts and circumstances of the case and thus render justice.)
1. Captioned 'Original Petition' (hereinafter 'OP' for the sake of brevity) is an application under section 34 of 'The Arbitration and Conciliation Act, 1996 (Act 26 of 1996)', which shall hereinafter be referred to as 'A and C Act' for the sake of brevity, convenience and clarity.
2. In captioned OP, an 'arbitral award dated 11.07.2018 bearing reference MSEFC/CR/78/2017' (hereinafter 'impugned award' for the sake of convenience and clarity) made by 'Micro Small Enterprises Facilitation Council' (hereinafter 'said Council' for the sake of brevity and convenience) has been assailed.
3. In the physical hearing today, Mr.S.Ramesh, learned counsel on record for the sole petitioner is before this Court, but there is no representation for the two respondents though this Court is informed that they have been duly served and their names together with full / complete addresses as in short and long cause titles as in the captioned OP have been shown in the cause list. To be noted, this court issued notice in the captioned OP vide proceedings dated 02.06.2020 and this Court is informed that notices have been duly served, but respondents have not chosen to respond and/or enter appearance through counsel, though this matter was listed as many as seven times thereafter, i.e., on 20.07.2020, 22.07.2020, 29.07.2020, 05.08.2020, 16.09.2020, 30.09.2020 and 06.10.2020. To be noted, this is the 8th consecutive hearing/listing, in which respondents have not chosen to come before this Court. It is also to be noted that out of these eight hearings/listings (including this physical hearing today), six hearings/listings were virtual hearings which were duly notified in the cause list and 2 hearings are physical hearings which have also been duly notified in the cause list. Therefore, this court proceeds to hear the captioned OP on merits on the basis of available records and by hearing learned counsel for petitioner. To be noted, from the earlier proceedings it is seen that on 02.06.2020, notice has been issued, private notice has also been permitted and Registry has been directed to requisition arbitral records from second respondent.
4. In this regard, this court has reminded itself that sub section (6) of section 34 of A and C Act prescribes one year time line for disposal of applications under section 34 of A and C Act. This one year time line has been emphasised by Hon'ble Supreme Court in Bhumi Vikas Bank Samiti case being State of Bihar Vs. Bihar Rajya Bhumi Vikas Bank Samiti reported in (2018) 9 SCC 472. This Court reminded itself that Boomi Vikas Bank Samiti case of Hon'ble Supreme Court is an authority for the broad proposition that pre-application notice under sub-section (5) of Section 34 is only directory and not mandatory, but the observation made by Hon'ble Supreme Court therein in paragraph 26 is of significance and the same reads as follows:
'26. We are of the opinion that the view propounded by the High Courts of Bombay and Calcutta represents the correct state of the law. However, we may add that it shall be the endeavour of every court in which a Section 34 application is filed, to stick to the time-limit of one year from the date of service of notice to the opposite party by the applicant, or by the Court, as the case may be. In case the Court issues notice after the period mentioned in Section 34(3) has elapsed, every court shall endeavour to dispose of the Section 34 application within a period of one year from the date of filing of the said application, similar to what has been provided in Section 14 of the Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Act, 2015. ........ '
(Underlining and double underlining made by this Court to supply emphasis and highlight)
5. This Court has also reminded itself that the sublime philosophy and salutary principle underlying A and C includes finality of arbitral awards ingrained in Section 35, minimum judicial intervention ingrained in section 5 and time lines prescribed at every stage, i.e., for arbitration as well a challenge to arbitral awards which has been delineated supra.
6. In the case on hand, i.e., instant case, it is submitted that petitioner and first respondent are governed by 'The Micro, Small and Medium Enterprises Development Act, 2006 (Act 27 of 2006)', which shall hereinafter be referred to as 'MSMED Act' for the sake of brevity and convenience. It also comes to light that petitioner and first respondent are 'buyer' and 'supplier' respectively within the meaning of section 2(d) and 2(n) respectively of MSMED Act. To be noted, the term 'buyer' is defined in section 2(d) of MSMED Act and the term 'supplier' is defined in section 2(n) of MSMED Act.
