Court’s Decision
The Bombay High Court set aside the arbitral award passed by the Micro and Small Enterprises Facilitation Council under the MSMED Act, 2006, holding that the reasoning was “cryptic, skimpy and summary” and failed to consider core contentions raised. The Court ruled that the award suffered from perversity and inadequate reasoning, making it unsustainable under Section 34 of the Arbitration and Conciliation Act, 1996. The matter may be re-litigated before the Facilitation Council, but without reliance on the present award. The Court also directed release of the deposit made by the Petitioner.
Facts
Relevance of the Bombay High Court’s Ruling
- The Petitioner, Nexus Infratech, an MSME entity, was awarded a contract worth ₹14.75 crores by the Military Engineering Services for installation of a 2300 KWP solar power plant.
- Nexus sub-contracted work worth ₹12.35 crores to SIKCO Engineering Services (SESL).
- Due to delays, Nexus issued a Termination Notice on 26 August 2019 alleging non-completion of work. By then, ₹8.08 crores had already been paid.
- SESL claimed non-payment of certain invoices and approached the Facilitation Council. Arbitration ensued after conciliation failed.
- The Arbitral Award dated 30 December 2022 held that ₹2.05 crores was payable with statutory interest to SESL based on three invoices (003, 018, 020).
- Nexus challenged the award under Section 34, alleging that the invoices were fabricated, bogus, or duplicated.
Issues
- Whether the Facilitation Council’s award suffered from perversity, inadequacy of reasoning, and failure to consider vital contentions.
- Whether GST returns filed belatedly could form the sole basis of acceptance of invoices.
- Whether the arbitral award satisfied the standards required under Section 34 of the Arbitration Act.
Petitioner’s Arguments
- The invoices were fabricated; invoice 018 was a duplicate of invoice 004, already paid.
- Invoice 003 allegedly covered supplies never received; the e-way bills cited Mahindra Bolero vehicles incapable of carrying the material value of ₹1.65 crores.
- GST returns for invoice 003 were filed belatedly in July 2021, long after disputes arose and arbitration commenced, indicating fabrication.
- The Arbitral Tribunal ignored specific objections and treated GST payments as conclusive proof of validity.
- The award contradicted evidence and failed to provide proper reasoning.
Respondent’s Arguments
- Nexus wrongfully terminated the contract and directly procured materials from suppliers, cutting SESL out.
- Materials and services under the invoices were duly supplied.
- The Facilitation Council rightly relied on GST records and invoices to uphold SESL’s claim.
- Objections raised by Nexus were frivolous and intended to avoid payment.
Analysis of the Law
- The Court emphasized that under Section 34, it does not sit as an appellate authority but must assess whether the award reflects a reasonable decision-making process.
- Citing Associate Builders v. DDA (2015) 3 SCC 49, the Court reiterated that even an award by lay arbitrators must be logical and address contentions raised.
- Referring to OPG Power Generation (P) Ltd. v. Enoxio Power (2025) 2 SCC 417, the Court classified awards into three categories: (1) no reasons/unintelligible reasons, (2) improper reasons showing flawed process, (3) inadequate reasons. Awards falling in category (2) are vulnerable under Section 34.
Precedent Analysis
- Associate Builders v. DDA (2015) 3 SCC 49: Courts cannot re-appreciate evidence but can set aside awards that are perverse or based on flawed reasoning.
- OPG Power Generation (2025) 2 SCC 417: Awards with cryptic, unintelligible, or inadequate reasons may be interfered with under Section 34.
- The Court applied these precedents to hold that the Facilitation Council’s reasoning—resting solely on GST returns without considering timing or allegations of fabrication—was flawed.
Court’s Reasoning
- The arbitral reasoning was limited to one cryptic paragraph, merely holding that invoices with GST paid were valid.
- The Council failed to address core allegations of fabrication, duplication, and belated GST filing.
- The award wrongly assumed all material was supplied by SESL without analysing evidence.
- The Court observed: “The reasoning in the Impugned Award is cryptic, skimpy and summary… In my assessment, the reasons in the Impugned Award are inadequate and reveal a flaw in the decision-making process.”
- Both Nexus and SESL, being MSMEs, deserved a higher duty of care from the Facilitation Council.
Conclusion
The Court set aside the Impugned Award, holding it unsustainable under Section 34 for perversity and inadequate reasoning. The arbitral process may be conducted afresh, with the Facilitation Council permitting evidence based on existing pleadings. Deposits made by Nexus were ordered to be released within four weeks. No costs were imposed, leaving parties to press claims in future proceedings.
Implications
- Reinforces that Facilitation Council awards must provide cogent reasons, even if delivered by non-judicial members.
- Establishes that mere reliance on GST returns is insufficient when allegations of fabrication are raised.
- Highlights the duty of higher scrutiny when both parties are MSMEs, to ensure fairness and prevent abuse.
- Strengthens judicial oversight under Section 34 against perverse or inadequately reasoned awards
