A) ABSTRACT / HEADNOTE
The Supreme Court in M/s Harcharan Dass Gupta v. Union of India addressed the interplay between the Micro, Small and Medium Enterprises (Development) Act, 2006 (MSMED Act) and the Arbitration and Conciliation Act, 1996. The central issue was whether the contractual stipulation fixing Bengaluru as the seat of arbitration could override the jurisdiction of the Micro and Small Enterprises Facilitation Council (MSEFC) under Section 18(4) of the MSMED Act, when the supplier was registered in Delhi. The appellant, a registered MSME, had invoked the Delhi Facilitation Council against the Indian Space Research Organisation (ISRO). The Delhi Facilitation Council referred the dispute to arbitration through the Delhi Arbitration Centre. However, the Karnataka High Court upheld ISRO’s objection, holding that since the contract fixed Bengaluru as the arbitral seat, the Delhi Arbitration Centre lacked jurisdiction.
The Supreme Court set aside the High Court’s decision, holding that Section 18(4) of the MSMED Act overrides any contractual stipulation regarding the seat of arbitration. The Court emphasized that the legislative intent behind the MSMED Act was to protect MSMEs from delayed payments and to provide a specialized forum. Consequently, once the statutory mechanism under Section 18 is invoked, it prevails over private contractual agreements. The Court relied heavily on its earlier ruling in Gujarat State Civil Supplies Corporation Ltd. v. Mahakali Foods Pvt. Ltd. (2023) 6 SCC 401, which affirmed the overriding effect of the MSMED Act over the Arbitration Act.
The ruling reinforces the principle that special legislation prevails over general law and clarifies that in MSME disputes, the jurisdiction of the Facilitation Council is determined by the supplier’s location, irrespective of any contrary contractual clause. The arbitral proceedings were restored under the aegis of the Delhi Arbitration Centre.
Keywords: Section 18(4) MSMED Act; Arbitration and Conciliation Act, 1996; overriding effect of special law; seat of arbitration; Facilitation Council jurisdiction; supplier’s location; MSME protection; Delhi Arbitration Centre; ISRO contracts; statutory arbitration.
B) CASE DETAILS
| Particulars | Details |
|---|---|
| i) Judgment Cause Title | M/s Harcharan Dass Gupta v. Union of India |
| ii) Case Number | Civil Appeal No. 6807 of 2025 |
| iii) Judgment Date | 14 May 2025 |
| iv) Court | Supreme Court of India |
| v) Quorum | Pamidighantam Sri Narasimha, J. and Joymalya Bagchi, J. |
| vi) Author | Justice Pamidighantam Sri Narasimha |
| vii) Citation | [2025] 6 S.C.R. 422 : 2025 INSC 689 |
| viii) Legal Provisions Involved | Micro, Small and Medium Enterprises (Development) Act, 2006 – Sections 15–24, particularly Section 18(4); Arbitration and Conciliation Act, 1996 – Sections 7, 16, 80 |
| ix) Judgments overruled by the Case | None, but Karnataka High Court’s decision in WP No. 27269 of 2023 was set aside |
| x) Related Law Subjects | Arbitration Law, Commercial Law, MSME Law, Contract Law, Constitutional Law (judicial review under Articles 226/227) |
C) INTRODUCTION AND BACKGROUND OF JUDGMENT
The present judgment is a significant pronouncement concerning the intersection of contractual autonomy in arbitration agreements and statutory arbitration under the MSMED Act. The dispute arose from a construction contract awarded by ISRO to the appellant, a registered MSME. The contract included an arbitration clause stipulating Bengaluru as the arbitral seat. When disputes regarding payments surfaced, the supplier approached the Delhi Facilitation Council under Section 18(1) of the MSMED Act. Upon ISRO’s refusal to participate in conciliation, the matter was referred to arbitration through the Delhi Arbitration Centre.
The arbitral tribunal assumed jurisdiction and directed ISRO to file its statement of defence. Instead, ISRO challenged the proceedings before the Karnataka High Court, contending that the seat of arbitration fixed under the contract was Bengaluru, thereby ousting the jurisdiction of the Delhi Arbitration Centre. The High Court agreed, holding that private party autonomy in arbitration clauses must prevail.
