Delhi High Court: In a petition for appointment of an arbitrator under Section 11 of the Arbitration and Conciliation Act, 1996 (‘Arbitration Act’), a Single Judge bench of Jyoti Singh, J*, held that the statutory mechanism given under Section 18 of the Micro, Small and Medium Enterprises and Development Act, 2006 (‘MSMED Act’) is not a mandatory provision. However, once the party invokes the jurisdiction, the mechanism for dispute resolution provided in Section 18 will come into play and the party cannot abandon the procedure and seek appointment of an Arbitrator under Section 11 of Arbitration Act.
Background
The petitioner is registered as a Micro Enterprise in Ministry of Micro, Small and Medium Enterprises and is governed by the MSMED Act. The respondent placed a purchase order with the petitioner for purchase of SAP Business One License and its implementation on the terms mentioned in the Agreement. The respondents defaulted on payment for invoices and unlawfully terminated in the license.
The petitioners, in accordance with Clause 14.1 of the Agreement, sent a legal notice invoking arbitration. Upon respondent’s refusal of the notice, the petitioners filed the present petition which is an application under Section 11(6) of the Arbitration Act for appointment of a Sole Arbitrator. The preliminary objection raised by the respondents was on the grounds of maintainability. The respondents contended that the petitioners must take recourse of the dispute resolution mechanism under Section 18 of the MSMED Act and cannot invoke arbitration under Section 11 of the Arbitration Act.
The primary issue for consideration was whether it is mandatory to invoke Section 18 of the MSMED Act when Section 11 of the Arbitration Act has already been invoked.
The counsel for respondents argued that MSMED Act is a special Act and the Arbitration Act is a general Act. Applying the legal principle of generalia specialibus non derogant, the special law must prevail over the general law. Therefore, the mechanism provided under Section 18 of the MSMED Act must take precedence over Section 11 of the Arbitration Act.
Analysis, Law, and Decision
Rejecting the respondent’s contention, the Court opined that where proceedings under Section 18 are not pending, parties with disputes arising out of commercial relationships were not precluded from invoking arbitration proceedings. Evaluating the scheme of the MSMED Act, the Court explained that Section 17 and 18 of the MSMED Act must be read conjointly. Section 17 provides that the buyer shall be liable to make payment with interest for goods and services rendered by the supplier. Section 18 entitles a person to refer the matter to the Micro and Small, Medium Enterprises Facilitation Council (‘MSEFC’) when default under Section 17 occurs. On receipt of reference, MSEFC shall either conduct mediation proceedings itself or refer the matter to any institution. Where mediation is not successful, MSEFC shall either take up arbitration itself or refer the dispute to an arbitration institution. Once the dispute enters into arbitration, the provisions of the Arbitration Act become applicable.
The Court further opined that the provisions of Section 18 cannot be construed to mean that once dispute under Section 17 arises, the parties must mandatorily take recourse to the dispute resolution mechanism envisaged under Section 18(1). The Court stated that the legislature in its wisdom has used the word ‘may’ in Section 18(1), which indicates that the intent of the legislature was to leave it to the discretion of the aggrieved party to either take recourse to Section 18 of MSME Act or to resort to procedure under Arbitration Act. In cases where agreements between parties allow for a specific method of dispute resolution, the parties may choose to invoke that instead of making a reference to MSEFC.
The Court reiterated the position laid down by the Supreme Court in Gujarat State Civil Supplies Corporation Ltd. v. Mahakali Foods (P) Ltd. 2023 6 SCC 401, that once the statutory mechanism under Section 18(1) of the MSMED Act has been triggered, it would override any agreement between the parties. The non-obstante clause in Section 18(1) and (4) would take effect and preclude the parties from invoking any other mechanism until the mechanism under Section 18 is taken to its logical conclusion. However, where the mechanism under Section 18 is not invoked, the parties may resort to any other mechanism for resolution of their disputes.
In the present case, since statutory mechanism under Section 18 of the MSMED Act had not been invoked, therefore, it could not be said that any proceedings were pending before the Council. Thus, the application for appointment of arbitrator under Section 11 of the Arbitration Act was allowed. Accordingly, the Delhi International Arbitration Centre (DIAC) was instructed to take steps for appointment of a Sole Arbitrator.
[Total Application Software Co. (P) Ltd. v. Ashoka Distillers and Chemicals (P) Ltd., Arb. P. 206 of 2025, decided on 27-5-2025]
*Judgement authored by- Justice Jyoti Singh
Advocates who appeared in this case :
For the Petitioner: K.S. Negi, Nikhil Rajput, Advocates
For the Respondent: Vinita Sasidharan, Vasu Vats Aadya Malik, Advocates
Buy Arbitration and Conciliation Act, 1996 HERE
