TEAM NO 22 7th College of Legal Studies, University of Petroleum and Energy Studies Intra Moot Court Competition 2012

Before

THE HONBLE HIGH COURT OF UTTRANSH

Writ Jurisdiction U/Art.226 &227

W.P. No ---- / 2012

Western Major Ltd. ........ Petitioner

Vs.

J& G Ltd. (Through Managing Director)............ Respondent 1 Uttransh Facilitation Council (Through Chairman)....Respondent 2 State of Uttransh (Through Secretary)..........Respondent 3 Union of Indiana (Through Secretary)......Respondent 4

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TABLE OF CONTENTS

List of Abbreviations......................................................................................... -3-

Index of Authorities.............................................................................................-4-

Statement of Jurisdiction................................................................................... -5-

Statement of Facts................................................................................................-6Statement of Issues.......-7Summary of Arguments.......-8Arguments Advanced.......-9Prayer.......-22-

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LIST OF ABBREVIATIONS 1. AIR 2. AC Act 3. BOMLR 4. Edn. 5. Kant 6. MSMED 7. MSEFC Rules 8. Ors. 9. Raj 10. SC 11. SCC 12. Sec. 13. SCW 14. U/S 15. UOI 16. v. All India Reporter Arbitration and Conciliation Act, 1996 Bombay Law Report Edition Karnataka Micro, Small and Medium Enterprises Development Act, 2006
Micro Small and Medium Enterprises Facilitation Council Rules, 2006

Others Rajasthan Supreme Court Supreme Court Cases Section Supreme Court Weekly Under section Union of India Versus

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INDEX OF AUTHORITIES 1. A.P.Transco v. Sri Gowri Sankar Cable Industries and others, 2002 (3) ALT 134(D.B.) 2. Anukul Chandra Pradhan v. Union of India, 1997 (6) SCC 1 3. The Managing Director v. Afco Rubbers (p) Ltd, W.P.(C).No. 31131 of 2009 4. Eden Exports v. Union of India & Others MANU/TN/1705/2010 5. Jupiter Alloy v. Union of India & Ors., WP No. 871 of 2011, Kolkata High Court 6. K.S.R.T.C. v. Union of India, 2010(1) KLT65 7. Lucent Technologies Inc. v. ICICI Bank Ltd, MANU/DE/2717/2009 8. Mysore Cement v. Svedala Barmac Ltd, AIR 2003 SC 3493 9. Principal v. Manibhai, 2011 Indlaw GUJ 1292 10. 10.Premier Automobiles v. Kamlekar Shantaram Wadke, 1975 SC 2238 11. Raj Kumar Shivhare v. Assistant Director, Directorate of Enforcement and another, 2010 (4) LW 1 12. Registrar, Cooperative Society v. Krishan Kumar Singhania, 1995(6) S.C.C. 482 13. Sunder v. Union of India, MANU/SC/0573/2001 14. United Electricals Limited v. Symphony Engineers Kollam, W.P.(C).No. 27868 of 2009, Kerala High Court 15. Welspun v. Micro Small and Medium Enterprises Facilitation Council & Others, (2012)166PLR195 16. Bengal Jute Mills v. Jewraj, AIR 1943 Cal 13; 17. Prince v. GG Council, AIR 1955 Punj 240 18. Mahomedali v. Charatsingh, 80 IND. Cas 596

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STATEMENT OF JURISDICTION

The Respondents humbly submit before the Hon'ble High Court of Uttransh the memorandum for the Respondents in the W.P. -- /-- filed by Western Major Ltd. under Article 226 and 227 of the Constitution of Indiana, 1950.

The present memorandum sets forth the facts, contentions and arguments in the present case .

