Courts Cannot Determine Whether Agreement Is Works Contract Under MSMED Act, Open To Be Adjudicated By Arbitrator Only- Delhi HC
The Delhi High Court has observed that whether an agreement is a works contract has to be determined by the Arbitrator only under the MSMED Act, the Court cannot adjudicate upon such an issue.
The Court dismissed an appeal that was filed contending that agreements were distinct composite work contracts involving both services and goods.
The Division Bench of Chief Justice Satish Chandra Sharma and Justice Saurabh Banerjee held that "The learned Single Judge in the first impugned order has not gone into the determination of the subject work contracts/agreements as such and has rightly left the issue, as to whether the work contracts/agreements were in fact work contracts which are indivisible contracts including the ‘supply of goods’ and which ‘render a service’ open to be adjudicated by the learned Arbitrator. As such, this Court cannot go into the said determination."
The Micro and Small Enterprises Facilitation Council (South-East), GNCTD (MSEFC), issued two Reference Orders on February 7, 2022, in MSEFC Case under The Micro, Small and Medium Enterprises Development Act, 2006 (MSME Act). These orders pertained to disputes related to civil works, electrical works, and other structural works at 'Wishtown Klassic Block Towers, Jaypee Greens, Noida (UP)', involving Jaiprakash Associates Ltd. (JAL) and Krishna Buildestates Pvt. Ltd. (KBPL).
JAL challenged these orders by filing Writ Petitions. Both petitions were dismissed together in a common order dated March 16, 2023. Subsequent reviews of these orders were disposed of in a common review order dated April 12, 2023.
KBPL, despite registering under the MSME Act on September 7, 2019, had been invoicing JAL for work contracts/agreements prior to registration. The supplies took place after KBPL's MSME registration. Following disputes arising from these contracts, KBPL approached MSEFC to refer the disputes to arbitration. MSEFC issued Reference Orders on February 7, 2022, referring the disputes to the Delhi International Arbitration Centre (DIAC).
JAL's contention was that since work came to a halt by August 31, 2019, and bills were raised before KBPL's MSME registration, the references were not valid. JAL argues that the MSEFC lacked jurisdiction to refer the disputes to arbitration. Moreover, JAL asserts that since the disputes involved both work contracts and services, and only one bill was raised post-registration of KBPL, all agreements' disputes shouldn't have been referred to arbitration.
Advocate Anil Dutt appeared for the Petitioner and Advocate Avishkar Singhvi appeared for the Respondents.
In response, the counsel for JAL had contested both impugned orders on the basis that the agreements were distinct composite work contracts involving both services and goods. They argued that KBPL did not inform about its MSME registration and pointed out discrepancies in billing dates. They also claimed that the reference to arbitration nullified their agreed jurisdiction for arbitration.
On the other hand, KBPL's counsel argued that since one of the bills covered the period beyond KBPL's MSME registration, the reference orders were valid.
The Court noted that the Single Judge, through the first impugned order, had held that even though the work contracts were initiated before KBPL's MSME registration, some agreements' bills and work took place post-registration, making the MSME Act applicable. This order also noted that the disputes involved both services and goods and highlighted several factors, such as the interlinked agreements and the continued work post-registration.
“it is an admitted position of the appellant that one of the invoices under the work contracts/agreements is indeed post registration of KBPL as a MSME. Thus, this Court is of the opinion that the MSEFC was well within its powers to refer the matter to arbitration and there was no error of any kind.”
The review of the first impugned order, addressed through the second impugned order, modified a portion of the first order but left the question of whether the contracts were work contracts to be decided by the Arbitrator.
The Court evaluated the arguments, referencing precedent cases, and concluded that KBPL's registration as an MSME, the ongoing work, and the fact that one invoice was post-registration all supported the MSEFC's reference. The Court found no merit in JAL's challenges and upheld the impugned orders.
Accordingly, the Court dismissed the appeal.
Cause Title: Jaiprakash Associates Ltd. v. Micro and Small Enterprises Facilitation Council & Anr.
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