Ahluwalia Contracts (India) Ltd Vs Ozone Research & Applications (I) Pvt. Ltd. & Anr. (Delhi High Court)
Summary: The Delhi High Court, in Ahluwalia Contracts (India) Ltd Vs Ozone Research & Applications (I) Pvt. Ltd. & Anr., considered whether Delhi courts had territorial jurisdiction to entertain a petition under Section 34 of the Arbitration and Conciliation Act, 1996, challenging an award passed by the Micro and Small Enterprises Facilitation Council at Nagpur. The purchase order contained a clause stating that all disputes were subject to Delhi jurisdiction, but did not contain an arbitration agreement. Justice Prateek Jalan held that the statutory arbitration conducted by the Nagpur Facilitation Council had its seat at Nagpur and that the Delhi High Court therefore lacked territorial jurisdiction to entertain the award challenge. The Court relied on the Supreme Court’s decision in Gujarat State Civil Supplies Corporation Limited Vs Mahakali Foods (P) Ltd., concerning the overriding operation of Chapter V of the Micro, Small and Medium Enterprises Development Act, 2006.
The dispute arose from a purchase order dated 22 May 2010 issued by Ahluwalia Contracts (India) Ltd. to Ozone Research & Applications (I) Pvt. Ltd. Clause 8 of the purchase order expressly provided that all disputes would be subject to Delhi jurisdiction. However, the purchase order did not contain an arbitration clause. The respondent, claiming to be a micro or small enterprise, invoked the statutory dispute-resolution mechanism under Section 18 of the MSMED Act, 2006. The matter was referred to the Micro and Small Enterprises Facilitation Council at Nagpur, where the respondent was located. The Council exercised jurisdiction under Section 18(4) and ultimately passed an arbitral award. The petitioner challenged that award before the Delhi High Court through O.M.P. (COMM) 343/2017.
Although the first respondent was not represented when the matter was heard, it had raised an objection to the Delhi High Court’s territorial jurisdiction in its written reply. The objection was based on the contention that the arbitration had been conducted at Nagpur and the award had also been rendered there. Consequently, according to the respondent, Nagpur constituted the seat of arbitration and any application to set aside the award had to be presented before the appropriate court having territorial jurisdiction over Nagpur. The Court requested the petitioner’s counsel, Mr. Shashank Garg, to address the jurisdictional issue with particular reference to the Supreme Court’s decision in Gujarat State Civil Supplies Corporation Limited.
The petitioner relied on Indian Oil Corporation Ltd. Vs FEPL Engineering (P) Ltd., a Division Bench decision of the Delhi High Court dated 26 September 2019. In that case, the parties had expressly agreed that both the venue and the juridical seat of arbitration would be New Delhi, and had conferred exclusive jurisdiction upon Delhi courts. The Division Bench held that the location of the statutory Facilitation Council determined the venue of arbitration but did not displace the contractually agreed seat. It further observed that the statutory overriding provisions of the MSMED Act should not necessarily be construed as nullifying every contractual term concerning court jurisdiction. On that reasoning, the Division Bench had held Delhi courts competent to entertain the challenge to the award.
Justice Prateek Jalan distinguished the decision in Indian Oil Corporation on the ground that the present purchase order did not contain any arbitration clause. In Indian Oil Corporation, the parties had expressly agreed on both an arbitration arrangement and the jurisdictional forum. In the present case, there was only a general clause conferring jurisdiction on Delhi courts for disputes arising from the purchase order. The Court held that, in the absence of an arbitration clause, it was not possible to conclude that the parties had agreed to a particular juridical seat of arbitration capable of determining jurisdiction over the statutory arbitration proceedings conducted under the MSMED Act.
The High Court further examined the Supreme Court’s decision in Gujarat State Civil Supplies Corporation Limited Vs Mahakali Foods (P) Ltd.. The Supreme Court had identified the overriding effect of the non-obstante clauses in Sections 18(1) and 18(4), read with Section 24 of the MSMED Act. It had explained that Chapter V establishes a special statutory framework for the recovery of dues by micro and small enterprises, and that private arbitration arrangements cannot deprive eligible suppliers of the statutory remedy available before the Facilitation Council. The Delhi High Court reproduced the relevant portions of paragraphs 23, 27 and 28 of the Supreme Court judgment to explain the legislative framework and its relationship with contractual arbitration agreements.
