Recently, the Delhi High Court dismissed a petition challenging an arbitral award under Section 34 of the Arbitration and Conciliation Act. The dispute centred around the respondent's entitlement to benefits under the Micro, Small and Medium Enterprises Development Act, 2006 (hereinafter “MSMED Act”). The Court, applying principles from Supreme Court rulings, upheld the arbitral award, dismissing the petition and affirming the respondent's statutory rights under the MSMED Act.
Brief Facts:
The Petitioner, a private apparel manufacturing company, placed four purchase orders for fabric with the Respondent, a fabric supplier, to fulfil an urgent order from M/s Trent Limited. However, the Respondent’s delivery of the fabric was delayed, causing the Petitioner to miss the critical deadline for delivering the garments to M/s Trent. As a result, M/s Trent cancelled its orders with the Petitioner, leading to significant financial losses for the Petitioner. The Respondent, claiming an outstanding amount of Rs. 1,38,62,111.96/- for the fabrics supplied, filed a claim.
The dispute was first referred to the Micro, Small and Medium Enterprise (MSME) Facilitation Council under the MSMED Act, 2006, which was sent to the Delhi International Arbitration Centre (DIAC). The Arbitrator, after reviewing the case, found that although the goods were delivered, they were not always on time. Despite this, the Petitioner accepted the delayed goods without protest or return, which indicated that time was not considered essential in the contract. The Arbitrator also ruled that the Petitioner failed to prove that the Respondent was made aware of the strict delivery timeline tied to the M/s Trent order.
Ultimately, the Arbitrator awarded Rs. 1,36,65,867/- to the Respondent for the unpaid fabric supply and rejected the Petitioner’s counterclaim of Rs. 96,35,204.90/- for damages. The Arbitrator also dismissed the Petitioner’s objections regarding the Respondent’s MSME registration, as the Petitioner had not raised the issue during the mediation process and participated fully in the arbitration.
Contentions of the Petitioner:
The Petitioner contends that when placing the purchase orders, the Respondent was informed about the final shipment to M/s Trent Limited and its timeline, particularly by Ms. Shilpi Mathur, who handled the transactions with the Petitioner. The Petitioner argues that despite her being the key person with knowledge of the details, the Respondent failed to call her as a witness, instead presenting Mr. Harish Kumar, who lacked knowledge of the matter. The Petitioner also asserts that the Arbitrator overlooked vital evidence, including witness testimonies, legal notices, and WhatsApp communications, which demonstrate the Respondent’s awareness of the time-sensitive nature of the order.
Furthermore, the Petitioner challenges the Respondent’s entitlement to claim benefits under the MSMED Act, arguing that the Respondent’s Udyog Aadhar certificate was outdated and had not migrated to the Udyam portal as required by a 2020 notification. Thus, the Petitioner contends that the Respondent is not statutorily entitled to the relief sought under the MSMED Act.
Observation of the Court:
The Court discussed the limited grounds under Section 34 of the Arbitration and Conciliation Act, 1996, on which an arbitral award may be set aside, as laid out in various Supreme Court rulings. It cited the case of OPG Power Generation Private Limited v. Enexio Power Cooling Solutions India Private Limited, which clarified that an award may be annulled if it is patently illegal or irrational. However, the Court emphasised that a mere erroneous application of law or reappreciation of evidence is not grounds for setting aside the award. It also noted that an award would be considered "perverse" if it is based on no evidence, ignores vital evidence, or is so irrational that no reasonable person could have reached the same conclusion. The Court reiterated that an arbitrator's decision is final on factual matters, and interference is warranted only if the award contravenes the law, contractual terms, or natural justice. In essence, the Court stressed that the power to set aside an award is restricted to instances where the award is not just incorrect but fundamentally flawed, such as being contrary to public policy or based on a serious procedural irregularity.
The decision of the Court:
The Court, applying the legal principles established by the Supreme Court, upheld the Arbitrator's decision, stating that it did not warrant interference under Section 34 of the Arbitration and Conciliation Act. The Court emphasised that it cannot reappraise evidence or substitute its conclusions for those reached by the Arbitrator if the Arbitrator's conclusions are plausible and supported by evidence. The Court found that the Arbitrator had carefully examined the evidence, and no errors of law or fact were found that could make the award perverse or illegal. Regarding the MSMED Act, the Court noted that the Respondent, having registered under the MSMED Act in 2017, was entitled to its benefits, and the Petitioner's objections regarding non-migration to Udyam were dismissed. The Petitioner's arguments were seen as unsubstantiated, and the Court concluded that the Arbitrator's award was consistent with the law and public policy.
Consequently, the Court dismissed the petition, rejecting the challenge to the award.
Case Title: In-Time Garments Pvt Ltd v. Hsps Textile Pvt Limited
Citation: O.M.P. (COMM) No. 436 of 2024
Coram: Hon’ble Mr. Justice Subramonium Prasad
Advocate for Petitioner: Mr. Rakesh Kumar, Mr. Abhimanu Mahajan, Mrs. Preeti Kashyap, Mr. Varun Pandit, Mr. Yash Dhawan and Mr. Yash Tewari
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