7. From the case file placed before this Court and the submissions made by learned counsel for petitioner, it comes to light that first respondent has agreed to make some products which are part of pollution control systems for the petitioner which (this court is informed by petitioner) in turn has to be supplied to its main contractor. Be that as it may, dispute erupted between petitioner and first respondent with regard to two products. One is, pressure sound filter equipment and the other is fibre glass reinforcement plastic lining in sewage treatment plant tanks. With regard to the first product, it is the case of the petitioner that the equipment Inspector of the main contractor rejected the same and in the case of the second product, the first respondent delayed the work beyond tolerance limits leaving it to the petitioner to engage their people in the workshop of first respondent and complete the work. In this backdrop, two debit notes were raised by petitioner on first respondent and the two debit notes add upto a total sum of Rs.7,48,373/- (Rupees seven lakhs forty eight thousand three hundred and seventy three only) principal with interest.
8. As alluded to supra, parties are governed by MSMED Act. Therefore, provisions of sections 18 and 19 of MSMED Act kicked in resulting in the matter being taken up for arbitration by said Council.
9. Before the said Council, parties appeared and completed pleadings. To be noted, this is evident from the impugned award itself and this is clear from paragraph No.6 of the impugned award dated 11.07.2018 made by the said Council, which reads as follows:
'6. In the Council meeting held on 09.05.2018, the Petitioner was present and represented by Thiru J.A.Shanbhah and the Respondent was present and represented by Thiru Kamal. As the Respondent had submitted the Counter affidavit, the Council directed the Petitioner to give a response to the counter affidavit filed by the Respondent and adjourned the case to the next hearing.'
10. Thereafter, petitioner before this court (respondent before said Council) did not appear before the said Council on 11.07.2018, but pleadings were complete. What is of relevance is pleadings of respondent before said Council, more particularly in the reply filed by the petitioner herein (respondent before said Council) sub paragraphs (a) and (b) of paragraph 2 of reply of petitioner herein (respondent before said Council) is of relevance and the same read as follows:
'2.It is submitted that the case of the Petitioner is that the Respondent has to make payment to the Petitioner company as per the terms of contract and emails sent by the Petitioner company and since the Respondent did not pay make the payment, the petitioner has approached this Hon'ble Council seeking appropriate reliefs. At the outset, it is submitted that the Petitioner has not submitted any original documents to the Respondent for econciliation since the Petitioner very well know that there is no that there is no due which has to be claimed from the Respondent and therefore the question of payment does not arise at all. To prove this the Respondent herein gives the following narration of events.
a) The Respondent submits that the mere perusal of the emails sent by the Petitioner on 08/07/2017 (Annexure R1) and the reply sent by the Respondent on 12/07/2017 (Annexure R2) would reveal that the Respondent is not liable to pay any outstanding to the Petitioner.
b) The Petitioner themselves admit to the Respondent for debit in the email dated 17/03/2016 and 28/04/2016 (Annexure R3) and the Petitioner has made a huge delay in supply to the Respondent which would be revealed from the Petitioner's email dated 28/01/2016 and 02/04/2016 (Annexure R4) the Respondent has also addressed the Petitioner through email dated 01/04/2016 (Annexure R5) that the Petitioner did not fulfill the quality parameters of the client.'
11. Learned counsel for petitioner adverting to aforementioned sub paragraphs (a) and (b) of paragraph 2 of pleadings before the said Council, submitted that emails referred to therein are as follows:
12. Therefore, it is clear that before said Council, pleadings were complete and the petitioner before this court has placed documents in support of its pleadings. In the aforesaid backdrop, the impugned award came to be made by said Council.
13. Notwithstanding very many grounds raised in the captioned OP, the pointed submission or in other words, the focussed submission of learned counsel for petitioner centred around said Council not setting out reasons upon which the award is based. In other words, it is the pointed case of learned counsel for petitioner that there is infarction of sub section (3) of section 31 of A and C Act. To be noted, section 31(3) of A and C Act reads as follows:
'31.Form and contents of arbitral award.-(1) x x x x x x
(2) x x x x x x x
(3) The arbitral award shall state the reasons upon which it is based, unless--
(a) the parties have agreed that no reasons are to be given, or
(b) the award is an arbitral award on agreed terms under section 30.'
