Safiya Malik

A recent judgment by Delhi High Court  has upheld the supremacy of the Micro, Small, and Medium Enterprises Development Act, 2006 (MSMED Act) over arbitration agreements in disputes involving MSMEs. The Delhi High Court has dismissed a petition seeking the appointment of a sole arbitrator, stating that the statutory remedy available under the MSMED Act takes precedence over contractual arbitration clauses.

The dispute arose from a Service Framework Agreement executed on February 9, 2022, between the petitioner, Idemia Syscom India Private Limited, and the respondent, M/S Conjoinix Total Solutions Private Limited. The contract was established for the purpose of providing IT services in relation to a project awarded to the petitioner by the State Transport Department of Orissa. The petitioner alleged that the respondent had failed to fulfil its contractual obligations, resulting in a breach of contract and non-performance of agreed services.

The petitioner sought the appointment of an arbitral tribunal as per Clause 8.2 of the agreement, which provided for dispute resolution through arbitration. However, the respondent, being a registered MSME, had already initiated proceedings before the Micro and Small Enterprises Facilitation Council (MSEFC) in Chandigarh under Section 18 of the MSMED Act. The respondent argued that the MSMED Act contained overriding provisions that took precedence over any arbitration clause in a private agreement.

To support its claim, the respondent cited judicial precedents, including Silpi Industries v. Kerala State Road Transport Corporation and Gujarat State Civil Supplies Corporation Ltd. v. Mahakali Foods (P) Ltd., which held that the MSMED Act supersedes the Arbitration and Conciliation Act, 1996 (A&C Act) in cases concerning MSMEs.

The petitioner opposed this contention, arguing that the dispute was not limited to recovery claims under the MSMED Act but extended to broader issues of contract breach, liability, and damages. The petitioner also contended that the agreement fell under the category of a "works contract," which, according to its interpretation, would not be governed by the MSMED Act. Furthermore, the petitioner claimed that at the time of invoking arbitration, there were no pending proceedings under the MSMED Act, making its petition valid.

The respondent, however, rejected the assertion that the contract was a "works contract" and maintained that the primary dispute pertained to service supply and delayed payments, both of which fell under the ambit of the MSMED Act. The respondent further argued that its statutory rights under the MSMED Act could not be negated by a contractual arbitration clause.

The court examined the statutory provisions of the MSMED Act, particularly Sections 17 and 18, which pertain to the recovery of dues and the structured dispute resolution process through the MSEFC. The court noted that Section 18(1) and Section 18(4) of the MSMED Act contain non-obstante clauses that establish the Act's supremacy over any conflicting legislation, including the A&C Act.

"While the A&C Act is the general law governing arbitration, the MSMED Act specifically addresses disputes concerning MSMEs and mandates a statutory mechanism for resolution."

The court referred to the Supreme Court’s ruling in Silpi Industries and Mahakali Foods, which reaffirmed that the MSMED Act, being a special law, prevails over the A&C Act in matters involving MSMEs. The Supreme Court had further stated that even if an arbitration agreement existed between parties, an MSME retained the right to approach the MSEFC for dispute resolution. The court observed:

"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."

The petitioner’s claim that the contract was a "works contract" was also considered by the court. However, the court held that determining whether the agreement constituted a "works contract" required a deeper examination of factual evidence, which was beyond the scope of adjudication under a Section 11 petition of the A&C Act. The court referenced SBI General Insurance Co. Ltd. v. Krish Spinning, which clarified that the role of the court under Section 11 is limited to a prima facie examination of whether an arbitration agreement exists between the parties. Since the nature of the contract was a contested issue requiring detailed analysis, the court found that it was best adjudicated within the framework of the MSMED Act’s dispute resolution process.

Furthermore, the court observed that the MSMED Act had been enacted after the A&C Act and contained explicit provisions to ensure the protection of MSMEs. The non-obstante clauses in Sections 18(1) and 18(4) made it clear that once an MSME chose to invoke the statutory dispute resolution mechanism, that mechanism would take precedence. The court also stated that the MSMED Act provides for arbitration as part of its structured resolution process, and such arbitration is conducted within the framework of the MSMED Act itself.

Having established that the respondent was an MSME and had already initiated proceedings under Section 18 of the MSMED Act, the court ruled that the arbitration clause in the agreement could not override the statutory dispute resolution process prescribed under the MSMED Act.

Accordingly, the petition seeking the appointment of a sole arbitrator was dismissed. The court held that once an MSME has invoked its rights under the MSMED Act, the prescribed legal procedure must be followed, and private arbitration cannot be enforced in contravention of the statutory framework.

"In view of the above, the present petition is dismissed."

Case Title: Idemia Syscom India Private Limited Vs M/s Conjoinix Total Solutions Private Limted
Case Number: ARB.P. 1284/2024
Bench: Justice Manoj Kumar Ohri

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