MSMED Act Will Prevail Over Arbitration Act In Disputes Pertaining To A Party Which Is An MSME: Delhi High Court

The Delhi High Court Bench of Justice Manoj Kumar Ohri has reiterated that the Arbitration and Conciliation Act, 1996 is a general law governing the field of arbitration whereas the MSMED Act, 2006 governing a very specific nature of disputes concerning MSMEs, is a specific law and being a specific law would prevail over Arbitration and Conciliation Act, 1996. Background Facts The Petitioner had engaged the Respondent for providing certain IT services in a project awarded to the Petitioner by the State Transport Department, Orissa for tracking commercial vehicles. Both the parties entered into a Service Framework Agreement on 09.02.2022. Subsequently, the Petitioner alleged breach and non-performance of the agreement by the Respondent which has resulted in disputes between them. Vide email dated 01.07.2024, the Respondent invoked the arbitration clause of the agreement wherein it proposed the name of Ms. Shilpa Dogra as the Sole Arbitrator to which the Petitioner expressed some reservations and the arbitrator could not be appointed. Therefore, the Petitioner has sought the intervention of the Court in appointment of the arbitrator. It was also informed to the Court that subsequent to filing of the present petition, the Respondent has initiated proceedings under Section 18 of the MSMED Act, 2006 before the MSME Facilitation Council, Chandigarh, which are currently pending. Contentions The Counsel for the Petitioner submitted that the Respondent approaching the Facilitation Council under the MSMED Act would not affect the maintainability of the present petition as at the time of filing the present petition, no proceedings were pending under the MSMED Act. It was further contended that the jurisdiction of MSME Council is limited to recovery of amount due for any goods supplied or services rendered by the supplier, whereas the present dispute is much wider in scope and extends to determination of liability of the Respondent for breach of contract. Lastly, the Petitioner submitted that the contract in question governing the parties, is works contracts which are outside the ambit of MSMED Act and hence the Respondent's pending reference under Section 18 of the MSMED Act is not maintainable. Per contra, the Counsel for the Respondent contended that since the Respondent had already invoked the jurisdiction of the Facilitation Council under the MSMED Act and the same being a beneficial legislation containing non-obstante clause, it would prevail over the Arbitration and Conciliation Act, 1996. The Respondent also denied that the contract in question is a works contract and submitted that the dispute pertained to the supply of service and interest on delayed payments, which is very much covered by the MSMED Act. Observations The Court observed that while Arbitration & Conciliation Act is a general law governing the field of arbitration, MSMED Act governs a very specific nature of disputes concerning MSMEs and it sets out a statutory mechanism for the payment of interest on delayed payments. Thus, MSMED Act being the specific law and Arbitration and Conciliation Act being the general law, it would prevail over the general law. The Court noted that in view of Section 18 and Section 24 of the MSMED Act which provide non obstante clauses which have the effect of overriding any other law for the time being in force, the legislative intent is clear that MSMED Act would have an overriding effect on the provisions of the Arbitration & Conciliation Act. The Court relied on the judgments of the Apex Court in Silpi Industries and Ors. v. Kerala SRTC and Anr. 2021 SCC OnLine SC 439 and Gujarat State Civil Supplies Corporation Ltd. v. Mahakali Foods (P) Ltd. (2023) 6 SCC 401. The Court further observed that the provisions of MSMED Act would become ineffective if, by way of an independent arbitration agreement between the parties, the process mandated in Section 18 of the MSMED Act is sidestepped. Further, the fact that the Petitioner approached the Court under Section 11, Arbitration and Conciliation Act first would be of no significance as the MSMED Act does not carve out any such exception to the non-obstante clause. The Court noted that since the parties are at odds about the nature of the contract, it became a triable issue requiring adjudication which would involve detailed appreciation of evidence. However, it is a settled position of law that the scope of enquiry vested with the Court under Section 11, Arbitration and Conciliation Act is limited to forming a prima facie opinion as to the existence of an agreement between the parties. Additionally, the contention that the dispute involves a works contracts, essentially becomes a question regarding the jurisdiction of the arbitral tribunal constituted under Section 18, MSMED Act and the arbitral tribunal would be competent to rule on its own jurisdiction. ...

MSMED Act Will Prevail Over Arbitration Act In Disputes Pertaining To A Party Which Is An MSME: Delhi High Court

Arpita Pande

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MSMED Act Will Prevail Over Arbitration Act In Disputes Pertaining To A Party Which Is An MSME: Delhi High Court

Arpita Pande

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