The Delhi High Court has clarified that a statutory arbitration agreement under the MSMED Act arises only after conciliation proceedings have formally failed, and not merely due to inaction by the Facilitation Council. This ruling reinforces the sequential, mandatory nature of the dispute resolution mechanism prescribed for MSMEs.
Background & Facts
The Dispute
The petitioner, M/s Jubilant Marketing Pvt. Ltd., a registered small enterprise under the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act), supplied conveyor structures to the respondent, M/s Robbins Tunneling and Trenchless Technology India Pvt. Ltd., pursuant to work orders issued between January 2018 and June 2023. The petitioner raised 14 invoices for goods supplied, totaling Rs. 77,04,901. On 06.06.2023, the respondent made a partial payment of Rs. 8,00,000 and has since defaulted on the outstanding balance.
Key Facts
- The petitioner is registered as a small enterprise under the MSMED Act
- Work orders were issued between January 2018 and June 2023
- Final payment of Rs. 8,00,000 made on 06.06.2023
- Outstanding dues: Rs. 77,04,901 across 14 invoices
- Petitioner filed Application No. UDYAM-DL-11-0001801/S/00001 under Section 18(1) of the MSMED Act on 24.06.2024
- MSEF Council issued notice on 24.06.2024, directing payment within 15 days
- Case converted to MSEFC Case No. DL/11/S/NDC/01219 on 02.09.2024
- Multiple conciliation meetings held between July 2024 and April 2025
- On 17.04.2025, respondent admitted pending payment and sought 7 - 10 days to file reply
- Order dated 22.04.2025: Council gave final opportunity to file reply; warned that failure would lead to arbitration
- As of 18.11.2025, petitioner inquired and found no reply filed and no arbitration initiated
- No formal order terminating conciliation or referring matter to arbitration has been passed
Procedural History
- 06.06.2023: Last payment made by respondent
- 24.06.2024: Petitioner files application under Section 18(1) of MSMED Act
- 02.09.2024: MSEF Council converts application to Case No. DL/11/S/NDC/01219
- 17.04.2025: Conciliation meeting held; respondent admits default and seeks time
- 22.04.2025: MSEF Council issues order directing respondent to file reply within 10 days; states matter will be forwarded to arbitration if reply is not filed
- 18.11.2025: Petitioner inquires with MSEF Council; learns no reply filed and no arbitration initiated
- 18.03.2026: Petition filed under Section 11(6)(c) of Arbitration Act before Delhi High Court
- 09.04.2026: Judgment pronounced
The Parties' Positions
Petitioner: Argued that Section 18(3) of the MSMED Act creates a statutory arbitration agreement, and that the Council’s failure to act after the 22.04.2025 order constitutes a failure under Section 11(6)(c) of the Arbitration Act, entitling it to seek court appointment of an arbitrator.
Respondent: Contended that no valid arbitration agreement exists under Section 7 of the Arbitration Act; that conciliation is still pending; and that the Council’s conditional observation does not constitute termination of conciliation or initiation of arbitration.
Relief Sought
The petitioner sought appointment of a sole arbitrator under Section 11(6)(c) of the Arbitration Act to adjudicate the outstanding dues of Rs. 77,04,901, with interest under Section 16 of the MSMED Act.
The Legal Issue
The central question was whether, in the absence of a formal termination of conciliation proceedings and without any referral to arbitration by the MSEF Council, a petitioner may invoke Section 11(6)(c) of the Arbitration Act for appointment of an arbitrator on the ground that the Council has failed to act.
Arguments Presented
For the Petitioner
The petitioner relied on Section 18(3) of the MSMED Act, arguing that it creates a statutory arbitration agreement under Section 7 of the Arbitration Act by deeming the dispute to be governed by the Arbitration Act as if an agreement existed. It contended that the Council’s failure to act after its 22.04.2025 order constituted a failure under Section 11(6)(c) of the Arbitration Act, which permits court intervention when an institution entrusted with appointment duties fails to perform. It further argued that Section 2(4) of the Arbitration Act makes Part I applicable to all arbitrations under any enactment, including the MSMED Act, unless inconsistent.
