The High Court held that in disputes involving an MSME, the provisions of the MSMED Act will override the Arbitration Act.
On 24-02-2025, the Delhi High Court Single-Judge Bench of Justice Manoj Kumar Ohri reviewed an Arbitration Petition and held that the provisions of the MSMED Act override the Arbitration Act in disputes involving an MSME-registered party, ensuring that statutory remedies under the MSMED Act take precedence over contractual arbitration agreements.
The petitioner had filed a petition under Section 11 of the Arbitration and Conciliation Act, 1996, seeking the appointment of a Sole Arbitrator to adjudicate disputes arising out of a Service Framework Agreement dated 09.02.2022. The petitioner engaged the respondent to provide IT services for a project awarded by the State Transport Department, Orissa. Alleging a breach and non-performance of the agreement by the respondent, the petitioner invoked the arbitration clause but could not reach a consensus on the arbitrator’s appointment. Subsequently, the respondent initiated proceedings under Section 18 of the Micro, Small and Medium Enterprises Development (MSMED) Act before the MSME Facilitation Council, Chandigarh, which remained pending.
The respondent opposed the petition, asserting that it had been registered as an MSME and had duly informed the petitioner of this fact. It argued that the MSMED Act, being a beneficial legislation with a non-obstante clause, would override the Arbitration and Conciliation Act. Citing precedents such as Silpi Industries and Ors. v. Kerala State Road Transport Corporation and Another, REEDLAW 2021 SC 06039 and Gujarat State Civil Supplies Corpn. Ltd. v. Mahakali Foods (P) Ltd., the respondent contended that the statutory mechanism under the MSMED Act should take precedence over a private arbitration agreement. The petitioner countered by arguing that the MSME Council’s jurisdiction was limited to the recovery of dues and did not cover broader contractual disputes. It also maintained that the contract in question was a works contract, which would fall outside the scope of the MSMED Act.
Upon examining the contentions, the Court noted that the MSMED Act provided a statutory mechanism for dispute resolution, including conciliation and arbitration. Section 18(1) contained a non-obstante clause, ensuring that disputes covered under Section 17 would be referred to the Facilitation Council. The Court acknowledged that the MSMED Act, being a special legislation, would prevail over the general provisions of the Arbitration and Conciliation Act. Further, Section 24 of the MSMED Act reinforced its overriding effect over any inconsistent law, including arbitration agreements between parties. The Court relied on the Supreme Court’s rulings in Silpi Industries and Ors. v. Kerala State Road Transport Corporation and Another, REEDLAW 2021 SC 06039 and Gujarat State Civil Supplies Corpn. Ltd., reaffirming that a statutory mechanism could not be bypassed through a contractual arbitration agreement.
The petitioner did not dispute the respondent’s MSME status at the time of contract execution or the fact that the respondent had invoked the MSME Facilitation Council's jurisdiction. The dispute over whether the contract constituted a works contract or fell within the ambit of the MSMED Act was a triable issue requiring detailed evidence and adjudication. The Court emphasized that its scope under Section 11 of the Arbitration and Conciliation Act was limited to forming a prima facie opinion on the existence of an arbitration agreement. Given that the MSMED Act’s dispute resolution mechanism had already been triggered, the Court concluded that the petition was not maintainable and accordingly dismissed it.
Mr. Prateek Kumar and Mr. Shivam Grover, Advocates, represented the Petitioner.
Mr. M.P. Sahay, Ms. Yaman Verma, Ms. Khushboo, Mr. Kartik Jindal and Ms. Chitra Chanda, Advocates, appeared for the Respondent.
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