The High Court noted that Section 18(4) of the MSMED Act empowers the Facilitation Council to act as arbitrator or conciliator where the supplier is situated within its jurisdiction, even if the buyer is located elsewhere in India. The respondent supplier was located at Nagpur, and the Nagpur Facilitation Council accordingly assumed jurisdiction and passed the award. Considering the absence of an agreed arbitration seat and the overriding statutory provisions explained by the Supreme Court, the High Court concluded that the seat of the arbitration in the present case was Nagpur. The petition before the Delhi High Court was therefore not maintainable on territorial-jurisdiction grounds.
Accordingly, the High Court dismissed O.M.P. (COMM) 343/2017 along with the pending application, while expressly granting liberty to the petitioner to file a petition on the same cause of action before the appropriate court in accordance with law. The Court did not adjudicate the merits of the underlying monetary claim or the substantive validity of the arbitral award. Its ruling was confined to territorial jurisdiction and the maintainability of the challenge before the Delhi High Court. The decision illustrates the distinction drawn by the Single Judge between a general contractual jurisdiction clause and an express agreement identifying the juridical seat of arbitration in proceedings conducted under the MSMED Act.
The ruling must also be understood in the context of subsequent judicial developments. The Delhi High Court Division Bench in Ircon International Limited Vs Pioneer Fabricators Private Limited, decided on 27 March 2023, subsequently disagreed with this Single Judge’s approach and held that a contractual clause conferring exclusive jurisdiction upon Delhi courts could govern a post-award challenge even where the statutory MSMED arbitration had been conducted at Kanpur and the contract contained no arbitration clause. Accordingly, the decision in Ahluwalia Contracts should not be treated as an unqualified statement of the prevailing Delhi High Court position on territorial jurisdiction.
Cases Discussed
1. Indus Mobile Distribution Pvt. Ltd. Vs Datawind Innovations Pvt. Ltd. (Supreme Court); (2017) 7 SCC 678 — Referred to within the quoted Indian Oil Corporation decision concerning the effect of an agreed arbitral seat and the exclusive jurisdiction of courts at that seat.
2. Indian Oil Corporation Ltd. Vs FEPL Engineering (P) Ltd. (Delhi High Court); FAO(OS)(COMM) 92/2019; 26/09/2019; 2019 SCC OnLine Del 10265 — Distinguished because the contract in that case contained an arbitration clause and a jurisdiction clause fixing New Delhi as the agreed seat, unlike the purchase order considered in the present proceedings.
3. Gujarat State Civil Supplies Corporation Limited Vs Mahakali Foods (P) Ltd. (Supreme Court); (2023) 6 SCC 401; 2022 SCC OnLine SC 1492 — Applied regarding the special statutory arbitration mechanism and the overriding operation of Sections 18 and 24 of the MSMED Act over inconsistent private arbitration arrangements.
FULL TEXT OF THE ORDER OF DELHI HIGH COURT
1. The present petition under Section 34 of the Arbitration and Conciliation Act, 1996 [“the Arbitration Act”], is directed against an award rendered by the Micro and Small Enterprises, Facilitation Council, Nagpur in a claim lodged by the respondent No. 1 against the petitioner claiming to be a Micro and Small Enterprise.
2. Although respondent No. 1 is unrepresented today, I find that an objection on the ground of territorial jurisdiction is taken in the reply filed by respondent No. 1. At my request, Mr. Shashank Garg, learned counsel for the petitioner, has addressed on this aspect, particularly keeping in view the judgment of the Supreme Court in Gujarat State Civil Supplies Corporation Limited vs. Mahakali Foods (P) Ltd.1
3. The disputes between the parties arise out of a Purchase Order dated 22.05.2010 (at page 63 of the petitioner’s list of documents) [“the Purchase Order”]. Clause 8 of the Purchase Order provides as follows: –
“All disputes are subject to Delhi Jurisdiction.”
4. Although the Purchase Order does not contain an arbitration clause, the claims of respondent No. 1 herein were referred for conciliation and arbitration to the Facilitation Council under Section 18 of the Micro, Small and Medium Enterprises Development Act, 2006 [“MSMED Act”]. Section 18(4) of the MSMED Act provides as follows: –
“18. Reference to Micro and Small Enterprises Facilitation Council.
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(4). Notwithstanding anything contained in any other law for the time being in force, the Micro and Small Enterprises Facilitation Council or the centre providing alternate dispute resolution services shall have jurisdiction to act as an Arbitrator or Conciliator under this section in a dispute between the supplier located within its jurisdiction and a buyer located anywhere in India.”