For the Respondent
The respondent argued that Section 11(6) of the Arbitration Act requires a pre-existing arbitration agreement as defined under Section 7, which must be in writing and reflect mutual consent. It emphasized that the word "shall then" in Section 18(3) of the MSMED Act clearly indicates that the Arbitration Act applies only after conciliation has been formally terminated and arbitration is initiated. It further contended that the Council’s conditional observation was not a binding order terminating conciliation, and that the petitioner, having voluntarily invoked the statutory mechanism, cannot abandon it midway.
The Court's Analysis
The Court undertook a detailed examination of the legislative intent behind the MSMED Act, particularly Chapter V, which establishes a specialized, sequential dispute resolution mechanism for MSMEs. It emphasized that the Act was enacted to ensure timely payment and provide an expeditious remedy, distinct from general arbitration law.
"The use of the words 'shall then' in Section 18(3) of the MSMED Act leaves no manner of doubt that the deeming fiction will not come into existence till conciliation has failed and the same has been terminated, followed by the MSEF Council taking up the dispute for arbitration or referring it to an appropriate arbitral institution."
The Court held that Section 18(3) operates as a two-stage process: first, conciliation under Section 18(2), and second, arbitration only upon its failure. The phrase "as if the arbitration was in pursuance of an arbitration agreement" is a legal fiction that activates only after the preconditions are met. Until then, no arbitration agreement exists under Section 7 of the Arbitration Act.
The Court distinguished Vallabh Corporation v. SMS India Pvt. Ltd., Microvision Technologies, and M.B. Sugars & Pharmaceuticals - cases cited by the petitioner - on the ground that those involved pre-existing arbitration agreements or non-initiation of conciliation. Here, conciliation was initiated and remained pending.
It further held that Section 11(6)(c) of the Arbitration Act requires an "appointment procedure agreed upon by the parties," which presupposes a valid arbitration agreement under Section 7. In the absence of such an agreement, the Court lacks jurisdiction to appoint an arbitrator, even if the MSEF Council is inactive.
The Court also rejected the argument that Section 2(4) of the Arbitration Act overrides the sequential scheme of the MSMED Act, noting that Section 24 of the MSMED Act explicitly provides for its overriding effect over inconsistent laws, and that the two statutes are not inconsistent because they operate at different stages.
The Verdict
The petition was dismissed. The Court held that no statutory arbitration agreement existed under Section 18(3) of the MSMED Act because conciliation proceedings had not been formally terminated. The petitioner’s recourse under Section 11(6) of the Arbitration Act was not maintainable in the absence of a valid arbitration agreement. However, the Court directed the MSEF Council to conclude the pending conciliation proceedings and take further action, including referral to arbitration if warranted, within two months from the date of judgment.
What This Means For Similar Cases
Statutory Arbitration Is Not Automatic
- Practitioners must confirm that conciliation under Section 18(2) of the MSMED Act has been formally terminated before seeking court appointment under Section 11(6)
- A mere delay or non-action by the MSEF Council does not trigger arbitration or confer jurisdiction under the Arbitration Act
- Petitions under Section 11(6) filed prematurely will be dismissed without prejudice to pursuing remedies before the MSEF Council
No Arbitration Without Agreement or Termination
- The deeming fiction under Section 18(3) is conditional and cannot be invoked by judicial fiat
- Courts cannot create an arbitration agreement where none exists under Section 7
- Parties must exhaust the statutory mechanism before seeking alternative remedies
- Any attempt to bypass the MSMED Act’s sequential process will be viewed as an abuse of process
Procedural Compliance Is Non-Negotiable
- The MSEF Council’s conditional observations (e.g., "if reply is not filed, we will refer to arbitration") are not equivalent to formal termination
- Parties must obtain a clear, written order terminating conciliation before proceeding to arbitration
- Legal notices or informal communications cannot substitute for statutory procedure
- Practitioners should file applications before the MSEF Council seeking a formal order on termination if no action is taken within a reasonable time
