Ad-Hoc Arbitrator Can Grant Interest U/S 16 Of MSMED Act, Even If Reference Was Not Made To MSME Council: Delhi High Court

Brief Facts:

Respondent No. 2 (“Owner”) owned a thermal power plant in Haldia, West Bengal. It appointed BF Infrastructure Ltd. (“BFIL”) as the 'Engineering, Procurement, and Construction (EPC)' contractor of the plant. In 2012, the Owner invited bids for a coal handling project related to the plant. A successful bid was submitted by Scorpio Engineering Pvt. Ltd. (“Scorpio”). A tripartite agreement was executed between the Owner, Scorpio and BFIL with a total project value of Rs. 47.5 Crore.

In 2013, BFIL invited bids for various works related to the same project. Shristi Infrastructure Development (“Shristi Infrastructure”) submitted a successful bid. Subsequently, letters of intent were issued. On 20th December 2013, a purchase order and a works order were issued in favour of Scorpio for the equipment and related services. On the same day, BFIL and the Owner directed Shristi Infrastructure to issue identical purchase and works order to Scorpio.

On 6th June 2014, the Owner, BFIL and Shristi Infrastructure entered into a tripartite agreement, transferring all of the BFIL's obligations to the Owner. As a result of this agreement, Shristi Infrastructure started dealing with the Owner directly. On 3rd August 2015, the Owner confirmed the substitution of Shristi Infrastructure as the new EPC contractor by executing a supply contract.

Disputes arose and Scorpio sent a legal notice to Shristi Engineering and the Owner, invoking arbitration on 14th April 2017. Shristi Engineering claimed that it never received the notice. Subsequently, Scorpio filed a petition under Section 11 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) and a sole Arbitrator was appointed. The Arbitrator pronounced the award on 16th October 2019 and directed Shristi Engineering and the Owner to jointly and severally pay Rs. 6,56,84,982/- to Scorpio. This included Rs. 5,73,15,078/- for unpaid supplies and services, and Rs. 83,69,904/- for costs incurred to continue bank guarantees. An interest rate of 38.85% per annum was also levied from the date of the award until actual payment. In case of delay beyond six weeks, an enhanced rate of 2% above the prevailing interest rate was to apply. Feeling aggrieved, Shristi Infrastructure challenged the award under Section 34 of the Arbitration Act, before the Delhi High Court (“High Court”).

Contentions of Shristi Infrastructure:

Shristi Infrastructure contended that the Arbitrator did not have jurisdiction over the subject matter, as it was a dispute under the Micro, Small and Medium Enterprises Development Act, 2006 (“MSMED Act”). Section 18 of the MSMED Act is a special provision. Hence, it overrides the Arbitration Act. Therefore, an arbitration could only have been conducted by the 'facilitation council', as provided under the MSMED Act. Shristi Infrastructure further contended that it was not a party to the agreement signed on 20th December 2013, which issued a purchase and works order in favour of Scorpio. Therefore, there was no contractual relationship or privity of contract with either Scorpio or the Owner. Hence, Shristi Infrastructure could not have been made a party to the arbitration. Shristi Infrastructure was also not a part of the group structure of the Owner entity and hence, the application of the group of companies doctrine was not applicable. Despite this, the Arbitrator held that Shristi Infrastructure acted as an agent of the Owner. Even though the agency was assumed, Section 230 of the Indian Contract Act provides that an agent can't be personally held liable for the act of the principal. The statement of claim filed by Scorpio was directed against the Owner solely and all actions such as changes in layout plans and delays were attributed to the Owner. However, the Arbitrator also imposed liability on Shristi Infrastructure. Shristi Infrastructure was never a part of any correspondence or meetings relating to the performance of the contract. Further, the invoices submitted by Scorpio were never approved by Shristi Infrastructure. However, the Arbitrator awarded the sum of Rs. 5,73,15,078, relying solely on those invoices without verification.

