In deciding seat of arbitration, MSMED Act overrides agreement between the parties . MSMED Act overrides the Arbitration Act – Supreme Court
In a recent judgment Hon’ble Supreme Court has held that MSMED Act overrides the Arbitration Act and for deciding the “seat of arbitration”, the agreement between the parties stood overridden by the statutory provisions under the MSMED Act.
ABCAUS Case Law Citation:
4565 (2025) (05) abcaus.in SC
In the instant case, the appellant had challenged the order passed by the Karnataka High Court deciding the seat of arbitration.
The respondent organisation was based in Bengaluru. It had invited bids for construction of employee residence by way of the tender. The Appellant who was a registered supplier under the MSMED Act was selected, leading to an agreement for the execution of the project.
In view of certain disputes between the parties, the appellant invoked jurisdiction of the Facilitation Council at Delhi under Section 18 of the MSMED Act. In exercise of powers under Section 18, the Facilitation Council issued a notice to the respondent organisation for conciliation, but the respondent refused to participate in the said proceedings.
Due to non-cooperation of the respondent, the Facilitation Council took its decision to refer the dispute to arbitration under Section 18(3) of the MSMED Act. As the arbitration was to be conducted through institutional through Delhi Arbitration Centre, the Centre proceeded further and appointed a sole arbitrator.
The arbitrator took the claim petition on record and directed the respondent to file its statement of defence. However, instead of filing its defence, the respondent chose to approach the High Court by filing a writ petition under Article 226/227 challenging the assumption of jurisdiction by the Delhi Arbitration Centre and also the conduct of arbitral proceedings in Delhi.
While hearing the writ petition, the High Court passed an ex parte order granting stay on further proceedings. Eventually, by the impugned order the High Court held that the Delhi Arbitration Centre, at the instance of the Facilitation Council, Delhi could not have assumed jurisdiction as it is contrary to the agreement between the parties. In view of the specific terms of the agreement providing for settlement of disputes, it was agreed that the seat of arbitration shall be at Bengaluru, . the High Court held that the proceedings conducted by the Delhi Arbitration Centre and the arbitration to be without jurisdiction, and as such illegal and contrary to law.
The Hon’ble Supreme Court observed that the issue is no more res integra and is covered by the decision of the Court wherein it was held that 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 was specifically held that the MSMED Act, 2006 being a special legislation to protect MSMEs by setting out a statutory mechanism for the payment of interest on delayed payments, the said Act would override the provisions of the Arbitration Act, 1996 which is a general legislation. Even if the Arbitration Act, 1996 is treated as a special law, then also the MSMED Act, 2006 having been enacted subsequently in point of time i.e. in 2006, it would have an overriding effect, more particularly in view of Section 24 of the MSMED Act, 2006 which specifically gives an effect to the provisions of Sections 15 to 23 of the Act over any other law for the time being in force, which would also include the Arbitration Act, 1996.
It was further held rejected the argument that a conscious omission of the word “agreement” in sub-section (1) of Section 18, which otherwise finds mention in Section 16 of the MSMED Act, 2006 implies that the arbitration agreement independently entered into between the parties as contemplated under Section 7 of the Arbitration Act, 1996 was not intended to be superseded by the provisions contained under Section 18 of the MSMED Act, 2006, as not acceptable.
It was held that a private agreement between the parties cannot obliterate the statutory provisions. Once the statutory mechanism under sub-section (1) of Section 18 is triggered by any party, it would override any other agreement independently entered into between the parties, in view of the non obstante clauses contained in sub-sections (1) and (4) of Section 18. The provisions of Sections 15 to 23 have also overriding effect as contemplated in Section 24 of the MSMED Act, 2006 when anything inconsistent is contained in any other law for the time being in force.
It was also held that no party to a dispute covered under Section 17 of the MSMED Act, 2006 would be precluded from making a reference to the Facilitation Council under Section 18(1) thereof, merely because there is an arbitration agreement existing between the parties.
The Hon’ble Supreme Court further observed that the issue relating to ‘seat of arbitration’ in all cases covered under the MSMED Act is settled in view of the pronouncement of the Court. This position is also true by virtue of the specific provision of the MSMED Act, that is, sub-Section (4) of Section 18, which vests jurisdiction for arbitration in the Facilitation Council where the supplier is located.
The Hon’ble Supreme Court noted that in the instant case, there was no dispute about the fact that the appellant-MSME was located in Delhi and as such the Facilitation Council entrusted the conduct of arbitration through the institutional aegis of the Delhi Arbitration Centre.
In view of the above, the Hon’ble Supreme Court allowed the appeal and restored the arbitral proceedings under the aegis of Delhi Arbitration Centre.
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