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STATEMENT OF FACTS I J&G Ltd. is a company incorporated in the state of Uttransh and is a registered small scale enterprise. Western Major Ltd., a road construction company, is incorporated in Indiana. II In the year 2009, the state of Uttransh awarded a major contact to Western Major for the construction of roads connecting the rural areas to the major cities/towns. Western Major decided to enter into a contract with J&G Ltd. for supply 20 units of machinery to Western Major at cost of Rs. 12 Lakhs each unit, via two contracts for 10 units each. III A letter of comfort was also issued by state government of Uttransh in favor of Western Major on behalf J&G Ltd. IV Under the first contract (AT-336) on receiving half of the ordered quantity Western Major made full payment in respect of full contract. While, under the second contract Western Major received full quantity and was left to make a payment of Rs 40 Lakhs towards the contract. V On failure to supply 5 machines by J&G, Western Major took recourse to Clause 23 of the contract and after adjusting the claim with payment pending under Contract no AT-337 asked for a claim of Rs, 23, 60,000. Western Limited moved to the Govt. of Uttransh for enforceability of LOC. But it was rejected. VI Meanwhile, J&G received a award in his favor by Facilitation Council on reference made to it under Section 18 of MSMED Act, 2006.Aggrieved by the said award. The Petitioner filed the present petition.
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STATEMENT OF ISSUES

1. Whether Petition under Article 226 & 227 of the Constitution of Indiana is maintainable before this Honble Court?

2. Whether the Arbitral Award passed by the Facilitation Council is liable be set aside?

3. Whether the Facilitation Council is liable to take into account the counter-claim setup by the petitioner?

4. Whether the Government of Uttransh is liable to pay Rs 23, 60,000 to the Petitioner on account of Letter of Comfort?

5. Whether the impugned provisions of the MSMED Act, 2006 are ultra vires of the Constitution of Indiana?

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SUMMARY OF ARGUMENTS 1. Petition under Article 226 & 227 of the Constitution of Indiana is not maintainable before this Honble Court. The remedy under Article 226 is a discretionary remedy and the High Court has always the discretion to refuse the ground of any writ if it is satisfied that the aggrieved party can have an adequate remedy elsewhere. 2. The Arbitral Award passed by the Facilitation Council is not liable to be set aside. The Facilitation Council has the jurisdiction to act as an arbitrator by itself, after the failure of conciliation proceedings. 3. The Facilitation Council does not have the jurisdiction to decide and entertain the counter claim set up by the Petitioner. The Facilitation Council has only jurisdiction to hear and adjudicate the matter regarding payments to the supplies which were made to the buyer as per Section 17 of the Micro, Small and Medium Enterprises Development Act 2006 and not to decide all the disputes. 4. The Government of Uttransh is not liable to pay Rs 23, 60,000 to the Petitioner on account of Letter of Comfort. The Respondent humbly contends that he is not liable to pay any amount to the Petitioners as Letter of Comfort is not a legally binding document. 5. Sections 15, 18 and 19 of the MSMED Act, 2006 are constitutionally valid. It is submitted that the impugned provisions of the MSMED Act, 2006, are well within the scope of the Constitution.

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ARGUMENTS ADVANCED

1. Petition under Article 226 & 227 of the Constitution of Indiana is not maintainable in this Honble Court.

The High Courts should exercise the jurisdiction under Article 226 in accordance with judicial considerations and well established principles. Any exercise of jurisdiction based on irrelevant or extraneous considerations shall be invalid. 1 The remedy in Article 226 is a discretionary remedy and the High Court has always the discretion to refuse the ground of any writ if it is satisfied that the aggrieved party can have an adequate remedy elsewhere.2 1.1. Availability of an alternative remedy acts as a bar to file a petition in the Honble High Court. The impugned Award made by the Facilitation Council, being an Arbitral Award, as per the provisions of sub-section (3) of Section 18 of the MSMED Act, could be challenged by the petitioner before the District Court, under the provisions of Section 34 of the Arbitration and Conciliation Act, 1996. It is thus contended that as there is an efficacious, alternative statutory remedy, the petition may not be entertained. The Kerala High Court in K.S.R.T.C. v. Union of India,3 held that When a Statute provides for the appellate remedy, such a remedy cannot be avoided or bypassed, on the ground that certain statutory conditions imposed for availing the same, are
1 2