Contentions of Scorpio (Respondent No.1):

Scorpio contended that this petition was filed during the pendency of a previous Section 34 petition challenging the same arbitral award, which remained defective for more than 3 years. When Shristi Infrastructure failed to cure the defects, it filed this Section 34 petition to bypass the limitation period. The award was passed on 16th October 2019, while this petition was filed on 16th May 2022 with a delay of 1320 days. The Arbitration Act provides a time period of 90 days (extendable up to 120 days) for challenging the award. Further, Shristi Infrastructure introduced several grounds in this petition, which were not argued before the Arbitrator. Regarding the privity of the contract, Scorpio argued that it received direct work and purchase orders from Shristi Infrastructure. Shristi Infrastructure also had the right to charge liquidated damages from Scorpio. Thus, when an agent has a personal interest in the contract, it could be held liable for the actions of the principal. Shristi Infrastructure also made inconsistent claims. On one hand, it cited Section 230 to claim agency. On the other hand, it admitted that it was an independent contractor. Scorpio also contended that Shristi Infrastructure had issued the invoices, and the payments were made directly to it. Thus, there was an independent and direct relationship.

Observations of the High Court:

The High Court held that the scope of judicial intervention with an arbitral award is limited in nature. Section 34 petition could only be entertained in cases of incapacity of a party, invalid arbitration agreement, procedural irregularity, denial of fair hearing, or conflict with public policy. The courts are not permitted to reappreciate evidence or substitute their own view in place of the arbitral tribunal's view. The High Court rejected Scorpio's contention that this petition was not valid as another Section 34 petition was pending with defects. It was held that the previous petition was non-est (not in existence), as no steps were taken to bring it before the High Court. Further, the present Section 34 petition was within the limitation period, in light of the Supreme Court's suo motu extension of limitation due to the COVID-19 pandemic. The delay in filing the present petition was condoned, and it was held that mere procedural technicalities must not defeat substantive justice.

The High Court further held that under Section 18(1) of the MSMED Act, reference to the Facilitation Council is optional and not mandatory. Since Scorpio had not approached the Facilitation Council, Section 18 of the MSMED Act was not triggered. Therefore, the ordinary arbitral proceedings were valid and unaffected.

The High Court rejected Shristi Infrastructure's contention that it was not bound by the arbitration clause as it was not a party to the agreement signed on 20th December 2013 between the Owner and Scorpio. It was held that Shristi Infrastructure played a central role in the contract's performance by issuing purchase orders, checking invoices, and recommending payments. This factual finding was accepted as Shristi Infrastructure failed to present rebuttal evidence in front of the arbitrator. Based on its central role, it was held that Shristi Infrastructure was a part of the Owner's group of companies. The High Court referred to Cox and Kings Ltd. v. SAP India Pvt. Ltd. [2023 INSC 1051], in which the Supreme Court held that even a non-signatory can be made a party to arbitration if there was mutual intent and active involvement of the non-signatory in the composite nature of transactions. Shristi Infrastructure's contention regarding agency under Section 230 of the Indian Contract Act was also rejected. It was observed that the Arbitrator passed the award based on the 'Group of Companies' doctrine and not on the basis of the agency.

Additionally, the High Court held that Sections 15 and 16 of the MSMED Act impose corresponding duties on the buyers to make timely payments. Irrespective of whether a reference to the Facilitation Council is made or not, Sections 15 and 16 are enforceable in an MSME setup. When the buyer defaults in making the payments, obligations under these sections are triggered. It was further held that the MSMED Act was specifically designed to protect the interests of MSMEs and thus, Section 16 of the MSMED Act prescribes a high interest rate as a deterrent mechanism against delayed payments. The issue between Shristi Infrastructure and Scorpio was within an MSME setup. Therefore, the High Court upheld the interest rate of 38.85% imposed by the Arbitrator on the outstanding payment and costs. As a result, the arbitral award was upheld, and Shristi Infrastructure's Section 34 petition was dismissed.

Case Title: Shristi Infrastructure Development vs Scorpio Engineering Private Limited and Anr.

Citation: 2025 LiveLaw (Del) 521

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

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