HP High Court Sets Aside ₹95 Crore Ex-Parte Award, Citing Arbitrator Misconduct & Violation of Natural Justice Under MSMED Act - 2025-07-11

HP High Court Sets Aside ₹95 Crore Ex-Parte Award, Citing "Justice Hurried is Justice Buried"

Shimla, Himachal Pradesh – In a significant ruling on arbitration law and natural justice, the Himachal Pradesh High Court has set aside an ex-parte arbitral award of over ₹95 crore passed against The Bihar Medical Services and Infrastructure Corporation Ltd (BMSICL). A Division Bench comprising Chief Justice G.S. Sandhawalia and Justice Ranjan Sharma found the award vitiated by "patent illegality" and "misconduct" on the part of the arbitrator, who conducted proceedings in "utter haste" during the COVID-19 pandemic.

The Court held that the onerous condition of a 75% pre-deposit under Section 19 of the Micro , Small and Medium Enterprises Development (MSMED) Act, 2006, cannot bar judicial review under Article 226 of the Constitution in exceptional circumstances, especially where principles of natural justice are blatantly violated.

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Background of the Dispute

The case originated from a 2013 agreement where M/s Medipole Pharmaceutical India Pvt. Ltd., a Himachal Pradesh -based supplier, was to provide drugs to BMSICL in Bihar. A dispute arose over non-payment and the quality of a specific drug, which led to BMSICL blacklisting the supplier and a series of litigations in the Patna High Court between 2014 and 2017.

In 2017, the supplier shifted the legal battle to Himachal Pradesh , filing a reference with the HP Micro and Small Enterprises Facilitation Council (the Council) under the MSMED Act, claiming dues of approximately ₹29.83 crores. After conciliation failed, the Council appointed an arbitrator. The matter eventually reached a second arbitrator in February 2021.

Arguments Before the High Court

Petitioner's (BMSICL) Arguments:

Violation of Natural Justice: Senior Counsel for BMSICL argued that the arbitrator rushed the proceedings during the peak of the COVID-19 pandemic. They contended that being based in Patna, they were unable to travel and present their case, leading to an unjust ex-parte award.

Arbitrator's Misconduct: It was highlighted that the arbitrator allowed the supplier to massively enhance its claim from the initial ₹29.83 crores to ₹66.50 crores, and finally to over ₹95 crores, without any notice to BMSICL. This was argued to be beyond the scope of the arbitral reference.

Jurisdiction: BMSICL contested the jurisdiction of the HP Council, citing a clause in the original agreement that vested exclusive jurisdiction in the courts of Bihar.

Onerous Pre-Deposit: They argued that the mandatory 75% pre-deposit (amounting to over ₹72 crores) for challenging the award was an onerous condition that rendered their statutory remedy illusory, justifying the invocation of the High Court's writ jurisdiction.

Respondent's ( Supplier ) Arguments:

Special Statute: Counsel for the supplier argued that the MSMED Act is a special law with overriding effect, and Section 18(4) grants jurisdiction to the Council where the supplier is located.

Statutory Timelines: The speed of the proceedings was justified under Section 18(5) of the MSMED Act, which mandates a decision within 90 days.

Pre-Deposit is Mandatory: A strong objection was raised against the maintainability of the challenge, asserting that Section 19 of the MSMED Act makes the 75% pre-deposit a mandatory pre-condition for any court to entertain an application to set aside an award.

Court’s Rationale and Decision

The High Court decisively sided with BMSICL, quashing the arbitral award and directing the Council to appoint a new arbitrator. The Bench made several critical observations.

"The old adage that 'justice hurried is justice buried' comes to mind in the manner in which the proceedings had been conducted by the Arbitrator."

On Violation of Natural Justice: The Court noted that the ex-parte proceedings were initiated on March 19, 2021, and the award was passed on April 6, 2021—a period when the Supreme Court had issued suo motu orders extending limitation periods due to the pandemic. The failure to provide BMSICL, a party based in a distant state, a fair opportunity to present its case was deemed a gross violation of natural justice.

On Arbitrator's Misconduct: The Court found the arbitrator's conduct in allowing the claim to be enhanced from ₹29.83 crores to ₹95.71 crores without notice to the buyer as a "patent illegality appearing on the face of it." This was held to be a decision on matters beyond the scope of the submission to arbitration, constituting clear misconduct.

"The claimants had thus gone from Rs.29,83,80,909.00/-, to claim Rs.95,71,00,208.00/-... The audacity as such of the Buyer to have claimed enhanced amount... has apparently misconducted himself on the face of the record."

On Writ Jurisdiction and Onerous Pre-Deposit: Addressing the crucial issue of maintainability, the Court acknowledged the Supreme Court's differing views on whether a writ petition is maintainable against an MSMED award. While the India Glycols Ltd. case barred it, the view was doubted in the Tamil Nadu Cements Corporation Ltd. case, which referred the matter to a larger bench.

The High Court held that the rule of alternative remedy is one of discretion, not compulsion. Citing the onerous condition of depositing over ₹72 crores, the Court concluded that it would be unjust to deny relief.

"Such onerous condition to deposit 75% amount of Rs.95 crores, in our considered opinion, would not be liable to be met in the peculiar facts and circumstances of the case... it would bring the Corporation to its knees... when there is patent illegality, irregularity and mis-conduct on the part of the Arbitrator."

Final Verdict

The High Court disposed of both the writ petition and the arbitration case by setting aside the impugned award. It directed the HP Micro and Small Enterprises Facilitation Council to appoint a new arbitrator to decide the dispute afresh, leaving all issues, including jurisdiction and limitation, open for consideration.