Reading Between the Lines: The Special Case of Private-Public Arbitrations Under the MSMED Act

The author is Vedanshi Mishra, a fourth-year student at National Law Institute University, Bhopal.

Introduction

The Micro, Small and Medium Enterprises Development Act, 2006 [“MSMED Act”] is a beneficial legislation aimed at facilitating the development of micro, small and medium enterprises. However, despite its beneficial nature, the MSMED Act faced many challenges because of its direct conflict and overlap with the Arbitration & Conciliation Act, 1996 [“Arbitration Act”]. While most of these challenges have been well resolved by judicial precedents, the concerns regarding the independence and impartiality of the Micro & Small Enterprise Facilitation Council [“MSEFC”], especially in cases of arbitrations between a private and a government entity [“Private-Public Arbitration”], have been conveniently overlooked. 

The MSEFC was put in place to resolve disputes through the mechanism of conciliation & arbitration under Section 18, MSMED Act. In this process, it is an obvious extension that it must adhere to the first principles of arbitration, including principles of independence and impartiality. The consistent disregard of these principles in Private-Public Arbitration is the theme of this article. In this context, Section 18 is demystified by structurally bifurcating the discretion conferred upon the MSEFC. The end result, making arbitration before the MSEFC more tenable and aligned with the first principles of arbitration and the principles of natural justice. 

To synchronize this, the article is divided into two parts, namely, the seemingly unruly powers of the MSEFC (Part I), which showcases how the MSEFC’s mandate is unclear and overly broad directly in the teeth of the principles of the Arbitration Act. Then, it argues that harmonious and purposive reading of the Arbitration Act and the MSMED Act leads to dividing the discretion under Section 18 in a way catering to the objectives of both Acts (Part II).

Part I: The Seemingly Unruly Powers of the MSEFC

Lawson LJ has rightly stated in Maxwell v Deptt. of Trade that “Doing what is right may still result in unfairness if it is done in the wrong way”. This plainly and obviously applies to MSEFC arbitrations. 

In this context, this part discusses the existing problems with the statutory arbitration before the MSEFC and how the same violates the principles of independence and impartiality. For the same, this part broadly discusses two themes: first, the importance of principles of independence, impartiality and equality; second, the wide and unbridled powers of the MSEFC violating such principles.  

The foundation of principles of independence and impartiality lies in the Latin maxim Nemo Judex in Causa Sua Potest, alongside the famous saying of Lord Hewart that “justice must not only be done but must be seen to be done”. The application of these principles in dispute resolution highlights their importance in maintaining public confidence in the settlement of disputes. However, they are often overlooked in the context of the MSEFC’s Private-Public arbitration, highlighting the pressing need for a thorough examination in this regard. 

With that understanding in place, the scheme of Section 18, MSMED Act must be seen. This was analysed by the Supreme Court in Jharkhand Urja Vikas Nigam Ltd. v State of Rajasthan [“Jharkhand Urja”], wherein it held that “Under Section 18(3), when conciliation fails and stands terminated, the dispute between the parties can be resolved by arbitration. The Council is empowered either to take up arbitration on its own or to refer the arbitration proceedings to any institution as specified in the said section. It is open to the Council to arbitrate and pass an award, after following the procedure under the relevant provisions of the Arbitration and Conciliation Act, 1996, particularly Sections 20, 23, 24 and 25.”

The aforementioned analysis highlights that the MSEFC holds the discretion to either handle arbitration directly or refer it to an institution while ensuring compliance with the procedural provisions of the Arbitration Act. It is because of this very discretion, concerns regarding independence and bias, casting a doubt on the effective functioning of the MSEFC emerge as no guidelines/procedure for its exercise are provided under the MSMED Act. This showcases its unbridled powers. 

Adding to this, the MSEFC is a regulatory body discharging adjudicatory functions, wherein its members become the arbitrators. Such an arrangement raises concerns over its independence and impartiality, especially in cases, wherein one of the parties to a dispute is a government entity or a Public Sector Undertaking (“PSU”). This is because the public involvement in such situations raises reasonable apprehension of the government entity controlling majority of the arbitrators (As stated in the judgement popularly known as “Core II”). 

The importance of addressing this is not only clarified in theory but also has practical backing. In a Private-Public arbitration under the MSMED Act, especially wherein the powers of MSEFC are unbridled and it may act as an arbitrator, the possibility of an unfair decision being taken in favour of the private entity is higher than a fair decision being taken. This, however, is not a reflection on the MSEFC’s competence in resolving disputes objectively but rather an inclination towards reasonable apprehension of bias (discussed in Part II). 

Section 18(3), MSMED Act and the judgement of Jharkhand Urja make a clear reference to the procedural provisions of the Arbitration Act, which through necessary implication includes Section 18 of the Arbitration Act (equal treatment of parties). It is well known that any form of bias or partiality contains within itself the power to handicap a party from presenting its own case fairly, thereby leading to unequal treatment. 

Thus, the need to limit this discretion vested in the MSEFC to either conduct arbitration itself or refer it to an institution arises. This is furthered by taking a glance at the consequences as iterated in the Private-Public Arbitrations wherein the MSEFC is less likely to delegate the matter to another institution. The next part of this article showcases the interpretational tools which may cater to resolving this problem by linking the Arbitration Act with the MSMED Act, thereby limiting Section 18 of the MSMED Act.