5. By virtue of this provision, the Facilitation Council in Nagpur, where respondent No. 1 is located, assumed jurisdiction and rendered the award.
6. The objection taken by respondent No. 1 is that the arbitration having been conducted under the MSMED Act in Nagpur and the award having been rendered in Nagpur, the seat of the arbitration in the present case was in Nagpur and, therefore, the challenge to the award would not lie before this Court.
7. It is noted in order dated 06.04.2022 that Mr. Garg sought to support the jurisdiction of this Court by reference to a judgment of the Division Bench of this Court in Indian Oil Corporation Ltd. vs. FEPL Engineering (P) Ltd.2 In the said judgment, the Division Bench was concerned with a contract which contained an arbitration clause and a jurisdiction clause. The Division Bench found that these clauses constituted New Delhi as the venue of arbitration and also conferred exclusive jurisdiction upon the Courts in New Delhi. The Court held that, by virtue of Section 18(4) of the MSMED Act, the arbitration was, in fact, conducted by a Facilitation Council outside Delhi, but the said provision would have the effect of shifting the venue of the arbitration and not its seat. The observations of the Division Bench in paragraphs 20 and 23 of the aforesaid decision are relevant, and are reproduced below: –
“20. In the present case, both the VENUE as well as the SEAT (by way of the jurisdiction clause) has been agreed to be at New Delhi. We, therefore, have no hesitation to say that the Courts at Delhi would have the jurisdiction to entertain the petition challenging the award passed by the MSME Council. Since the parties agreed to confer exclusive jurisdiction to Courts at New Delhi, notwithstanding the fact that the purchase order in question dated 10th March 2016, was issued by the Petitioner from its Vadodra Office to the Respondent at Navi Mumbai, and even if no cause of action has arisen in Delhi, the Courts of Delhi would have jurisdiction to entertain the petition under Section 34 of the Arbitration Act. This is pertinently because in Indus Mobile(supra) as noted in para 19 of the judgement, the Court has held that Section 16 to 21 of CPC would not be attracted. Thus notwithstanding the fact that cause of action may not have arisen in New Delhi, since the Seat has been agreed to be in Delhi, the courts here would have the jurisdiction to entertain the petition under section 34 of the Arbitration Act.
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23. Undoubtedly, the MSME Act is a special legislation dealing with Micro, Small and Medium Enterprises and would have precedence over the general law. There are decisions of several Courts holding that the provisions of MSME Act would override the provisions of the Contract between the parties. However, we are not engaged with the said controversy and, in fact, we had made it clear to the learned counsel for the Appellant, during the course of arguments, that the questions relating to the jurisdiction of the MSME Council to act as an Arbitrator and other similar issues will not be examined by us, as the learned Single Judge has not considered any of those aspects and has decided the objection petition only on the ground of territorial jurisdiction. However, this does not mean that the jurisdiction clause agreed between the parties has to be given a go-by. The overriding effect of the MSME Act, cannot be construed to mean that the terms of the agreement between the parties have also been nullified. Thus, jurisdiction of the MSME Council which is decided on the basis of the location of the supplier, would only determine the ‘VENUE’, and not the ‘SEAT’ of arbitration. The ‘SEAT’ of arbitration would continue to be governed in terms of the arbitration agreement between the parties, which in the present case as per jurisdiction Clause No. 35 is New Delhi. As a result, in terms of the decision of the Supreme Court in Indus Mobile (supra), it would be the Courts at New Delhi that would have exclusive jurisdiction to entertain the petition under Section 34 of the Act.”3
8. The aforesaid judgment proceeds on an interpretation of Section 18(4) of the MSMED Act vis-à-vis the contractual provisions contained in the arbitration clause and the jurisdiction clause of the agreement. However, in the present case, the Purchase Order does not contain an arbitration clause at all. In such circumstances, it is, in my view, not possible to hold that the parties agreed to a particular seat of the arbitration which would vest jurisdiction in this Court despite the provisions of the MSMED Act.
9. In any event, the judgment of the Supreme Court in Gujarat State Civil Supplies Corporation Ltd.4 [which was rendered on 31.10.2022, well after the decision of the Division Bench in Indian Oil Corporation Ltd.5] makes it clear that the provisions of Chapter V of the MSMED Act would override the Arbitration Act and the contractual arrangement. In paragraph 23 of the judgment, the Supreme Court has identified the following salient features of the scheme of Chapter V of the MSMED Act: –
“23. Having regard to the purpose, intention and objects as also the scheme of the MSMED Act, 2006 and having regard to the unambiguous expressions used in Chapter-V thereof, following salient features emerge:
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(vi) The provisions of Arbitration Act, 1996 has been made applicable to the dispute only after the Conciliation initiated under sub-section (2) does not succeed and stands terminated without any settlement between the parties.