Union of India v. WN Chadha, AIR 1993 SC 1082 Rashid Ahmed v. Municipal Board, AIR 1950 SC 163; C.A. Abraham v. ITO, AIR 1961 SC 609; S.Jagadeesan

v. Ayya Nadar Janaki College, (1984) 1 SCC 158

3

2010(1) KLT65

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onerous. An appeal is a statutory remedy and not a fundamental right, and merely because the remedy is a conditional one, does not mean that it should be ignored, as has been done by the petitioner, by invoking the writ jurisdiction of this Court. Further in Eden Exports v. Union of India & Others 4 the Madras High Court held that, in any event, the question is once the petitioner had participated in the proceedings before the Facilitation Council, then any resultant order will have to be challenged before the appropriate court and certainly the jurisdiction under Article 226 of the Constitution cannot be invoked that too for commercial cause where the right of parties were governed by the contract and intervened by MSMED Act. The Apex Court in Raj Kumar Shivhare v. Assistant Director, Directorate of Enforcement and another5 held that; If the appellant in this case is allowed to file a writ petition despite the existence of an efficacious remedy by way of appeal under Section 35 of FEMA this will enable him to defeat the provisions of the Statute which may provide for certain conditions for filing the appeal, like limitation, payment of court fees or deposit of some amount of penalty or fulfillment of some other conditions for entertaining the appeal. It is obvious that a writ court should not encourage the aforesaid trend of by-passing a statutory provision. Thus, it is a well settled principle of law that a writ petition should not be allowed when the statue itself provides for an efficacious remedy.

4 5

MANU/TN/1705/2010 2010 (4) LW 1

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Further in Jupiter Alloy v. Union of India & Ors.6 the Honble Calcutta High court held that; Even if it is accepted that Facilitation Council gave the award without following the procedure under the Act, 2006, may at best lead to a conclusion that the award is vitiated either by an illegality or by a material irregularity, and in such case the question of remand to the Council will arise. There is no reason to permit the petitioners to approach the Writ Court for the purpose. In United Electrical Limited7 and The Managing Director v. Afco Rubbers (p) Ltd. 8 the Kerala High Court rejected the writ petitions under Article 226 challenging the Award by the facilitation Council on the ground of availability of an efficacious alternative remedy under Section 34 of the AC Act, 1996. Thereby, it is submitted that the writ petition shall not be entertained by this High Court as the above submissions clearly negate the essential requirements for the admissibility of any petition by the High Court exercising its jurisdiction under Article 226 of the Constitution. 2. The Arbitral Award given by Facilitation Council is not liable to be set aside. The Award passed by the Facilitation Council is valid and according to the provisions of law. The MSMED Act, 2006 confers absolute power to the Council to act as arbitrator in all the cases. The intent of the legislation is to provide an adequate and speedy forum to small scale industries so as to protect them from big industries. This intent further made explicit by Section 24 of MSMED Act, 2006.

6 7 8

WP No. 871 of 2011 United Electricals Limited v. Symphony Engineers Kollam, W.P.(C).No. 27868 of 2009 W.P.(C).No. 31131 of 2009

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2.1 The Facilitation Council has the jurisdiction to act as an arbitrator. The Respondent contends that the Facilitation Council has the jurisdiction to act as an arbitrator by itself, after the failure of conciliation proceedings. Section 18(3) of MSMED Act, 2006 clearly lays down that, Where the conciliation initiated under sub-section (2) is not successful and stands terminated without any settlement between the parties, the Council shall either itself take up the dispute for arbitration or refer it to any institution or centre providing alternate dispute resolution services for such arbitration. The Honble Punjab & Haryana High Court, in Welspun v. Micro Small and Medium Enterprises Facilitation Council & Others9 held that; Section 18(3) provides that where a conciliation initiated under Section 18(2) is not successful and stands terminated without any settlement between parties, the Council shall itself take up the dispute for arbitration. If Section 18 of the Act, 2006 provides for a mode of resolution of a dispute wherein this Council is to adjudicate acting as an arbitrator in terms of the Act, 1996, it would not be open for any party to oust the said jurisdiction of this Council which has been vested in terms of Section 18(3) of the Act, 2006 merely by creating a mutual agreement. Thereby, it is clear that after the conciliation proceedings fail, the Facilitation Council has the power, either to act as an arbitrator by itself or refer the matter to an institute for arbitration.