Part II: The Inherent Limitations to MSEFC’s Discretion Under Section 18

Admittedly, the text of the MSMED Act provides no guidance for how the MSEFC should exercise its discretion. However, concluding that there are no limitations on such discretion will be an extremely myopic view. To begin with literal interpretation, we must read not only what is written but also what is not written. While it is true that the MSMED Act does not place an explicit limitation on MSEFC’s discretion, it does not also explicitly waive the principles that ordinarily apply to the functioning of a statutory body performing adjudicatory functions, i.e., principles of independence and impartiality.

The question that now arises is, are the powers of the MSEFC so extensive as to surpass the established principles of the Arbitration Act, i.e., Schedule V and Section 18? The answer is a plain and simple no. If anything, Section 18(3) of the MSMED Act includes the Arbitration Act by reference, which by implication includes Schedule V and Section 18 of the Arbitration Act. Hence, the Arbitration Act fills the gaps of the MSMED Act, and the discretion so vested is inherently limited. 

The main support for the argument that there are inherent limitations on MSEFC’s discretion is the fact of potential or justifiable bias of the MSEFC when acting as an arbitrator in Private-Public Arbitration. To understand bias in an arbitration, the judgement of Director-General of Fair-Trading v The Proprietary Association of Great Britain may be referred to, wherein a distinction was drawn between ‘actual bias’, which denotes a demonstrable situation where a judge has been influenced by partiality and prejudice in decision, and ‘apparent bias’, which denotes reasonable apprehension that a judge may have been, or may be biased.  This is also highlighted in the 246th LCI Report that the test in arbitration is not of “actual bias” but rather of “reasonable apprehension of bias”.

It is noteworthy that it is not contended that the MSEFC is inherently/actually biased; however, due to it being a government entity, there is a reasonable apprehension that it may be biased in a setting wherein one of the parties is also a government entity or a PSU. This bears a significant weight on the arbitral award’s ultimate value. Adding salt to injury, the aggrieved party, in accordance with Section 19 of the MSMED Act, in order to set aside the award has to deposit 75% of the amount with the court, with no certainty of its refundability pre- and post-disposal of the application. If the parties are unable to furnish the said deposit, they lose their right to approach the court under Section 34 of the Arbitration Act or to approach the High Court under Article 226 of the Constitution of India. Even if they succeed in the Section 34 stage, their remedy will be worthless, as they will again be referred back to the MSEFC. Thereby, entering into a vicious cycle. 

To avoid this, it is crucial to undertake a purposive and harmonious analysis of the MSMED Act and the Arbitration Act by attaching it to “reasonableness”. It cannot be assumed that the legislature intended to give the MSEFC unbridled powers ultimately leading to its abuse. It is perceptible that the legislature wanted the MSEFC to exercise sits discretion reasonably, and not in a mala fide or arbitrary manner, in consonance with the Arbitration Act. 

In that vein, it may be concluded that in cases of a Private-Public Arbitration, the MSEFC should reasonably refer the matter to an institution, rather than act as arbitrator itself. This would ultimately resolve the problems of apprehension of bias. In all other situations (or rather permutations and combinations), it may exercise its discretion as it deems fit. This is the bifurcation of discretion, i.e., limited and not-so limited, depending on the nature of parties before it. 

The implication of this would be two-fold, namely, first, parties would not be deprived of justice, and their problems would not be extended to the Section 34 stage in most cases and second, the analysis that the MSMED Act prevails over the Arbitration Act still remains; however only when there is a conflict between the two legislations. As far as the principles of independence and impartiality are concerned, there is no such conflict because of the MSMED Act’s silence on the same. Hence, the Arbitration Act prevails, filling the gaps. 

Conclusion

In conclusion, the MSEFC arbitrations come with many inherent problems, but this article shifts the narrative, presenting it not as a hurdle but as a pathway to resolving the longstanding challenges. The prominent challenge it faces is with respect to its role in Private-Public arbitrations wherein it is more likely to act as an arbitrator itself under Section 18, MSMED Act. The ‘state government’ (i.e., State under Article 12) sets up the MSEFC under Sections 20 and 21 of the MSMED Act and, thus acts through the MSEFC in line with qui facit per alium per facit per se (what one does through another is done by oneself). Following this line of reasoning, if the MSEFC acts as the arbitrator in Private-Public arbitrations, it will violate the mechanism envisaged under the Arbitration Act and the judgements of Perkins Eastman and Core II.

Harmonising the text of Section 18 of the MSMED Act with the above-mentioned legal position brings us to the conclusion that MSEFC’s discretion is not unfettered. In Private-Public arbitrations, the discretion of the MSEFC must be derived in conjunction with Section 18 of the Arbitration Act, the extant judgements thereto, the principles of reasonableness laid down for statutory bodies performing quasi-judicial functions and the principles of equity and natural justice that are the very grundnorm of any adjudicatory process. 

The arbitrations before the MSEFC are rising; to cater to that, institutions like IIAC have developed specialised regulations. If the MSEFC yields adjudicatory responsibility to arbitral institutions such as IIAC, DIAC or MCIA, in line with the conclusion of the present article, it will hit two birds with one stone. Not only will it allay the burden on the already overburdened MSEFC working in two roles (conciliator and arbitrator), but it will also further fair play and boost trust in MSEFC.