Delhi High Court: 75% Deposit Of The Awarded Amount As A Precondition To Appeal The Award Provided Under Special Statute Not Applicable On Private Arbitrations

Delhi-High-Court

Certain special statutes in India provide for statutory arbitrations. Consider a situation where parties which are governed by such special statutes instead of following the arbitration mechanism provided thereunder commences private arbitration under the Arbitration & Conciliation Act, 1996 (‘Arbitration Act’). In such a scenario, whether the special privileges provided under the special statutes in respect of arbitrations thereunder will be applicable to private arbitrations triggered otherwise than under such special statutes? One such issue was under consideration before the Delhi High Court in Avr Enterprises vs Union of India CM(M) 769/2018 decided on 8 May 2020 in respect of arbitration under the Micro Small and Medium Enterprises Development Act, 2006 (‘MSME Act’). The issue before the Court was whether the condition of mandatory pre-deposit of 75% of the awarded amount as a sine qua non for appealing against the arbitral award culminated from an arbitration triggered under MSME Act will also be applicable to private arbitrations when parties which are governed by MSME Act chose not to trigger arbitration mechanism provided thereunder and instead opted for private arbitration? While answering the issue in negative, the Delhi High Court inter alia held that such condition is only applicable to the award which are rendered as a result of ‘reference’ made by the Micro and Small Enterprises Facilitation Council (‘Council’) for arbitration and not otherwise in the private arbitrations. With this background, let us examine the legal landscape on this issue.

Applicable Legal Principles

In terms of Section 18 of the MSMED Act, any party to a dispute with regard to any amount due under Section 17 of the MSMED Act make a reference to the Council. On receipt of the reference 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 to such an institution or centre, for conducting conciliation and the provisions of Sections 65 to 81 of the Arbitration Act shall apply.

Where conciliation initiated under sub-section (2) of Section 18 of the MSMED Act 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 Act 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 the Arbitration Act.

In terms of Section 19 of the MSMED Act, no application for setting aside any decree, award or other order made either by the Council itself or by any institution or centre providing alternate dispute resolution services to which a reference is made by the Council, shall be entertained by any court unless the appellant (not being a supplier) has deposited with it 75% of the amount in terms of the decree, award or, as the case may be, the other order in the manner directed by such court. On deposit of the 75% of the awarded amount, the court shall order that such percentage of the amount deposited, as it considers reasonable, be paid to the supplier, subject to such conditions as it deems necessary to impose.

Supreme Court ruling in M/s Snehadeep Structures Private Ltd vs Maharashtra Small Scale Industries Development Corporation Ltd[1]

In this landmark case, the question under consideration before the Supreme Court was whether the expression ‘appeal’ used in  Section 7 of the predecessor of MSME Act i.e. Interest on Delayed Payments to Small Scale and Ancillary undertakings Act 1993 (‘Interest Act’) includes an application, to set aside the arbitral award, filed under Section 34 of the Arbitration Act.

Section 6 of the Interest Act contemplated two kind of proceedings; (i) a Suit or other proceeding under any law for the time being in force and (ii) reference to the Industry Facilitation Council for acting as an arbitrator or conciliator. In the context of Section 6 of the said Act, Section 7 provided that no appeal against any decree, award or other order shall be entertained unless the appellant (not being a supplier) deposits 75% of the amount in terms of the decree, award or other order.

In contrast to Section 6 of the Interest Act, Section 18 of the MSMED Act does not contemplate filing of a Suit. It only contemplates a reference to the Micro and small Enterprises facilitation Council. Since Section 18 of the MSMED Act only contemplates a reference to the Council, Section 19 also refers to a decree, award or other order made either by the Council itself or by any Institution or Centre providing alternate dispute resolution services to which a reference is made by the Council.

Further, in Section 7 of the Interest Act, there is no qualification as in Section 19 of the MSMED Act i.e. “any decree, award or other order made either by the Council itself or by any institution or centre providing alternate dispute resolution services to which a reference is made by the Council”. It is in light of these provisions, that the Supreme Court in Snehadeep has held that deposit of 75% of the award amount in terms of Section 7 of the Interest Act is the condition precedent for hearing an application under Section 34 of the Arbitration Act and further held that the word ‘appeal’ appearing in Section 7 of the Interest Act is referring to application filed under Section 34 of the Arbitration Act and the word ‘award’ includes the arbitral award.

Issue

Thus, the issue before the Court was whether Sections 18 and 19 of the MSME Act are applicable in private arbitrations invoked by parties governed by MSME Act?

Judgement

The bone of reasoning given by the Court was based on the starting point of arbitration mechanism under MSME Act i.e. reference to the Council which is then proceeded by conciliation and failing of such conciliation lead to triggering of arbitration. Thus, for the condition of 75% of pre-deposit under Section 19 of the MSME Act it is essential that such award has culminated from a ‘reference to’ the Council and not otherwise as in the present case. Similar reasoning was provided by the Division Bench of the Delhi High Court in Bharat Heavy Electrical Limited v. the Micro and Small Enterprises Facilitation Centre & Anr. However, the Division Bench of the Gujarat High Court in Saryu Plastics Private Limited & Ors. Versus Gujarat Water Supply and Sewerage Board held a contrary view. In Saryu Plastics the Division Bench of the Gujarat High Court has specifically considered the question as to whether Section 19 of the MSME Act would be applicable to a case where arbitrator was appointed by the parties and there was no reference to the Council under Section 18 of the MSME Act. The Gujarat High Court held that Section 19 of the MSME Act would still apply.

Another pertinent parlance is drawn by the Court in respect of Civil Suit for recovery where the Court is empowered to waive pre-deposit of the decretal amount under Order 41(1)(3) Civil Procedure Code, 1908 pending appeal or grant a conditional stay pending appeal. If Section 19 of MSME Act is to be made applicable on all other proceedings filed by parties which are governed by MSME Act, then it will make other legal remedies otiose.

In view thereof, the Court concluded that Section 19 of the MSME Act would apply only to proceedings initiated under section 18 of the MSME Act and would not apply to an award published by an Arbitrator appointed by the parties otherwise than in accordance with section 18 of the MSME Act.

[1] 2010 (3) SCC 34

Disclaimer: The views expressed in this post are mine and do not reflect the views of the organisation(s) I am engaged with

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s