(2012)166PLR195

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2.2 The provisions of the MSMED Act, 2006 have an overriding effect over the terms of the contract and any other law in force. It is pertinent to note that MSMED Act, 2006 is a special Act of the legislature. It is an Act to provide for facilitating promotion and development and for enhancing the competitiveness of micro, small and medium enterprises and for matters connected therewith or incidental thereto 10. Section 24 of the Act, 2006 gives an over-riding effect to the provisions of the Act. It lay down: The provisions of sections 15 to 23 shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force. In Welspun11, the Punjab & Haryana High Court explaining the procedure under Section 18 held that: Section 18(3) provides for two procedures: (i) on termination of conciliation, it can either take up the arbitration itself or (ii) refer the matter to arbitration as though there is an arbitral agreement between the parties. It is possible for a Council to make a reference to arbitration even in the absence of an arbitration agreement. If there is an arbitration agreement between the parties, it only means that the power is still available when the Council, without invoking its own powers. Thereby, the Facilitation Councils power to act as an arbitrator after conciliation proceedings have failed is absolute and unfettered. Moreover, there are at least twenty five central enactments, which contain provisions for statutory arbitrations. The reference to statutory arbitration and the primacy that it obtains over
10 11

Supra note 3, 4, See Also Principal v. Manibhai, 2011 Indlaw GUJ 1292 Supra note 9

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contractual reference to independent modes of resolution of disputes had come before Hon'ble the Supreme Court in several cases. In Registrar, Cooperative Society v. Krishan Kumar Singhania12, the Supreme Court dealt with a conflict between the statutory arbitration contained under West Bengal Cooperative Societies Act, 2006 and Arbitration and Conciliation Act, 1996 and provided for a primacy of application of the State Act. 2.3 The Arbitration Award has been passed according to the procedure laid down in the MSMED Act, 2006. The Respondent humbly submits that MSMED Act, 2006 is a special Act, therefore, the provisions of the said Act would prevail over any other law. As conciliation initiated under Section 18(3) was not successful, the Council itself took up the dispute for arbitration, in exercise of jurisdiction vested in it under the provisions of Section 18(1) of the MSMED Act. Further, Section 18 does not require that a formal order should be passed regarding the failure of conciliation and reference of the dispute to itself, for arbitration, by the Council. The Honble High Court of Gujarat in Principal v. Manibhai13, explaining the procedure to be followed by Facilitation Council while acting as arbitrator held; If the provisions of sub-s.(3) of S. 18 are perused carefully, it is clear from the plain reading thereof that there is no requirement of making a formal order to the effect that conciliation has failed and that the dispute is to be taken up by the Council, itself, for arbitration. Thereby, the award passed by Facilitation Council is valid and according to the provisions of
12 13

1995(6) S.C.C. 482 2011 Indlaw GUJ 1292

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law. 3. The Facilitation Council does not have the jurisdiction to decide and entertain the counter claim set up by the Petitioner. The Respondent humbly submits that the Facilitation Council has no jurisdiction to hear the counter claim. The Facilitation Council has only jurisdiction to hear and adjudicate the matter regarding payments to the supplies which were made to the buyer as per Section 1714 of the Micro, Small and Medium Enterprises Development Act 2006. It is pertinent to note that the Council has very limited jurisdiction and the Act never empowered the Council to consider and decide the counter claim of buyer. Since the arbitral proceedings are under MSMED Act, 2006 the scope of arbitration is limited to the dispute, which has been referred as per Section 1815 and no other issue beyond the said reference can be examined by the Arbitrator. The authority of the Council is limited to the adjudication of the reference made under Section 18. Counter claim is to be adjudicated by civil court or other arbitration as per the agreement.

14

17. Recovery of amount due: For any goods supplied or services rendered by the supplier, the buyer shall be

liable to pay the amount with interest thereon as provided under section 16.
15

18. Reference to Micro and Small Enterprises Facilitation Council: 1) Notwithstanding anything contained in

any other law for the time being in force, any party to a dispute may, with regard to any amount due under section 17, make a reference to the Micro and Small Enterprises Facilitation Council.

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3.1 Arbitrator cannot go beyond the scope of reference. An Award is bad if the Arbitrators go beyond the scope of reference and decide disputes not submitted to them. 16 If an Award extends to the matters not within the scope of the submission it must be held to be void to the extent that is in excess of submission. 17 An Arbitrator derives its powers from preference which establishes the source and prescribes the limit of authority. He is bound to make an Award in conformity with it both, in substance and in form. 18 Thereby, it is submitted that both the contracts entered between the respondent No.1 and the petitioner are independent contracts and have the capacity to stand and be fulfilled according to the conditions laid down in them respectively. Moreover, it is submitted that from the plain reading of the marginal note of Chapter V19 of the MSMED Act, 2006, it can be inferred that the Facilitation Council adjudicating any matter referred to it, either in the capacity of a conciliator or an Arbitrator, has the authority to only deal with the issue of the delayed payments.

