Delhi High Court Rules That MSMED Act Overrides Contractual Arbitration Agreements: Dismisses Petition for Arbitrator Appointment Under Section 11 of the A&C Act Due to Pending MSME Facilitation Council Proceedings

1. Court’s Decision

The court dismissed the petition seeking the appointment of an arbitrator under Section 11 of the A&C Act. The reason for this was that the respondent, an MSME, had already invoked the dispute resolution mechanism under Section 18 of the MSMED Act, which overrides the contractual arbitration agreement between the parties. The court emphasized that the MSME Facilitation Council had jurisdiction over the matter and the case should proceed accordingly.

2. Facts of the Case

• The petitioner and the respondent entered into a Service Framework Agreement in which the respondent was engaged to provide IT services for a state transport department project.
• Disputes arose due to alleged breaches and non-performance of the agreement.
• The respondent invoked arbitration under the contract, but both parties could not agree on the appointment of an arbitrator.
• The petitioner then approached the High Court under Section 11 of the A&C Act for the court’s intervention in appointing an arbitrator.
• Meanwhile, the respondent approached the MSME Facilitation Council under Section 18 of the MSMED Act, arguing that MSME laws should govern the dispute resolution process.
• The petitioner contested the application of the MSMED Act, claiming the contract was a “works contract” and thus outside the Act’s scope.

3. Issues Considered by the Court

1. Does the petition under Section 11 of the A&C Act remain valid when MSME Facilitation Council proceedings are already initiated?
2. Can an arbitration agreement in the contract override the statutory dispute resolution process under the MSMED Act?
3. Is the contract in question a “works contract” and thus outside the MSMED Act’s scope?
4. Who has jurisdiction over the dispute – the MSME Facilitation Council or an independent arbitrator?

4. Petitioner’s Arguments

The petitioner argued:

1. The respondent’s invocation of the MSMED Act should not affect the appointment of an arbitrator, as no MSME proceedings were pending at the time of filing the petition.
2. The MSME Facilitation Council’s jurisdiction is limited to recovering dues, whereas the present dispute involves larger contractual obligations, including breach of contract.
3. The contract was a “works contract”, which the MSMED Act does not cover. Thus, the MSME Facilitation Council has no jurisdiction over the matter.
4. The respondent itself filed a trademark suit against the petitioner in another court, suggesting awareness of the MSME process’s limitations.
5. Since arbitration was contractually agreed upon, only an arbitrator should resolve the dispute.

5. Respondent’s Arguments

The respondent countered by stating:

1. It is a registered MSME, and its status was communicated to the petitioner before the dispute arose.
2. The MSMED Act is a beneficial legislation with an overriding effect over the A&C Act, as ruled in previous Supreme Court judgments.
3. The arbitration agreement in the contract cannot override the statutory right to approach the MSME Facilitation Council under Section 18.
4. The contract involved providing IT services, meaning it was not a “works contract” and thus covered under the MSMED Act.
5. The respondent had already chosen to pursue resolution under the MSMED Act, and therefore, it cannot be forced into private arbitration.

6. Analysis of the Law

• The MSMED Act contains non-obstante clauses in Sections 18(1) and 18(4), meaning it overrides other laws, including the A&C Act.
• Section 24 of the MSMED Act states that its provisions will prevail over any inconsistent law, further reinforcing its dominance.
• If an MSME raises a dispute under Section 18 of the MSMED Act, it must first go through conciliation before arbitration.
• The A&C Act allows arbitration based on agreements, but the MSMED Act, being a special law, takes precedence when applicable.

7. Precedent Analysis

The court relied on the following Supreme Court precedents:

1. Silpi Industries v. Kerala State Road Transport Corporation (2021 SCC Online SC 439)
   • Held that the MSMED Act overrides the A&C Act when it comes to dispute resolution involving MSMEs.
   • An MSME can approach the MSME Facilitation Council even if a separate arbitration agreement exists.
2. Gujarat State Civil Supplies Corporation Ltd. v. Mahakali Foods Pvt. Ltd. (2023) 6 SCC 401
   • Reaffirmed the supremacy of the MSMED Act over the A&C Act.
   • A private arbitration agreement cannot nullify an MSME’s statutory right to seek dispute resolution under the MSMED Act.
3. Other High Court Decisions
   • Various High Courts have upheld that the MSMED Act prevails over the A&C Act in cases concerning MSMEs.

8. Court’s Reasoning

1. Overriding Effect of the MSMED Act – Since the MSMED Act is a specific law enacted later than the A&C Act, it takes precedence.
2. Jurisdiction of MSME Facilitation Council – Once the MSME route is taken, it prevails over private arbitration.
3. Nature of the Contract as a Disputed Issue – Since the classification of the contract as a “works contract” or not requires evidence, it cannot be decided under a Section 11 petition.
4. Competence of MSME Arbitration Tribunal – If arbitration happens under the MSMED Act, the tribunal itself will determine its jurisdiction.

9. Conclusion

• The court dismissed the petition, stating that the MSMED Act provides a statutory dispute resolution mechanism that cannot be bypassed by a private arbitration agreement.
• Since the MSME Facilitation Council was already involved, the court refused to appoint an arbitrator under Section 11 of the A&C Act.

10. Implications of the Judgment

1. Strengthening MSME Protections – MSMEs can confidently rely on the MSMED Act’s statutory framework for dispute resolution.
2. Limiting the Effect of Private Arbitration Agreements – Businesses dealing with MSMEs cannot rely on arbitration clauses to avoid MSME statutory rights.
3. Legal Strategy for Businesses – Corporations contracting with MSMEs must recognize that MSMED Act protections will apply, regardless of pre-existing arbitration agreements.
4. Judicial Trend – Courts are consistently upholding the MSMED Act’s legislative intent, making it harder for larger companies to bypass MSME protections.

Also Read – Orissa High Court Declares Financial Corporation’s Auction Illegal: Judgment Analysis on Legality of Auctioning Mortgaged Property Under Section 29 of the SFC Act, 1951 – Reinforcing Protection of Bona Fide Purchasers and Limiting Scope of Section 29