MSMED Act Prevails Over Arbitration Agreement; Delhi Arbitration Centre May Conduct Arbitration for Supplier in Delhi

A bench of Justice Pamidighantam Sri Narasimha and Justice Joymalya Bagchi heard the civil appeal arising out of a Karnataka High Court order which had held that the Delhi Arbitration Centre lacked jurisdiction to conduct arbitral proceedings because the parties’ contract provided that the seat of arbitration was Bengaluru. The appeal challenged the High Court’s April 22, 2024 order which had stayed and subsequently set aside institutional proceedings initiated by the Facilitation Council, Delhi under the Micro, Small and Medium Enterprises (Development) Act, 2006 (MSMED Act).

The Court allowed the appeal and restored the arbitral proceedings under the aegis of the Delhi Arbitration Centre, holding that the statutory mechanism under Chapter V of the MSMED Act had overriding effect over the Arbitration and Conciliation Act, 1996. The Court emphasised that once the statutory process under Section 18 of the MSMED Act was triggered, it could “override any other agreement independently entered into between the parties.” The Court, in its reasoning, observed: “Thus, the Arbitration Act, 1996 in general governs the law of Arbitration and Conciliation, whereas the MSMED Act, 2006 governs specific nature of disputes arising between specific categories of persons, to be resolved by following a specific process through a specific forum. Ergo, the MSMED Act, 2006 being a special law and the Arbitration Act, 1996 being a general law, the provisions of the MSMED Act would have precedence over or prevail over the Arbitration Act, 1996. … It is also significant to note that a deeming legal fiction is created in Section 18(3) by using the expression ‘as if’ for the purpose of treating such arbitration as if it was in pursuance of an arbitration agreement referred to in sub-section (1) of Section 7 of the Arbitration Act, 1996. … Thus, considering the overall purpose, objects and scheme of the MSMED Act, 2006 and the unambiguous expressions used therein, this Court has no hesitation in holding that the provisions of Chapter V of the MSMED Act, 2006 have an effect overriding the provisions of the Arbitration Act, 1996.”

Background

The dispute arose after ISRO invited e-tenders on January 16, 2017 for construction of staff quarters in New Delhi and entered into an agreement dated September 11, 2017 with the appellant, M/s Harcharandass Gupta, a supplier registered under the MSMED Act. On a dispute, the appellant invoked the jurisdiction of the Facilitation Council at Delhi under Section 18 of the MSMED Act. The Facilitation Council issued a conciliation notice on March 30, 2022; when ISRO did not participate, the Council referred the dispute to arbitration under Section 18(3) and, through the Delhi Arbitration Centre, appointed a sole arbitrator on May 28, 2022.

Arbitral proceedings commenced on June 8, 2022. On September 26, 2023 the arbitrator directed ISRO to file a statement of defence. Instead, ISRO approached the Karnataka High Court by way of writ petition, contending that the contract specified Bengaluru as the seat and that Delhi could not assume jurisdiction. The High Court granted ex parte interim relief on December 7, 2023 and later allowed the writ petition, holding that the Delhi Arbitration Centre’s proceedings were contrary to the agreement.

The Supreme Court, relying on its decision in Gujarat State Civil Supplies Corporation Ltd. v. Mahakali Foods Pvt. Ltd., held that the MSMED Act’s Chapter V provisions, read with Sections 18 and 24, had an overriding effect. The Court reproduced the Mahakali ratio and observed that “A private agreement between the parties cannot obliterate the statutory provisions.” The bench clarified that it did not touch the merits of the underlying dispute and directed the arbitrator to permit the parties to raise and argue all questions of law and fact legally permissible. The appeal was allowed, the impugned Karnataka High Court order dated April 22, 2024 was set aside, and the Court directed conduct and conclusion of the arbitral proceedings; there was no order as to costs.

Case Details: Case No.: CIVIL APPEAL NO. 6807 OF 2025 (ARISING OUT OF SLP (C) NO. 14159 OF 2025; DIARY NO. 33751 OF 2024) Case Title: M/s Harcharandass Gupta v. Union of India Appearances: For the Petitioner(s): Ms. Priya Kumar, Senior Counsel For the Respondent(s): Mr. Vikramjit Banerjee, Additional Solicitor General