16

Jagat Hari v. Moran, 26 IND. Cas 73; Bolak v. Ram, 158 IND. Cas. 11; Bengal Jute Mills v. Jewraj, AIR 1943

Cal 13; Mohinder v. Raminder, AIR 1944 P.C 83.

17 18

Prince v. GG Council, AIR 1955 Punj 240. Duttaram v. Harjimal, AIR 1930 Sindh 170; Mahomedali v. Charatsingh, 80 IND. Cas 596; Juggobandhu

v.Chand Mohan, 31 IND.Cas 33.

19

DELAYED PAYMENTS TO MICRO AND SMALL ENTERPRISES

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4. The Government of Uttransh is not liable to pay Rs 23, 60,000 to the petitioner on account of Letter of Comfort. The Respondent No.3 humbly contends that there is no liability to pay any amount to the petitioners as Letter of Comfort is not a legally binding document. Black's Law Dictionary20 defines Letter of Comfort as a letter from a parent corporation on behalf of a subsidiary, stating its support (but short of guarantee) for the activities and commitments of another corporation. Chitty on Contrac21t clearly states that a Letter of Comfort would not convey contractual intention. In Mysore Cement v. Svedala Barmac Ltd.22 where letter of comfort was sought to be legally enforced the Apex Court held that; Letter of Comfort fall short of the essential legal prerequisites to be satisfied for being assigned any such status, despite endeavor to view them with a liberal approach in the background of the objects and purposes underlying conciliation, arbitration and alternative mode of settlement of disputes. Further, in Lucent Technologies Inc. v. ICICI Bank Ltd23 where one of the questions which had arisen for consideration before the Delhi High Court related to the construction and legal impact of what has been termed 'a letter of comfort'.

20 21 22 23

Blacks Law Dictionary, Standard Ninth Edition, Bryan A. Garner, 2008 Chitty on Contract, 31st Edition, Sweet & Maxwell, Vol. 2, 2008 AIR 2003 SC 3493 MANU/DE/2717/2009

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The Court held that the communications placed before the Court (one of them being a comfort letter) did not contain the kind of assent required to make for a binding contract. Applying the legal principles laid down in the several judgments, the Court held that the circumstances and documents did not indicate that the parties intended to create any legal relations. In a latest judgment 24, the Karnataka High Court relying on definition of letter of comfort as found in P. Ramanatha Aiyar's Advanced Law Lexicon25, which read as, Letter of Comfort is a document that indicates one party's intention to try to ensure that another party complies with the terms of a financial transaction without guaranteeing performance in the event of default . Held that, letter of comfort merely indicates the Appellant's assurance that the Respondent No. 2 would comply the terms of a financial transaction without guaranteeing performance in the event of default.

5. Sections 15, 18 and 19 of the MSMED Act, 2006 are constitutionally valid. It is submitted that the impugned provisions of the MSMED Act, 2006, are well within the scope of the Constitution. The contention raised by the petitioner regarding the impugned provisions of the said Act being ultra vires cannot be accepted.

The division bench of the Andhra Pradesh High Court in A.P.Transco v. Sri Gowri Sankar Cable Industries and others26 rejected both grounds including the contention regarding discrimination.

24 25 26

United Breweries Ltd v. Karnataka State Industrial Investment, AIR2012Kant65 P. Ramanatha Aiyar's Advanced. Law Lexicon, 3rd edition, 2005 2002 (3) ALT 134(D.B.)

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Article 14 of the Constitution although proclaims equality before law and equal protection of law does not forbid reasonable classification. Equality clause cannot be enforced in abstract. All laws cannot have universal application. Varying needs of different classes of people require different treatment. A benefit granted to a particular class of industries having regard to the capital they may invest if treated to be forming a separate class or category no exception thereto can be taken.

