Supreme Court to Constitute Larger Bench to Resolve MSME Arbitration Dispute
New Delhi, January 22, 2025: The Supreme Court of India has decided to refer critical questions of law related to arbitration proceedings under the Micro, Small, and Medium Enterprises Development (MSMED) Act, 2006, to a five-judge bench. This decision arises from a dispute involving Tamil Nadu Cements Corporation Limited (TANCEM) and Unicon Engineers over delayed payments and statutory arbitration proceedings. Background of the Dispute TANCEM, a government-owned company, had awarded a contract to Unicon Engineers in 2010 for designing, supplying, and commissioning Electrostatic Precipitators (ESPs) at a cost of ₹7.5 crores. However, Unicon Engineers alleged delays and non-payment for additional work, eventually filing a claim for ₹2.67 crores with interest under the MSMED Act in 2014
1/25/20252 min read
The Micro and Small Enterprises Facilitation Council (MSEFC) attempted conciliation, which failed. Consequently, it ruled in favor of Unicon Engineers in 2016, directing TANCEM to pay retention amounts and interest compounded at three times the Reserve Bank of India’s notified bank rate. TANCEM challenged this order through various legal avenues, including arbitration and writ petitions, citing issues like non-compliance with the Arbitration and Conciliation Act, 1996, and the MSMED Act's provisions.
Key Legal Questions Raised
The Supreme Court highlighted inconsistencies in previous rulings by different benches, leading to confusion over the scope of writ jurisdiction and arbitration under the MSMED Act. Specifically, the Court aims to address:
Whether writ petitions are entirely barred against orders of the MSEFC.
Under what circumstances writ jurisdiction may be exercised despite alternative remedies.
Whether members of the MSEFC, who initially act as conciliators, can subsequently arbitrate the same disputes.
Judicial Precedents and Divergences
The Court cited contrasting judgments on the matter. In Jharkhand Urja Vikas Nigam Ltd. v. State of Rajasthan (2021), the Court emphasized the distinct roles of conciliation and arbitration, ruling that proceedings could not be combined. On the other hand, the Gujarat State Civil Supplies Corporation Ltd. v. Mahakali Foods Pvt. Ltd. (2023) judgment upheld the MSEFC's authority to act as both conciliator and arbitrator under specific circumstances. A separate ruling in M/s India Glycols Ltd. v. MSEFC (2023) held that writ petitions against MSEFC orders are impermissible, leaving only statutory remedies under Section 34 of the Arbitration and Conciliation Act.
The Supreme Court acknowledged the potential hardship faced by companies due to the stringent pre-deposit requirement under Section 19 of the MSMED Act, which mandates depositing 75% of the award amount before challenging the decision.
Implications of the Decision
The Chief Justice of India, Sanjiv Khanna, noted that access to writ jurisdiction under Article 226 of the Constitution is a fundamental right and part of the basic structure. The Court stressed that writ jurisdiction could be exercised in cases involving violations of natural justice, lack of jurisdiction, or challenges to the constitutionality of laws, even if alternative remedies exist.
The judgment clarified that statutory provisions creating mandatory arbitration under the MSMED Act cannot entirely oust the High Court's jurisdiction under Article 226. However, the Court also highlighted the importance of judicial restraint to ensure the rule of law and efficient resolution of disputes through statutory mechanisms.
Next Steps
The matter will now be placed before a larger bench to harmonize the conflicting interpretations of the law. The Court's decision is expected to provide clarity on the interplay between statutory arbitration under the MSMED Act and the constitutional right to seek writ remedies.