14. As already alluded to supra, for all practical purposes, this is a statutory arbitration qua MSMED Act and more particularly, sections 18 and 19 thereat. Therefore, parties have not agreed that no reasons are to be given in the arbitral award. Likewise, it is very clear that there has been contest between parties and impugned award is not an arbitral award on agreed terms within the meaning of section 30 of A and C Act. This leads us to the indisputable sequitter that said Council ought to have given reasons upon which the impugned award is based owing to the statutory requirement in this regard which has been ingrained in section 31(3) of A and C Act.
15. This Court has carefully perused the impugned award. It is rather terse running to 3 pages spanning 9 paragraphs which read as follows:
'Order – MSE Facilitation Council:-
1. A reference under the provisions of the Micro, Small and Medium enterprises Development Act, 2006 was made to this Council on 28.08.2017 by M/s.Bindhu Techflow Solutions Pvt. Ltd, No.2/344, S No.208/1B, No.57, Thorapakkam Road, Gerugambakkam, Chennai – 600122, hereinafter referred to as the Petitioner against M/s Swift Tech Engineers (India) Pvt. Ltd, Plot No.42, Sivan Street, SVP Nagar, Valasaravakkam, Chennai – 600087, hereinafter referred to as the Respondent.
2. The Petitioner is engaged in fabrication of pressure vessel, tanks, piping and has an EM PART II No.330031104977 dated 27.03.2012. The Petitioner represented that the balance principal amount of 7,48,373/- and interest amount of 1,75,301/- is yet to be received from the Respondent pertaining to the invoices No.1145/115 dated 19.03.2016, 1149/117 dated 19.03.2016 and 1145/207 dated 30.04.2016. The Petitioner appealed to the Council for early settlement of principal together with interest.
3. In the Council meeting held on 20.12.2017, the Petitioner was present and represented by Thiru V.B.Parvatikar, Director and the Respondent was present and represented by Thiru P.M.Suresh Babu, Director. The Respondent sought time to file a counter and the case was adjourned to the next hearing.
4. In the Council meeting held on 30.01.2018, the Petitioner was present and represented by Thiru Pravin, Director and the Respondent was absent. The Council decided to give one more opportunity to the Respondent and adjourned the case to the next hearing.
5. In the Council meeting held on 08.03.2018, the Petitioner was present and represented by Thiru Pravin, Director and the Respondent was absent. The Council directed the Respondent to file a counter by 20.03.2018 and adjourned the case to the next hearing.
6. In the Council meeting held on 09.05.2018, the Petitioner was present and represented by Thiru J.A.Shanbhah and the Respondent was present and represented by Thiru Kamal. As the Respondent had submitted the Counter affidavit, the Council directed the Petitioner to give a response to the counter affidavit filed by the Respondent and adjourned the case to the next hearing.
7. In the Council meeting held on 13.06.2018, the Petitioner was present and represented by Thiru P.Pravin, Director and the Respondent was absent. The Petitioner submitted a rejoinder to the counter filed by the Respondent. The Council decided to give one more opportunity to the Respondent and adjourned the case to the next hearing.
8. In the Council meeting held on 11.07.2018, the Petitioner was present and represented by Thiru J.A.Shanbhah, Director and the Respondent was absent. As the conciliation process did not succeed and the Respondent had wilfully defaulted to appear before the Council, based on the merits of the case, the Council decided that the Respondent is liable to pay the principal amount along with the interest in accordance with Section 16 of the MSMED Act, 2006 and issued final orders.
9. Hence, taking cognizance of the submissions made and evidences produced during the hearings, the Council in accordance with sections 15, 16, 18(1),(2),(3) and (4) of the MSMED Act, 2006 hereby directs the Respondent to pay the principal amount of 7,48,373/- along with interest with monthly rests, at three times the Bank rate, notified by the Reserve Bank of India as stipulated in the MSMED Act, 2006 from the appointed due dates for 3 invoices pertaining to the period from 19.03.2016 to 30.04.2016 to the petitioner, till the date of settlement.
Based on the above, the petition filed before this Council on 28.08.2017 stands disposed.
Dated on this 11th day of July 2018.'
