When MSMED Section 18 Does Not Oust Ad Hoc Arbitration

Bharat Sanchar Nigam Ltd. floated an online tender in March 2016 for the supply of VRLA batteries. Microtex Energy Pvt. Ltd., registered as a Small Enterprise with Udyog Aadhar, emerged as the successful bidder and accepted Advance Purchase Order dated 10 June 2016 for 1361 sets of batteries against a 5 percent bank guarantee of Rs. 56,07,298. Two purchase orders followed in September and November 2016, with delivery periods later extended on the supplier's request.

After firm prices were determined, BSNL claimed there had been an overpayment of Rs. 34,57,920 because the firm price was lower than the rate originally indicated, citing the Gujarat Circle rates as a benchmark. When the supplier disputed the recovery, BSNL invoked and encashed the Performance Bank Guarantee on 1 December 2018. Microtex moved the Bangalore City Civil Court for restraint but the PBG was encashed in the interim. After failed conciliation, an arbitrator unilaterally appointed by BSNL on 5 July 2019 was later substituted by the High Court under Sections 14 and 15 of the Arbitration and Conciliation Act, 1996.

The Award

The sole arbitrator, by award dated 3 May 2024, directed BSNL to pay Microtex Rs. 2,76,82,030. Of this, Rs. 89,77,056 was to carry further interest under Section 16 of the MSMED Act, 2006 from the date of award till realisation, and Rs. 1,87,04,974 was to carry interest under Section 31(7)(b) of the Arbitration Act.

The Section 34 Challenge

BSNL, represented by Ms. Disha Karambar, contended that the tribunal lacked jurisdiction because Microtex was registered under the MSMED Act and fell within the definition of a supplier. According to BSNL, Section 18 of the MSMED Act required the dispute to be referred to the Facilitation Council, which ousted any ad hoc arbitration. This objection was, however, raised only at the stage of final arguments before the arbitrator.

Findings of Justice Sandeep V. Marne

The Court rejected the jurisdictional objection. It noted that the MSME party itself had participated in the ad hoc arbitration without protest, and held that Section 18 of the MSMED Act does not automatically oust a consensual arbitration where the supplier itself proceeds before the chosen forum.

On merits, the Court declined to disturb the tribunal's reading of the contract. The arbitrator had held that a clause conferring an unfettered right of price revision on one party with a concomitant duty on the other to accept the dictated price bordered on a feudal and unconscionable bargain. The arbitrator had also construed Clause 24 to mean that the Gujarat and Maharashtra Telecom Circles of BSNL were distinct procurement entities with their own policies, so Gujarat Circle rates could not justify a refund claim against the Maharashtra Circle supply.

Justice Marne reaffirmed that interpretation of contractual terms lies in the exclusive domain of the Arbitral Tribunal, and even an error in such interpretation is within jurisdiction and does not warrant interference under Section 34.

Outcome

The Commercial Arbitration Petition was dismissed and the connected Interim Application disposed of.

Takeaway

Government buyers cannot belatedly invoke MSMED Section 18 to dislodge an ad hoc arbitral award where the MSME supplier itself participated in the chosen forum, and contract interpretation by the tribunal will be respected on Section 34 review.