The Bombay High Court has clarified that registration under the Micro, Small and Medium Enterprises Development Act, 2006 does not compel parties to use the Facilitation Council for dispute resolution. Where parties have agreed to ad hoc arbitration, the Arbitration and Conciliation Act, 1996 governs the proceedings, and the statutory remedy under Section 18 of the MSMED Act remains optional.
Background & Facts
The Dispute
Bharat Sanchar Nigam Ltd. (BSNL), a government enterprise, entered into a contract with Microtex Energy Pvt. Ltd., a registered MSME, for the supply of VRLA batteries. After delivery delays and price revisions, BSNL claimed overpayment of Rs.34.58 lakh and invoked the Performance Bank Guarantee. Microtex disputed the claim and sought recovery of unpaid invoices, refund of the encashed guarantee, and damages.
Procedural History
- March 2016: BSNL issued tender with arbitration clause (Clause 20) mandating ad hoc arbitration by a designated officer.
- June 2016: Microtex accepted the Advance Purchase Order and submitted a bank guarantee.
- 2017 - 2018: Disputes arose over delayed delivery, price revisions, and alleged overpayment.
- December 2018: BSNL encashed the bank guarantee; Microtex filed suit for injunction, which failed.
- July 2019: BSNL unilaterally appointed an arbitrator; Microtex challenged this under Sections 14 and 15 of the Arbitration Act.
- November 2021: Bombay HC appointed an independent sole arbitrator after BSNL agreed to an impartial tribunal.
- March 2024: BSNL raised jurisdictional objection for the first time in written submissions, citing Section 18 of the MSMED Act.
- May 2024: Arbitral Tribunal awarded Microtex Rs.2.77 crore, including interest under Section 16 of the MSMED Act.
- March 2026: BSNL filed Section 34 petition to set aside the award.
Relief Sought
BSNL sought to set aside the arbitral award on grounds of lack of jurisdiction and improper award of interest. Microtex sought dismissal of the petition and enforcement of the award.
The Legal Issue
The central question was whether the existence of an arbitration agreement under the Arbitration Act, 1996 is rendered void or unenforceable merely because one party is a registered MSME under the MSMED Act, and whether the remedy under Section 18 of the MSMED Act is mandatory or optional.
Arguments Presented
For the Petitioner
BSNL contended that Section 18 of the MSMED Act, with its non-obstante clause, overrides the Arbitration Act and vests exclusive jurisdiction in the Facilitation Council for disputes involving MSME suppliers. It relied on Harcharan Dass Gupta v. Union of India and Gujarat State Civil Supplies Corp. v. Mahakali Foods, arguing that private arbitration is impermissible when Section 17 dues are involved. It further claimed that interest under Section 16 of the MSMED Act could not be awarded outside the Facilitation Council’s process.
For the Respondent
Microtex argued that Section 18 is an enabling, not mandatory, provision. It emphasized that neither party invoked the Facilitation Council, and BSNL itself initiated arbitration under the contract. It relied on Porwal Sales v. Flame Control Industries and Shristi Infrastructure Development v. Scorpio Engineering, asserting that the MSMED Act grants a choice, not a compulsion. It further contended that Sections 15 and 16 confer substantive rights independent of Section 18 proceedings.
The Court's Analysis
The Court examined the interplay between the Arbitration Act and the MSMED Act, distinguishing between statutory triggers and contractual agreements. It held that the judgments in Mahakali Foods and Harcharan Dass Gupta apply only when Section 18 is invoked. Where no party triggers the Facilitation Council, the arbitration agreement remains valid.
"The ratio of both the judgments cannot be read to mean as if they are an authority in the proposition that a private/ad hoc arbitrator appointed in terms of arbitration agreement between the parties would get divested of its jurisdiction to decide the dispute only because one of the parties to the dispute is a supplier registered under the MSMED Act."
The Court affirmed the reasoning in Porwal Sales, noting that Section 18(1) uses the word "may," indicating discretion. The absence of a trigger event negates the applicability of Section 18(4), which only confers jurisdiction on the Facilitation Council when invoked. The Court rejected the notion that the MSMED Act creates a "foisted remedy" on parties who have contractually opted for arbitration.
Regarding interest, the Court adopted the Delhi High Court’s view in Shristi Infrastructure, holding that Sections 15 and 16 confer substantive rights on suppliers. The obligation to pay interest arises from non-payment, not from the forum chosen. The Court noted that the high interest rate under Section 16 serves as a deterrent against delayed payments, aligning with the legislative intent to protect MSMEs.
The Court also declined to interfere with the arbitrator’s factual findings on contract interpretation, reaffirming the limited scope of Section 34 review.
The Verdict
The petitioner’s petition was dismissed. The Court held that an MSME’s registration under the MSMED Act does not invalidate a pre-existing arbitration agreement, and interest under Section 16 may be awarded in ad hoc arbitrations even if the Facilitation Council is not invoked. The arbitral award stands enforced.
What This Means For Similar Cases
Arbitration Agreements Remain Valid Despite MSME Status
- Practitioners may proceed with ad hoc or institutional arbitration even when one party is an MSME, provided no reference is made to the Facilitation Council.
- Parties should document their choice of forum clearly in contracts to avoid later jurisdictional challenges.
- A belated objection under Section 18 raised during arbitration proceedings will be rejected as waived.
Interest Under Section 16 Is a Substantive Right
- Claims for interest under Section 16 of the MSMED Act are enforceable in any arbitral forum, including those under the Arbitration Act.
- Arbitrators may award compound interest at three times the bank rate without requiring a Section 18 referral.
- Opposing parties cannot argue that interest is only available if the dispute is routed through the Facilitation Council.
Judicial Trend Confirms Discretion Over Compulsion
- Courts across India (Bombay, Delhi, Punjab & Haryana) increasingly treat Section 18 as an optional remedy.
- The legislative intent to protect MSMEs is achieved through substantive rights, not procedural exclusivity.
- Legal advisors should advise MSMEs to weigh the benefits of the Facilitation Council (speed, cost) against the flexibility of private arbitration.