The small scale and ancillary industries having regard to the policy decision of the Central Government as stated in the Parliament stand on a separate footing. If certain protections had been granted for the purpose of realization of the dues, the same can neither be said to be unreasonable nor discriminatory. Small scale and ancillary industries form a class by themselves. Moreover in Anukul Chandra Pradhan v. Union of India27 the Apex Court held that; Mere hardship as is well known cannot be a ground to strike down an otherwise valid Act. The said provisions, therefore, are not ultra vires Article 14 of the Constitution of India. Section 18 of the MSMED Act, 2006, whereof a statutory Tribunal known as Facilitation Council (hereinafter referred to as the Council) was constituted to act as an arbitrator. Creation of Courts and tribunals by the State Legislature comes within the purview of Entry 11-A of List III of VII Schedule to the Constitution of India. The Tribunal is merely in the nature of arbitral tribunal. The State has constituted such tribunal. Creditor may only exercise its right of option. The interests of the parties are protected by making a provision to prefer an appeal against the order of the Tribunal. In a given case, even the power of judicial review can be exercised by the High Court under Article 226 of the Constitution of India. The ambit and scope of two remedies is

27

1997 (6) SCC 1

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essentially the same viz., to recover the amount. Thus, the doctrine of election would apply as the two remedies are essentially not different in its ambit and scope.28. In, Premier Automobiles v. Kamlekar Shantaram Wadke 29, Apex Court observed that; The right to recover an amount from the supplier is common law right. Right to claim interest in terms of a statute is a substantive right. Such a right can be enforced both in a Civil Court as also a Tribunal constituted under a special Act. In a case of this nature, the jurisdiction of the Court and the Tribunal are co-extensive. By reason of the said Act, apart from interest, no right under the said Act to recover the money has been created. Retaining of jurisdiction of the Civil Court and at the same time providing an additional forum, which is in the nature of an arbitration Tribunal, in our opinion, cannot be said to be bad in law. Subsequently, Section 19 of the MSMED Act came to be challenged before the High Court of Kerala. A division bench of the Kerala High Court vide its judgment in K.S.R.T.C. v. Union of India30upheld the validity of Section 19. It was stated that even otherwise there is no guarantee for an unrestricted fundamental right to carry on trade and it is always subjected to reasonable restrictions found under the Article 19(6) of the Constitution. Moreover, the Parliament has ample power to restrict such contract. The fixing of time limit is to save the Micro and Small Enterprises from going out of existence due to wanton delay in payments by the buyers. To that extent, right to enter into contract can be curtailed. Such curtailment cannot be said to be either arbitrary or unconstitutional.

28 29 30

A.P. State Financial Corpn. v. Gar Re-Rolling Mills, 1994 (2) SCC 647 1975 SC 2238 Supra note 3

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The Act nowhere interferes with the other terms of the contract. In effect, the Act is not a substantial provision to interfere with the right to enter into a contract, but it only regulate the time for payment. It cannot be said to be either discriminatory or arbitrary so as to infringe the constitutional guarantee provided under Part III of the Constitution. Therefore, the argument that it curtails the free right to enter into contracts is hereby rejected. It is interesting to note that a constitution bench of the Apex Court in Sunder V. Union of India31 has held that a person who commits defaults and suffers an order or award or decree from the Facilitation Council alone is bound to pay such interest and such order if found erroneous can be corrected by judicial review by an appropriate legal forum. Thereby, it is contended that the Honble Court shall not entertain the petition as the impugned Act is not violative of the provisions of the constitution.

31

MANU/SC/0573/2001

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PRAYER

In the light of the arguments advanced and authorities cited, the respondent humbly submits that the Honble Court be pleased to adjudge, adjudicate and declare that: 1) The Arbitral Award passed by the Facilitation Council is not liable to be set aside. 2) Respondent No. 3 is not liable to pay Rs 23, 60,000 to the petitioner. 3) Sections 15, 18 and 19 of the Micro, Small and Medium Enterprises Development, Act 2006, are constitutionally valid. And/ or Pass any other order/ decree/judgment as this Honble High Court may deem fit in order to achieve the ends of Justice, Equity and Good Conscience.

For this act of kindness, the Respondent shall duty bound forever pray.

Sd. /- (Counsels for the Respondents)

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