The matter reached the Supreme Court, which was tasked with deciding whether the statutory mechanism under the MSMED Act can override private arbitration agreements. This dispute raised larger questions about the hierarchy between special statutes and general law, the extent of party autonomy in arbitration, and the constitutional powers of High Courts in interfering with arbitral proceedings.
By relying on the ratio in Gujarat State Civil Supplies Corporation Ltd. v. Mahakali Foods Pvt. Ltd. and Silpi Industries v. Kerala State Road Transport Corporation (2021) 18 SCC 790, the Court reiterated that MSMEs enjoy statutory protection which cannot be nullified by contractual clauses. The judgment thus reinforces legislative intent, ensuring that MSMEs receive the benefits of a dedicated statutory forum for expeditious dispute resolution.
D) FACTS OF THE CASE
In 2017, ISRO issued a tender for the construction of staff quarters in New Delhi. The appellant, M/s Harcharan Dass Gupta, a registered MSME supplier under the MSMED Act, was awarded the contract. The agreement executed on 11 September 2017 contained clauses (25 and 25A) stipulating that disputes would be resolved through arbitration with the seat at Bengaluru.
Disputes soon emerged, primarily concerning payment delays. The appellant invoked Section 18 of the MSMED Act, approaching the Delhi Facilitation Council in March 2022. The Council issued notice for conciliation under Section 18(2), but ISRO declined to participate. Consequently, in exercise of powers under Section 18(3), the Council referred the dispute to arbitration through the Delhi Arbitration Centre, which appointed a sole arbitrator.
The arbitral proceedings commenced in June 2022, and by September 2023, the arbitrator directed ISRO to submit its defence. Instead of complying, ISRO challenged the proceedings before the Karnataka High Court via Writ Petition No. 27269 of 2023, arguing that since the contract designated Bengaluru as the seat of arbitration, Delhi lacked jurisdiction. The High Court granted an interim stay and later held that the Delhi Arbitration Centre had no jurisdiction.
Aggrieved, the appellant filed a civil appeal before the Supreme Court. The central issue before the Court was whether the statutory jurisdiction vested in the Facilitation Council under Section 18(4) of the MSMED Act could be displaced by contractual provisions of the arbitration agreement between the parties.
E) LEGAL ISSUES RAISED
i. Whether the MSMED Act, 2006 overrides the Arbitration and Conciliation Act, 1996 in matters concerning MSME disputes?
ii. Whether a contractual stipulation fixing the seat of arbitration at Bengaluru prevails over the statutory mandate under Section 18(4) of the MSMED Act that arbitration shall be conducted where the supplier is located?
iii. Whether the Delhi Facilitation Council was competent to refer the dispute to arbitration despite the contractual arbitration clause?
iv. Whether the High Court of Karnataka erred in interfering with arbitral proceedings initiated under the MSMED Act?
F) PETITIONER/ APPELLANT’S ARGUMENTS
i. The counsels for the appellant submitted that the MSMED Act is a special legislation enacted to safeguard MSMEs against delayed payments, with a self-contained dispute resolution mechanism under Section 18. Once a supplier invokes this mechanism, it overrides any private arbitration agreement.
ii. The appellant argued that Section 18(4) expressly provides that jurisdiction lies with the Facilitation Council where the supplier is located, irrespective of the buyer’s location or contractual stipulations. Since the appellant is based in Delhi, the Delhi Facilitation Council rightly assumed jurisdiction.
iii. It was contended that the High Court erred in prioritizing contractual autonomy over statutory protection. Reliance was placed on Gujarat State Civil Supplies Corporation Ltd. v. Mahakali Foods Pvt. Ltd. (2023) 6 SCC 401, wherein the Supreme Court held that the MSMED Act prevails over the Arbitration Act.
iv. The appellant further relied on Silpi Industries v. Kerala SRTC (2021) 18 SCC 790, which affirmed that statutory provisions of the MSMED Act have overriding effect under Section 24.
G) RESPONDENT’S ARGUMENTS
i. The counsels for ISRO contended that party autonomy is the cornerstone of arbitration, and the contract between the parties fixed Bengaluru as the seat of arbitration. Therefore, the arbitral proceedings in Delhi were without jurisdiction.
ii. It was argued that the MSMED Act does not nullify validly executed arbitration agreements but merely provides an additional statutory mechanism, which cannot displace an agreed seat of arbitration.
iii. The respondent relied on Section 7 of the Arbitration Act, emphasizing that arbitration agreements voluntarily executed by parties must be respected to uphold certainty and sanctity in commercial contracts.
iv. ISRO also contended that the Delhi Facilitation Council acted beyond its jurisdiction in referring the matter to the Delhi Arbitration Centre, and the High Court rightly intervened to prevent parallel jurisdictional claims.
