“Reason is the Soul of Justice” – Madras High Court Sets Aside MSME Arbitral Award for Patent Illegality and Ignoring Vital Evidence

"The Arbitrator has totally ignored the counter-claim made by the petitioner and has also ignored the contentions of the petitioner through the statement of defence filed by them" – Madras High Court, in a significant ruling, set aside an arbitral award passed under the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act) by the District Level Facilitation Council, Punjab. The Court held that the award was patently illegal, non-speaking, and rendered in violation of natural justice, thereby conflicting with public policy under Section 34 of the Arbitration and Conciliation Act, 1996.

The dispute arose from a subcontract issued by Larsen & Toubro (L&T) to Jain Steels Industries through a Letter of Intent (LOI) dated 10.09.2016 for the supply of masts for a project with the Dedicated Freight Corridor Corporation of India (DFCCIL). L&T alleged that Jain Steels delayed the furnishing of a Performance Bank Guarantee (PBG) and supplied defective materials. Despite these objections, the Punjab-based MSME Facilitation Council passed an arbitral award on 02.07.2024 directing L&T to pay ₹1,99,29,166/- to Jain Steels (₹59.42 lakh as principal and ₹1.39 crore as interest), with additional post-award interest.

L&T challenged this award under Section 34 of the Arbitration Act, citing jurisdictional concerns, denial of opportunity, rejection of counter-claims without reasons, and reliance on evidence post-hearing.

Jurisdiction of Madras High Court vs. Punjab Venue under MSMED Act

The respondent contended that since the arbitration took place in Punjab, Madras High Court lacked jurisdiction. The Court rejected this objection, stating:

“The arbitration venue under the MSMED Act, which, in the instant case, is at Punjab, is treated only as convenience for the supplier… post-award challenges must follow the jurisdiction clause contained in the original contract.” [Para 16]

The Court relied on Goodyear India Ltd. v. Norton Intech and Gammon Engineers & Contractors v. Sahay Industries, confirming that the exclusive jurisdiction clause in the contract, conferring jurisdiction to Chennai courts, would prevail.

Pre-Deposit Requirement under Section 19 of MSMED Act

The respondent argued that L&T failed to deposit 75% of the awarded amount including post-award interest, as required under Section 19 of the MSMED Act. The Court clarified:

“Section 19 of the MSMED Act enables this Court to pass such other orders… the Registry had accepted the deposit... benefit of doubt should be given to the petitioner.” [Paras 31–32]

The petitioner also showed readiness to deposit any shortfall, establishing substantial compliance.

Rejection of Counter-Claim Without Reasons – Violation of Natural Justice

L&T had made a counter-claim of ₹71.17 lakh, citing defective and delayed supplies, supported by inspection reports dated 25.03.2017 and 29.03.2017. The Council dismissed the counter-claim without any discussion.

“There is absolutely no discussion and analysis made by the Council with regard to the documents filed by the petitioner… the Council has not given any reason as to why those documents cannot be relied upon.” [Para 22]

This, the Court held, violated Section 31(3) of the Arbitration Act, which mandates that arbitral awards must contain reasons.

Failure to Consider Vital Evidence – Patent Illegality and Conflict with Public Policy

Justice Abdul Quddhose cited the Supreme Court's rulings in Vijay Karia v. Prysmian Cavi and Ssangyong Engineering v. NHAI, observing:

“Failure to consider vital evidence by the Arbitrator would amount to the arbitral award being passed in conflict with the public policy of India.” [Para 23]

The Court specifically noted that:

• The delay in furnishing the PBG beyond the LOI-stipulated 15 days was ignored.

• The inspection reports proving defects were not addressed.

• The interest calculation, which formed three times the principal, was based on a document submitted post-hearing, denying L&T the opportunity to rebut.

“Any evidence relied upon by the Council… ought to have been made available to the petitioner during the course of arbitral proceedings, but not after the final hearing.” [Para 25]

Reasoned Award Requirement

Citing Kranti Associates Pvt. Ltd. v. Masood Ahmed Khan, the Court reiterated:

“Reasons facilitate the process of judicial review... This is virtually the life blood of judicial decision making justifying the principle that reason is the soul of justice.” [Para 19]

Justice Abdul Quddhose held that the arbitral award:

• Violated Section 34(2)(b)(ii) (public policy) and Section 34(2A) (patent illegality).

• Was passed without proper reasoning, ignoring critical evidence, and without fair opportunity to rebut key documents.

The Court set aside the award with the following directions:

1. The arbitral award dated 02.07.2024 is quashed.

2. Both parties are granted liberty to initiate fresh arbitration, if so advised.

3. Time spent before the Council and Court is excluded for limitation purposes under Section 14 of the Limitation Act, 1963.

This judgment underscores the non-derogable requirement for reasoned arbitral awards, especially under the MSMED framework. The Madras High Court has reiterated that even statutory arbitrations under the MSMED Act are not immune to judicial scrutiny, particularly when there is a denial of fair hearing, non-consideration of vital evidence, and departure from contractually agreed jurisdiction.

The decision also brings clarity to jurisdictional challenges under the MSMED Act and fortifies the role of Section 34 in maintaining minimum judicial standards in arbitration.

Date of Decision: 23rd July 2025