By: Animekh Pandey

Introduction

On June 07, 2024, the India International Arbitration Centre (the “Centre”) released the India International Arbitration Centre (Conduct of Micro and Small Enterprises Arbitration) Regulations 2024 (the “Regulations”). This article will critically understand the implications of the Regulations on the arbitration process under the Micro, Small, and Medium Enterprises Development Act, 2006 (“MSMED Act”).

Overview of the Regulations

Under section 18(3) of the MSMED Act, the Micro and Small Enterprises Facilitation Council (the “Facilitation Council”) refers a dispute for arbitration. Now, the arbitration will be conducted and administered by the Centre according to the Arbitration Act upon receiving a reference from the Facilitation Council. Before moving forward, I have highlighted a few key points about the Regulation and arbitration process envisaged under it:

1. Statement of Claim (Regulation 4), Defence and Counter Claim (Regulation 5): A 30 day window has been provided in the Regulationswith a 15 day extension for amendments is allowed via email, or physical submissions.
2. Appointment of Arbitrator (Regulation 8): The Centre will appoint a sole arbitrator from the Centre’s panel, who will disclose any relationships or interests that might affect their impartiality or ability to commit time to the arbitration, and must continually disclose any such circumstances throughout the proceedings to ensure independence, impartiality, and competence.
3. Fast Track Procedure (Regulation 11): All proceedings under the Regulations will involve a framework of fast-track arbitration to deliver an award within six months based on written submissions, with oral hearings only if necessary. 
4. Interim Measures ((Regulation 12): During arbitration, a party can request interim protective measures from the Arbitral Tribunal, such as preserving property or securing disputed amounts, which the Tribunal can modify, suspend, or terminate if needed.
5. Mode of arbitration (Regulation 17): The Tribunal with the consent of both the parties may conduct proceedings in physical, electronic, or hybrid modes.
6. Final Award ((Regulation 19): The draft of the final award needs to be submitted by the Tribunal within 21 days of closing of the proceedings to the Registrar who will further have 7 days to make suggestions for change which may be accepted by the Tribunal. The award allows for the charging of interest as contemplated under the MSMED Act. The Parties are also allowed a 30-day window from the passing of the award to apply for amending typographical/clerical errors or even ask for an interpretation about the whole/part of the Award from the Tribunal, which the Tribunal will consider and act upon within 30 days from the date of the Award.
7. Confidentiality (Regulation 28): The Regulations protect the parties, the Tribunal, and the Centre from any disclosure without prior written consent in regards to the proceedings.
8. Cost (Regulation 22) and Legal Aid ((Regulation 25): The Regulation clearly lays down all kinds of fees that are required to be paid by the Parties, which is contingent upon the principal sum at stake. It also provides for a waiver of up to 50% of the cost if the enterprise is facing financial difficulties. However, this is contingent on the amount of claim at stake in a proceeding.

Devil lies in the details

We need to appreciate the framework that has been envisaged under the Regulations and how it aims to increase transparency, proficiency, and time-bound dispute resolution. However, the Devil lies in the details, and when we go into details of how the framework regarding the costs are calculated under the Regulations, we make an interesting observation. Clause 22 of the Regulations clearly makes for a case where the proceedings can be suspended and the claims terminated if the Parties fail to pay the costs for arbitration. This cost is a joint obligation of both the Parties to pay with the Registrar as the final authority to determine these costs or any additional costs that are required to be paid. This Clause also allows any Party to pay for the costs that are obligations to be paid by another Party. If Clause 22 is read with Clause 29(2) of the Regulation we will make another unique observation, as Clause 29(2) allows the Registrar to take any decisions without providing any reasons unless explicitly stipulated in the Regulations. This would in practise lead to a situation where an unwilling Party who wants to escape the Regulations can simply not pay for their share of the costs. This would either lead to the other Party paying on behalf to sustain the arbitration proceeding or risk termination of proceedings altogether, even if their claim is stronger. Moreover, any scope of impropriety by the Registrar could also be shielded as they are not even obligated to pass a reasoned order and simply terminate the proceedings at will.

Cost Matters

Under the Haryana Micro and Small Enterprises Facilitation Council Rules, 2021 the fee that was originally required was a total amount of INR 3500 to bring a matter for reference to the Facilitation Council. Under the Daman & Diu Micro and Small Enterprises Facilitation Council Rules, 2016; the Telangana State Micro and Small Enterprises Facilitation Council Rules, 2017 and the Tamil Nadu Micro and Small Enterprises Facilitation Council Rules, 2017 the fee was originally INR 1000. In the Regulations, this fee has been made contingent upon the sum of both the claim and counter-claim, which starts from INR 10,000 which can go upward of INR 75,000. This would step up a hurdle that many MSME(s) have now to bear these additional fees making the very first step of admission of a reference expensive. We need to understand that the Regulations cover enterprises that according to the MSMED Act themselves are small scale industries. According to the latest data available from the Annual Report of the MSME Ministry 51% of the MSME(s) are rural based with a majority of them being manufacturing or trade service industries. The aim of the MSMED Act is to promote, develop, and enhance the competitiveness of small and medium enterprises to allow smooth flow of credit to these enterprises and to minimise the incidence of sickness of these industries. The Regulation fails to consider these considerations which will ultimately increase the financial burden on these enterprises and which will make them wary to initiate claims under the Regulations.

Additionally, if we even expect that these enterprises would be given some relief by way of Legal Aid envisaged in the Regulations, but the existence of Clause 29(2) again gives the Registrar complete discretion to allow the same, without providing any reasons to the contemplation behind their decision. In the case of Silpi Industries v. Kerala State Road Transport Corporation 2021 SCC Online SC 439 and again in the Gujarat State Civil Supplies Corporation Limited v. Mahakali Foods Private Limited 2022 SCC Online SC 1492 the Hon’ble Supreme Court has emphasized that arbitration proceedings initiated as per Section 18(3) of the MSMED Act, 2006 are to protect MSME’s by setting out a statutory mechanism for the payment of interest on delayed payments. Moreover, the Regulation does define financial difficulties, providing for a vide scope of interpretation that the Registrar can administer. The inclusion of such provisions in the Regulations threatens the intent of the MSMED Act as the Registrar can reject claims without providing any reasons according to the Regulations.  

Conclusion

Recently, with the genesis of institutions such as the Arbitration Bar of India, such issues can be highlighted and appeal to revise the Regulations to contextualise it in the contemporary ground realities can be achieved. The intent of the Regulations is definitely muddled with a few hurdles that should be understood and removed to uphold the objective of the MSMED Act and also to promote arbitration regime in India. This Regulation has created a unique opportunity to connect the arbitration regime with the domestic market in India and to familiarize a vastly diverse business sector with the efficiency prevalent in arbitration. An increase in the accountability over the administrative functions should also be emphasized as it would help to achieve more accessibility for arbitration in the domestic market and would truly achieve the objectives of a speedy, cost-efficient and transparent mechanism that is favoured by enterprises.

Author’s Bio

Animekh Pandey is an in-house lawyer at Encardio Rite Group. For any queries or suggestions regarding his article, feel free to reach out to him at animekh29pandey@gmail.com.