Supreme Court Affirms MSMED Act's Supremacy in Arbitration, Overrules High Court on Jurisdiction.
In a significant ruling of M/s. Harcharan Dass Gupta v/s Union of India., that underscores the protective intent of the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006, the Supreme Court has set aside a Karnataka High Court order that had halted arbitral proceedings due to a jurisdictional dispute. The apex court reaffirmed that the MSMED Act takes precedence over the Arbitration and Conciliation Act, 1996, particularly concerning the seat of arbitration.
The case involved an appeal filed by a registered supplier under the MSMED Act (appellant) against the Indian Space and Research Organisation (ISRO) (respondent), which is based in Bengaluru. The dispute arose from a construction contract for staff quarters in New Delhi, awarded to the appellant following an e-tender in 2017.
When disagreements emerged, the appellant invoked the jurisdiction of the Facilitation Council at Delhi under Section 18 of the MSMED Act. After ISRO refused to participate in conciliation, the Facilitation Council referred the matter to arbitration through the Delhi Arbitration Centre, which then appointed a sole arbitrator.
Arbitral proceedings commenced, but ISRO challenged the jurisdiction of the Delhi Arbitration Centre before the Karnataka High Court, arguing that their contract stipulated Bengaluru as the seat of arbitration. The High Court sided with ISRO, staying the proceedings and declaring the Delhi Arbitration Centre's assumption of jurisdiction as illegal and contrary to the agreement.
Overriding Effect of MSMED Act:
The Supreme Court, after hearing arguments from both sides, unequivocally stated that the issue was "no more res integra" and was settled by its previous binding precedent in Gujarat State Civil Supplies Corporation Ltd. v. Mahakali Foods Pvt. Ltd. (2023).
The Court reiterated the principle that the MSMED Act, being a special law designed to protect MSMEs and provide a specific dispute resolution mechanism, overrides the general provisions of the Arbitration Act. This overriding effect is reinforced by Section 24 and the non-obstante clauses in Section 18(1) and 18(4) of the MSMED Act.
Crucially, the judgment highlighted that a private arbitration agreement between parties cannot nullify the statutory provisions of the MSMED Act. Once the statutory mechanism under Section 18(1) is triggered, it prevails over any independent agreement. The Court emphasized that allowing a private agreement to supersede the MSMED Act would "frustrate the very purpose of enacting the Msmed Act, 2006."
Jurisdiction Based on Supplier's Location:
The Supreme Court specifically pointed to Section 18(4) of the MSMED Act, which states: "Notwithstanding anything contained in any other law for the time being in force, the Micro and Small Enterprises Facilitation Council or the centre providing alternate dispute resolution services shall have jurisdiction to act as an Arbitrator or Conciliator under this section in a dispute between the supplier located within its jurisdiction and a buyer located anywhere in India."
Since the appellant-MSME is located in Delhi, the Delhi Facilitation Council rightly exercised its power by entrusting the arbitration to the Delhi Arbitration Centre.
While allowing the appeal and setting aside the Karnataka High Court's order, the Supreme Court clarified that its decision solely pertains to the jurisdictional aspect and does not prejudice the merits of the case. The arbitrator is directed to allow both parties to raise all legally permissible questions of law and fact.
This ruling provides much-needed clarity on the jurisdictional interplay between the MSMED Act and the Arbitration Act, reinforcing the legislative intent to provide a swift and effective dispute resolution mechanism for micro and small enterprises.
Section 18, Micro, Small and Medium Enterprises Development Act - 2006
Section 24, Micro, Small and Medium Enterprises Development Act - 2006
Micro, Small and Medium Enterprises Development Act, 2006
Arbitration and Conciliation Act, 1996