(vii) Sub-section (1) and sub-section (4) of Section 18 starting with non obstante clauses have an effect overriding the other laws for the time being in force.
(viii) As per Section 24, the provisions of Sections 15 to 23 have an effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force.”
10. The question of conflict between the MSMED Act and the Arbitration Act has been addressed in paragraphs 27 and 28 of the judgment as follows: –
“27. The submissions made on behalf of the counsel for the Buyers that a conscious omission of the word “agreement” in sub-section (1) of Section 18, which otherwise finds mention in Section 16 of the MSMED Act, 2006 implies that the arbitration agreement independently entered into between the parties as contemplated under Section 7 of the Arbitration Act, 1996 was not intended to be superseded by the provisions contained under Section 18 of the MSMED Act, 2006 also cannot be accepted. A private agreement between the parties cannot obliterate the statutory provisions. Once the statutory mechanism under subsection (1) of Section 18 is triggered by any party, it would override any other agreement independently entered into between the parties, in view of the non obstante clauses contained in sub-section (1) and sub-section (4) of Section 18. The provisions of Sections 15 to 23 have also overriding effect as contemplated in Section 24 of the MSMED Act, 2006 when anything inconsistent is contained in any other law for the time being in force. It cannot be gainsaid that while interpretating a statute, if two interpretations are possible, the one which enhances the object of the Act should be preferred than the one which would frustrate the object of the Act. If submission made by the learned counsel for the buyers that the party to a dispute covered under the MSMED Act, 2006 cannot avail the remedy available under Section 18(1) of the MSMED Act, 2006 when an independent arbitration agreement between the parties exists is accepted, the very purpose of enacting the MSMED Act, 2006 would get frustrated.
28. There cannot be any disagreement to the proposition of law laid down in various decisions of this Court, relied upon by the learned counsel for the buyers that the Court has to read the agreement as it is and cannot rewrite or create a new one, and that the parties to an arbitration agreement have an autonomy to decide not only on the procedural law to be followed but also on the substantive law, however, it is equally settled legal position that no agreement entered into between the parties could be given primacy over the statutory provisions. When the Special Act i.e., MSMED Act, 2006 has been created for ensuring timely and smooth payment to the suppliers who are the micro and small enterprises, and to provide a legal framework for resolving the dispute with regard to the recovery of dues between the parties under the Act, also providing an overriding effect to the said law over any other law for the time being in force, any interpretation in derogation thereof would frustrate the very object of the Act. The submission therefore that an independent arbitration agreement entered into between the parties under the Arbitration Act, 1996 would prevail over the statutory provisions of MSMED Act, 2006 cannot countenanced. As such, sub-section (1) of Section 18 of the MSMED Act, 2006 is an enabling provision which gives the party to a dispute covered under Section 17 thereof, a choice to approach the Facilitation Council, despite an arbitration agreement existing between the parties. Absence of the word ‘agreement’ in the said provision could neither be construed as casus omissus in the statute nor be construed as a preclusion against the party to a dispute covered under Section 17 to approach the Facilitation Council, on the ground that there is an arbitration agreement existing between the parties. In fact, it is a substantial right created in favour of the party under the said provision. It is therefore held that no party to a dispute covered under Section 17 of the MSMED Act, 2006 would be precluded from making a reference to the Facilitation Council under Section 18(1) thereof, merely because there is an arbitration agreement existing between the parties.”6
11. Aforesaid being the position of the law laid down by the Supreme Court, in the facts of the present case, I am of the view that the seat of the arbitration, conducted by the Facilitation Council, was in Nagpur and the petition filed before this Court is not maintainable.
12. The petition, alongwith the pending application, is therefore dismissed as not maintainable, with liberty to the petitioner to file a petition on the same cause of action before the appropriate Court in accordance with law.
13. As respondent No. 1 is not represented today, the Registry is directed to forward a copy of this judgment to learned counsel for respondent No. 1.
Notes:
1 Arising out of SLP(C) No. 12884/2020. ↩
2 Judgment dated 26.09.2019 in FAO(OS)(COMM) 92/2019. ↩
3 Emphasis Supplied. ↩
4 Supra (note 1). ↩
5 Supra (note 2). ↩
6 Emphasis Supplied. ↩