H) RELATED LEGAL PROVISIONS
i. Section 18(1)–(4), Micro, Small and Medium Enterprises (Development) Act, 2006 – statutory mechanism for conciliation and arbitration through the Facilitation Council.
ii. Section 24, MSMED Act – overriding effect of provisions over other laws.
iii. Section 7, Arbitration and Conciliation Act, 1996 – definition of arbitration agreement.
iv. Section 16, Arbitration Act – Kompetenz-kompetenz principle (arbitral tribunal’s power to decide its jurisdiction).
v. Section 80, Arbitration Act – bar on conciliator acting as arbitrator, overridden by MSMED Act.
vi. Articles 226/227, Constitution of India – writ jurisdiction of High Courts.
I) JUDGMENT
The Supreme Court categorically held that the MSMED Act overrides the Arbitration Act in disputes involving MSMEs. It declared that once the statutory mechanism under Section 18 is invoked, the jurisdiction lies exclusively with the Facilitation Council of the supplier’s location, regardless of any contrary agreement.
The Court observed that the Karnataka High Court committed a grave error by holding that the Delhi Arbitration Centre lacked jurisdiction. It reasoned that Section 18(4) of the MSMED Act contains a clear non obstante clause, vesting jurisdiction in the Facilitation Council where the supplier is located. Since the appellant was based in Delhi, the Delhi Facilitation Council validly referred the dispute to arbitration under the aegis of the Delhi Arbitration Centre.
The Court reiterated that a private arbitration agreement cannot override statutory provisions. Referring to its earlier ruling in Mahakali Foods case (2023) 6 SCC 401, it affirmed that the MSMED Act is a special legislation with an overriding effect by virtue of Section 24. It further relied on Silpi Industries v. Kerala SRTC (2021) 18 SCC 790, which emphasized that the statutory purpose of protecting MSMEs cannot be frustrated by contractual clauses.
The judgment clarified that while the arbitral tribunal in Delhi will proceed with the matter, ISRO retains full liberty to raise all defences and legal objections before the arbitrator. Importantly, the Court made it clear that it was not adjudicating on the merits of the dispute but merely addressing the jurisdictional question.
Accordingly, the appeal was allowed, the order of the Karnataka High Court dated 22 April 2024 was set aside, and arbitral proceedings were restored before the Delhi Arbitration Centre.
a) RATIO DECIDENDI
The ratio decidendi of the judgment rests on two intertwined principles:
First, Section 18 of the MSMED Act creates a statutory arbitration framework that prevails over party autonomy in arbitration agreements. This principle flows from the maxim generalia specialibus non derogant, meaning general law (the Arbitration Act) yields to special law (the MSMED Act).
Second, the jurisdiction of the Facilitation Council is determined by the supplier’s location, not the contractual seat of arbitration. Section 18(4) explicitly provides that the Facilitation Council where the supplier is located shall have jurisdiction, irrespective of where the buyer is located or what the contract stipulates.
Thus, the Court held that contractual clauses cannot derogate from statutory mandates. The statutory protection under the MSMED Act is designed to advance the legislative objective of ensuring expeditious resolution of MSME payment disputes.
The ratio is consistent with Gujarat State Civil Supplies Corporation Ltd. v. Mahakali Foods Pvt. Ltd. (2023) 6 SCC 401, where the Court clarified that the MSMED Act overrides the Arbitration Act. It also aligns with Silpi Industries v. Kerala SRTC (2021) 18 SCC 790, which emphasized the overriding effect of Section 24.
