The Hon'ble Supreme Court of India, in the case of M/S Harcharan Dass Gupta v Union of India delivered a significant ruling affirming the precedence of the Micro, Small and Medium Enterprises Development Act 2006 (MSMED Act) over Arbitration and Conciliation Act 1996 (A&C Act) in disputes involving Micro, Small, and Medium Enterprises (MSMEs). This judgment clarifies the legal framework governing the dispute resolution process for (MSMEs) and also highlights the special protections provided by special laws, which would have an overriding effect over general laws.
Factual Background
The present case arises from a contractual dispute between the Indian Space Research Organisation (ISRO) and the appellant, a supplier duly registered under the MSMED Act of 2006. Pursuant to a tender floated by ISRO for the construction of staff quarters in New Delhi, the appellant herein was selected as a successful bidder, following which a formal Agreement was executed between the parties. However, during the course of execution of the project, certain dispute arose between the parties, which caused the appellant to approach the Facilitation Council (Council) in Delhi under Section 18 of the MSMED Act of 2006.
The Council issued notice for conciliation proceedings, however, ISRO chose not to participate in the process. Due to this reason, the Council referred the matter to the Delhi Arbitration Centre under Section 18(3) of the MSMED Act, in which a Sole Arbitrator was appointed. At the relevant stage of the Arbitration Proceedings, the Ld. Tribunal directed ISRO to file a statement of defence.
However instead of filing its Statement of Defence, ISRO challenged the jurisdiction of the Delhi Arbitration Centre before the Hon'ble High Court of Karnataka by filing a writ petition under Article 226 and 227 of the Constitution of India. ISRO relied on Clauses 25 and 25A of the Agreement, according to which it was agreed that in case of disputes, the seat of arbitration shall be Bengaluru.
Decision of the Hon'ble High Court of Karnataka
The Hon'ble High Court ruled that the Delhi Arbitration Centre assuming its jurisdiction, at the instance of the Council, contravened the terms specified in the Agreement and such assumption was illegal and contrary to law.
Findings and Observations of the Hon'ble Supreme Court of India
The matter at the instance of the Appellant came up for consideration before the Hon'ble Supreme Court of India. The Hon'ble Supreme Court, while adjudicating the dispute on merits, relied upon the judgment of Gujarat State Civil Supplies Corporation Ltd v. Mahakali Foods Pvt Ltd., wherein it was held that the Micro Small and Medium Enterprises Act 2006 (MSMED Act), being special legislation, takes precedence over the Arbitration & Conciliation Act 1996 (A&C Act).
The Court also placed reliance on the judgment delivered in the case of Silppi Industries v. Kerala SRTC (2021), wherein it had observed that the (MSMED Act) was a special legislation to protect the MSMEs by setting out a statutory mechanism for the payment of interest on delayed payments and the said act would override the A&C Act.
Further, the Respondent in the instant case had argued that a valid arbitration proceeding can be conducted only if it arises by virtue of an arbitration agreement as provided under Section 7 A&C Act. The Respondent, therefore, refuted the jurisdiction of the Delhi Arbitration Centre as it was inconsistent with the arbitration agreement.
On this point, the Hon'ble Supreme Court held that under Section 24 of the MSMED Act, the provisions regarding the constitution of a dedicated dispute resolution mechanism under Section 18 of the Act would prevail over any other general law like the A&C Act or the arbitration agreement. Hence, the Hon'ble Court upheld the supremacy of the MSMED Act and declared that a legal fiction was created under section 18(3) whereby an arbitration tribunal constituted by the Council would be deemed to be created by an arbitration agreement.
Moreover, on the question whether parties could enforce arbitration agreements which may be inconsistent with the provisions of the MSMED Act, the Hon'ble Court held that private agreements could not override statutory provisions. It also held that when two different interpretations of a provision of law are made out, the Courts would prefer those interpretations that would enhance the objectives of that particular law. In light of this, the Hon'ble Court held that even if the word 'agreements' is not mentioned, under section 18(1) of the Act, it does not mean that provisions contained therein could not override the agreements as executed between the parties.
Decision of The Hon'ble Supreme Court
The Supreme Court held that the MSMED Act 2006, being a special law, will prevail over the A&C Act in disputes involving MSMEs. The referral of the dispute to the Delhi Arbitration Centre by the Council was lawful, and the High Court erred in deeming it illegal. The Hon'ble Supreme Court affirmed that private agreements specifying a different seat of arbitration cannot override the statutory mechanisms under the MSMED Act of 2006.
Conclusion
Through the present judgement, the Hon'ble Supreme Court has reaffirmed the well-established principle that special law will prevail over general law when both deal with the same subject matter. Special laws, such as the MSMED Act, govern the specific nature of disputes arising between specific categories of persons. Such disputes are resolved through a specific process in a specific forum.
By prioritizing the dispute resolution mechanism under the MSMED Act over the general provisions of the Arbitration and Conciliation Act 1996, the Hon'ble Court has ensured that MSMEs can access statutory remedies without being limited by private agreements.
This decision also highlights the legislative intent to protect and promote the interests of MSMEs by providing them with a more effective, accessible, and specialised dispute resolution framework.
Co- Author: Yash Mohanty, Inter
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
