The Delhi High Court, in a significant ruling, held that an ad-hoc arbitrator appointed under the Arbitration and Conciliation Act, 1996, has the authority to grant interest as specified under Section 16 of the Micro, Small, and Medium Enterprises Development Act, 2006 (MSMED Act), even if the dispute was not referred to the MSME Facilitation Council. Justice Jasmeet Singh delivered this judgment, clarifying the scope of arbitrators' powers under the MSMED Act.
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Background of the Case:
The dispute originated from a coal handling project at a thermal power plant in Haldia, West Bengal. The plant's owner appointed BF Infrastructure Ltd. (BFIL) as the Engineering, Procurement, and Construction (EPC) contractor. Scorpio Engineering Pvt. Ltd. (Scorpio) was engaged for certain works under this project through a tripartite agreement involving the Owner, Scorpio, and BFIL. Subsequently, Shristi Infrastructure Development (Shristi Infrastructure) became involved through a series of agreements.
Shristi Infrastructure eventually replaced BFIL as the EPC contractor and dealt directly with the Owner. Disputes arose when Scorpio, claiming unpaid dues for supplies and services, initiated arbitration proceedings against Shristi Infrastructure and the Owner. On October 16, 2019, the arbitrator awarded Scorpio ₹6,56,84,982/-, including an interest rate of 38.85% per annum on the outstanding amount. Shristi Infrastructure challenged this arbitral award under Section 34 of the Arbitration and Conciliation Act before the Delhi High Court.
Shristi Infrastructure argued that the arbitrator lacked jurisdiction because the dispute was governed by the MSMED Act. It contended that Section 18 of the MSMED Act mandates that disputes under the Act should be resolved exclusively through the MSME Facilitation Council, making the ad-hoc arbitration invalid. Shristi Infrastructure also asserted that it was not a party to the agreement dated December 20, 2013, between the Owner and Scorpio and therefore could not be held liable.
The company further argued that it was not part of the Owner's corporate group, making the 'Group of Companies' doctrine inapplicable. It highlighted that the arbitrator wrongly imposed liability on it without any contractual relationship or direct correspondence with Scorpio.
Scorpio countered that the petition filed by Shristi Infrastructure was time-barred as it was filed after 1,320 days, far exceeding the permissible 90 to 120-day period under the Arbitration Act. It further argued that Shristi Infrastructure had directly issued purchase orders to Scorpio and had received payments from it, establishing a clear relationship. Scorpio emphasized that Shristi Infrastructure's inconsistent stand — claiming to be an agent of the Owner while simultaneously acting as an independent contractor — further weakened its case.
The Delhi High Court, while analyzing the matter, emphasized that the scope of judicial intervention in arbitral awards is limited under Section 34 of the Arbitration and Conciliation Act. It clarified that such intervention is permissible only on specific grounds, such as incapacity of a party, invalid arbitration agreement, procedural irregularities, denial of fair hearing, or conflict with public policy.
The Court dismissed Scorpio's argument regarding the time-barred nature of the petition, considering the Supreme Court's suo motu extension of limitation periods due to the COVID-19 pandemic. As such, the delay in filing was condoned.
The High Court then addressed the core issue of the arbitrator’s authority under the MSMED Act. It held that under Section 18(1) of the MSMED Act, approaching the MSME Facilitation Council is optional, not mandatory. Since Scorpio had not referred the dispute to the Facilitation Council, the ordinary arbitration process remained valid.
The Court rejected Shristi Infrastructure’s argument that it was not bound by the arbitration clause, noting that Shristi Infrastructure had directly participated in the contract’s performance by issuing purchase orders, processing invoices, and recommending payments. The High Court applied the 'Group of Companies' doctrine, observing that Shristi Infrastructure’s active role made it part of the Owner's group. This approach was consistent with the Supreme Court's ruling in Cox and Kings Ltd. v. SAP India Pvt. Ltd. [2023 INSC 1051], which allowed even a non-signatory to be held liable in arbitration under certain conditions.
Regarding the high interest rate of 38.85%, the Court affirmed that Sections 15 and 16 of the MSMED Act impose obligations on buyers to make timely payments to MSMEs. These sections are enforceable irrespective of any reference to the MSME Facilitation Council. The interest rate under Section 16 is designed as a deterrent against delayed payments, providing protection to MSMEs.
Case Title: Shristi Infrastructure Development vs Scorpio Engineering Private Limited and Anr.
Case No.: O.M.P.(COMM.) 246/2022
Advocates for the Plaintiffs: Mr Vaibhav Gaggar
Advocates for the Defendants: Mr Satyam Dwivedi, Mr Harshit Prakash and Mr Puja Jakhar (for Respondent 1)
Date of Pronouncement: 1st May 2025