Hence, the operative principle is: in disputes covered under the MSMED Act, arbitral proceedings must be conducted under the jurisdiction of the Facilitation Council where the supplier is registered, and private contractual agreements regarding arbitral seat cannot prevail.
b) OBITER DICTA
The Court made several significant observations that qualify as obiter dicta:
i. The Court clarified that while the Facilitation Council may act as both conciliator and arbitrator under Section 18, this does not conflict with Section 80 of the Arbitration Act, since the latter is overridden by the statutory scheme of the MSMED Act.
ii. It observed that when statutory provisions create a legal fiction—as in Section 18(3), which deems arbitration under MSMED Act to be “as if” arising from an arbitration agreement—the fiction must be carried to its logical end. The Council or institution thereby gains the full jurisdictional competence of an arbitral tribunal under the Arbitration Act, including the ability to rule on its own jurisdiction (Section 16).
iii. The Court stressed that while party autonomy is a foundational principle in arbitration, it cannot be elevated above statutory protections granted to weaker sections like MSMEs. The doctrine of party autonomy must yield where Parliament has legislated mandatory protections.
iv. The Court also remarked that High Courts, while exercising jurisdiction under Articles 226/227, must be cautious not to unduly interfere in arbitral proceedings, especially when statutory forums are involved. Excessive interference risks defeating legislative intent of expeditious dispute resolution.
These dicta signal a strong judicial policy favoring statutory protection of MSMEs over strict adherence to contractual autonomy.
c) GUIDELINES
From the judgment, certain guiding principles emerge:
i. Overriding effect of MSMED Act – The MSMED Act, 2006 is a special statute with overriding effect under Section 24. It prevails over the Arbitration and Conciliation Act, 1996 in case of inconsistencies.
ii. Jurisdiction of Facilitation Council – Under Section 18(4), jurisdiction lies with the Facilitation Council where the supplier is located, irrespective of the contractual seat of arbitration or location of the buyer.
iii. Contractual arbitration clauses – Private arbitration agreements cannot override statutory provisions under the MSMED Act. Once Section 18 is invoked, the statutory mechanism must prevail.
iv. Role of Facilitation Council – The Council can act both as conciliator and arbitrator, notwithstanding Section 80 of the Arbitration Act. This bar stands overridden by the non obstante provisions of the MSMED Act.
v. Legal fiction under Section 18(3) – Arbitration conducted under the MSMED Act is deemed to be “as if” under an arbitration agreement, thereby importing all powers and procedures of the Arbitration Act.
vi. High Court interference – High Courts should exercise restraint in interfering with proceedings under the MSMED Act via writ jurisdiction, as such interference undermines the statutory purpose of expeditious resolution of MSME disputes.
These guidelines reinforce certainty and uniformity in handling MSME disputes and clarify the scope of statutory arbitration under the Act.
J) CONCLUSION & COMMENTS
The judgment is a watershed in strengthening the statutory framework protecting MSMEs. By affirming the overriding effect of the MSMED Act, the Court curtailed the possibility of buyers circumventing statutory protections through contractual arbitration clauses. The ruling harmonizes the objectives of arbitration with legislative intent, balancing party autonomy with social justice considerations.
The decision has practical consequences: MSMEs can now confidently invoke the jurisdiction of their local Facilitation Councils, without fear that contractual arbitration clauses would displace their statutory rights. It reduces litigation over jurisdictional conflicts and ensures uniform application of Section 18 across India.
At a jurisprudential level, the Court has reinforced the doctrine that special statutes prevail over general law. It further strengthens the constitutional principle that legislative intent to protect vulnerable economic actors must prevail over private contractual autonomy.
However, the judgment also leaves open questions. Buyers may feel disadvantaged by being compelled to arbitrate outside the agreed seat. The decision could impact contractual certainty in large-scale government contracts where MSMEs are involved. Nevertheless, the Court rightly prioritized statutory protections for MSMEs, aligning with India’s economic policy of empowering small enterprises.
Overall, the ruling strikes a fair balance between autonomy and protection. It enhances the predictability of MSME dispute resolution and consolidates the role of Facilitation Councils as a mandatory first forum.
K) REFERENCES
a. Important Cases Referred
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Gujarat State Civil Supplies Corporation Ltd. v. Mahakali Foods Pvt. Ltd., (2023) 6 SCC 401.
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Silpi Industries v. Kerala State Road Transport Corporation, (2021) 18 SCC 790.
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K. Prabhakaran v. P. Jayarajan, (2005) 1 SCC 754.
b. Important Statutes Referred
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Micro, Small and Medium Enterprises (Development) Act, 2006 – Sections 15–24, especially Sections 18(1)–(4), 24.
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Arbitration and Conciliation Act, 1996 – Sections 7, 16, 80.
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Constitution of India – Articles 226 and 227.
