In a decisive ruling, the Supreme Court has reinforced that the dispute resolution framework set by the MSMED Act trumps private arbitration agreements. The Court quashed the Karnataka High Court’s attempt to block MSMED proceedings in Delhi just because the contract specified Bengaluru as the arbitration seat. The key takeaway: statutory mandates under the MSMED Act cannot be sidelined by private arbitration clauses.
Here’s the backdrop: ISRO had issued a tender for construction work in New Delhi, with a contract that pegged arbitration to Bengaluru. When a dispute surfaced, the supplier—registered in Delhi—triggered Section 18 of the MSMED Act, bringing the case to the Delhi Facilitation Council. After ISRO refused to join conciliation, the matter moved to arbitration at the Delhi Arbitration Centre, with a sole arbitrator appointed.
ISRO contested Delhi’s jurisdiction, insisting the arbitration seat was Bengaluru as per the contract, and secured a favorable ruling from the Karnataka High Court. But the Supreme Court swiftly reversed this, spotlighting that the MSMED Act’s provisions override such contract terms. The Court emphasized that Section 18(4) empowers the Facilitation Council where the supplier is located to handle arbitration, irrespective of any arbitration clause dictating otherwise.
Justice PS Narasimha, authoring the verdict, pointed out that the MSMED Act was designed to ensure quick, effective dispute resolution for micro, small, and medium enterprises and cannot be diluted by the Arbitration Act or private agreements. Citing a previous landmark case, Gujarat State Civil Supplies v. Mahakali Foods, the Court reiterated that parties cannot bypass the MSMED Act’s statutory scheme even if an arbitration agreement exists.
Bottom line: For MSME disputes, statutory arbitration rules take precedence—no private contract clause can override the legal right to approach the designated Facilitation Council for dispute resolution. The Supreme Court’s judgment restored the Delhi arbitration proceedings, firmly anchoring the MSMED Act’s supremacy in its domain.