16. This Court has chosen to reproduce the impugned award in entirety supra for ease of reference qua the reasons upon which impugned award is based not being given plea on which challenge to impugned award is predicated and posited. A perusal of the impugned award leaves this court with the considered opinion that upto paragraph 7, only the trajectory the matter has taken has been narrated. In paragraph 8, it has been held in one sentence that “....based on the merits of the case, said Council decided that the Respondent is liable to pay the principal amount along with the interest....”.
17. Thereafter, concluding paragraph, which is the operative portion of the impugned award or in other words, paragraph 9 has been set out. This makes it clear that said Council has not set out the reasons upon which the impugned award is based. This infarction of section 31(3) of A and C Act gets aggravated because there were pleadings on the part of the petitioner in captioned OP (Respondent before said Council), documents were also filed to support and buttress the pleadings, but there is no discussion about the pleadings or documents placed before said Council. There is no reference much less discussion or dispositive reasoning regarding electronic mails which were placed before said Council in support of the pleadings made by the petitioner herein, i.e., petitioner in captioned OP (Respondent before said Council). To be noted, there is no discussion qua rival pleadings either. In effect, there is no dispositive reasoning, i.e., nothing qua reasons on which impugned award is based.
18. Whenever there is challenge to an arbitral award made by said Council, provisions of A and C Act will apply to the disputes as if there was an arbitration agreement between parties within the meaning of section 7(1) of A and C Act (Obviously, section 7(1) has to be read in conjunction with section 2(1)(b) of A and C Act which defines 'arbitration agreement'). This legislation by incorporation has been made vide sub-section (3) of section 18 of MSMED Act which reads as follows:
'18.Reference to Micro and Small Enterprises Facilitation Council.--
(1) x x x x x x
(2) x x x x x x
(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 centre 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 disputes as if the arbitration was in pursuance of an arbitration agreement referred to in sub-section (1) of section 7 of that Act.'
19. Therefore, the moment captioned OP was presented in this court on 07.12.2018, all the provisions of A and C Act kicked in and started operating qua testing the impugned award. This legislation by incorporation is by dovetailing section 18(3) of MSMED Act with section 7(1) of A and C Act (to be noted, section 7(1) has to necessarily be read in conjunction with definition clause, i.e., section 2(1)(b) owing to the language in which section 2(1)(b) is couched) and all other provisions of A and C Act. For ease of reference, this Court deems it appropriate to extract and reproduce section 2(1
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)(b). It reads as follows: '2.Definitions.--(1) x x x x x (a) x x x x x (b) ”arbitration agreement” means an agreement referred to in section 7;' 20. This takes us to the obtaining position of law regarding challenge to arbitral awards under section 34 of A and C Act. 21. Infarction of such an all too sacrosanct provision of A and C Act sounds the death knell of an arbitral award. Hon'ble Supreme Court has declared in no uncertain terms that if an AT contravenes section 31(3) of the A and C Act, that would certainly amount to a patent illegality on the face of the impugned award. In this regard, paragraph 42.2 of the celebrated Associate Builders case being Associate Builders Vs. Delhi Development Authority reported in (2015) 3 SCC 49 is relevant and the same reads as follows: '42.2.(b) A contravention of the Arbitration Act itself would be regarded as a patent illegality — for example if an arbitrator gives no reasons for an award in contravention of Section 31(3) of the Act, such award will be liable to be set aside.' Be that as it may, Supreme Court has reiterated the above principle subsequently in Ssangyong case law being Ssangyong Engineering and Construction Company Limited Vs. National Highways Authority of India [(2019) 15 SCC 131]. In Ssangyong, Supreme Court has made it clear that this aspect of challenge to an arbitral award, i.e., contravention of section 31(3) is available in the post 23.10.2015 regime qua A and C Act also. 22. Owing to the narrative thus far, infarction of section 31(3) of A and C Act is clear as day light and in the light of the focussed submission made by learned counsel for petitioner in this regard, this court deems it unnecessary to embark upon the exercise of examining the other aspects of challenge to impugned award in captioned OP. 23. Therefore, the impugned award made by said Council is set aside or in other words, captioned OP is allowed qua limb (a) prayer. There shall be no order as to costs.