Author of “MSME Arbitration – A Draconian Legislation Or Relief?”

Tell us about yourself ?

I am a 2020 Law graduate from the University of Petroleum and Energy Studies, Dehradun. A young member of the Singapore International Arbitration Centre (YSIAC) and ICC (Young Arbitrators Forum) Network .Currently pursuing a certification course on International Arbitration at the University of Leiden, Netherlands. I really enjoy Arbitration as a subject and I wish to build a career in Dispute Resolution & Litigation.

Why do you think the MSME arbitration proves to be a Draconian legislation? 

In India out of the 29 States and 7 Union Territories, there are only 14 States in which the MSME Facilitation Councils operate on paper. Dispute resolution under the MSMED Act, 2006 is a one sided draconian legislation that grossly negates the very essence of alternative dispute resolution mechanism and further gives very little scope to challenge its rigidity. Section 18 & 19 of the Act is highly arbitrary and discriminatory towards the applicant buyer and clogs the initial entering process of the dispute resolution mechanism. Such unfair, arbitrary and unequal process with scarce judicial intervention has made it very difficult for the buyers, suppliers and the sick Industries to resort to such resolution provided under the 2006 Act.

What were the grounds on which the Constitutional validity of Section 18 of the MSMED Act was challenged?

The Hon’ble Madras High Court in Refex Energy Ltd. v. Union of India, held that Section 18 of the MSMED Act does not infringe Article 14 of the constitution. The constitutional Validity was challenged on the following grounds:

1.   Unilateral Arbitral Proceedings: A party cannot be forced to participate in the arbitration /Conciliation proceedings at the instance of the other party making the reference under section 18 of the MSMED Act.

2.   Ambit of Section 16, 17, 18The dispute raised would not fall within the ambit of sections 16, 17 and 18 of the MSMED Act, 2006.

3.   MSME under State List: The parliament has no power to legislate in respect of Micro, Small and Medium Scale industries as it is a subject falling within the scope of Entry 24 of List II of Schedule VII of the constitution and only the states will have the power to enact.

4.   Right to Approach the Court: Section 18 deprives the petitioner of its right to approach the courts for redressal of their grievances.

5.   No Arbitration in the Absence of Conciliation: Since a conciliation under section 18(2) is a pre-requisite for the MSME facilitation council, in the absence of such conciliation between the parties, within the meaning of section 18(2) of the Act, the MSME Facilitation Council has no jurisdiction to entertain the claim of the 2nd respondent and therefore, the reference of the dispute to arbitration is bad in law.

Why shouldn’t the same member be appointed to perform the dual role of an Arbitrator as well as a Conciliator?

    

There has often been a debate over the  power of a  ‘Facilitation Council’ in an MSME Arbitration  to serve as both a ‘conciliator’ and an ‘arbitrator’ when conflicts under section 18(1) thereof are referred to it. The arbitrator may be exposed to classified and Prejudicial information during conciliation without being required to disclose this information to any party participating in arbitration. Furthermore, communication or caucusing between the arbitrator and one side may lead to impartiality in the Arbitration Procedure. Empowering the same authority to do both types of functions of conciliation and Arbitration will result in prejudice and bias in its decisions.

How significant are the Arbitrator’s neutrality and independence in every arbitration proceeding?

      

The Arbitrator’s independence and neutrality are fundamental to every arbitration proceeding. Under section 12 of the Arbitration Act, a member of the institution who is supposed to be appointed as an Arbitrator, has to mandatorily reveal circumstances giving justifiable doubt as to his independence and neutrality. The absence of bias is one of the central principles of natural justice that extends to both judicial and Quasi -judicial proceedings.

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