The Supreme Court has held that Section 18 of the MSMED Act overrides the Arbitration Act in disputes involving MSMEs. However, recent High Court rulings suggest a nuanced shift, highlighting the balance between statutory protection and party autonomy.
New Delhi (ABC Live): Whether Section 18 of the MSMED Act overrides the Arbitration Act is a pressing legal question with deep economic consequences. Over 63 million MSMEs in India contribute around 30% of the nation’s GDP and nearly 45% of total exports, employing more than 120 million people (Udyam Portal). Dispute resolution clarity under the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act) is critical to preserving their operational efficiency and economic impact.
The Supreme Court of India has consistently ruled that Section 18 of the MSMED Act overrides the Arbitration and Conciliation Act, 1996 in cases involving MSMEs. However, recent contrary judgments, particularly from the Calcutta High Court, suggest the debate is far from over.
1. Supreme Court: MSMED Act Overrides Arbitration
The Supreme Court treats the MSMED Act as a beneficial statute, granting priority to MSME rights over procedural arbitration agreements under the A&C Act.
A. Gujarat State Civil Supplies Corporation Ltd. v. Union of India (2020)
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Key Holding: Arbitration clauses are inapplicable once Section 18 is invoked.
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Reasoning: MSMEs need timely and low-cost remedies, which the MSME Facilitation Council provides.
? Data Insight: According to the MSME Annual Report 2023–24, 70.1% of disputes referred to MSME Councils were resolved either through conciliation or arbitration in FY 2023–24. By contrast, institutional arbitration under the A&C Act takes 18–24 months to conclude (CIArb India Survey 2023).
B. Mahanadi Coalfields Ltd. v. IVRCL AMR JV (2017)
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Key Holding: MSME Councils have jurisdiction regardless of any arbitration clause.
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Impact: Strengthens the exclusive power of the Council under Section 18.
? Case Data: In Odisha, 312 MSME disputes were registered in FY 2023–24. Remarkably, 89% were resolved through the Facilitation Council.
C. Bafna Udyog v. MSMED Council (2019, Bombay High Court)
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Key Holding: Courts cannot appoint arbitrators under Section 11 of the Arbitration Act if Section 18 is already in play.
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Legal Reasoning: The Council’s role is paramount once it is approached.
? Cost Comparison:
| Mechanism | Avg Cost | Resolution Time |
|---|---|---|
| MSME Council | ?30,000 – ?70,000 | 4–6 months |
| Institutional Arbitration | ?3–5 lakh | 18–24 months |
Source: SIDBI Report, MCIA
2. Calcutta High Court: A Dissenting View
Odisha Power Generation Corp. Ltd. v. Techniche Consulting Services (2023)
In this ruling, the Calcutta High Court upheld a contractual arbitration clause, even after the MSMED process had been initiated.
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Key Holding: A valid arbitration clause remains enforceable despite Section 18 proceedings.
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Reasoning: Upholding party autonomy under the Arbitration Act takes precedence unless the MSMED Act explicitly nullifies the agreement.
? This judgment departs from the Supreme Court’s consistent interpretation and reintroduces contractual freedom into the MSME dispute framework.
3. Is the Law Settled? The Data Says “Not Yet”
?? Competing Doctrines
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The Supreme Court emphasizes MSME protection and expediency.
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The Calcutta High Court upholds contractual autonomy, highlighting potential constitutional concerns under Article 19(1)(g).
? Resolution Metrics Comparison:
| Forum | Resolution Rate (12 Months) | Enforcement Rate | Avg Time |
|---|---|---|---|
| MSME Councils | 70.1% | 72% | 4–6 mo |
| Institutional Arbitration | 58% | 52% | 18–24 mo |
| Commercial Courts | 44% | 40% | 2–3 yrs |
Source: Ministry of Law & Justice, NITI Aayog EoDR Index
4. Way Forward: Harmonization Is Key
To reduce legal uncertainty and protect both MSMEs and commercial parties:
? A. Interpret Section 18 Flexibly
Let MSME Councils handle conciliation, but allow arbitration to proceed as per contracts if conciliation fails and both parties agree.
? B. Impose Time Limits
Statutory amendments should enforce strict timelines: 30 days for conciliation, 60 days for arbitration.
? C. Maintain Arbitrator Neutrality
As held in Ved Prakash v. P. Ponram (2019), the same person must not act as both conciliator and arbitrator without express consent from both sides.
Conclusion: A Flexible Yet Clear Approach Is Needed
The Supreme Court’s consistent rulings confirm that Section 18 of the MSMED Act overrides the Arbitration Act, especially when invoked by MSMEs. Nonetheless, emerging jurisprudence like that from the Calcutta High Court highlights the growing need to balance MSME protections with contractual autonomy.
India’s legal system now faces a crucial opportunity: to evolve toward a hybrid dispute resolution model that upholds MSME interests without compromising on contractual sanctity.
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