Withdrawal Of MSMED Council Application Does Not Preclude Arbitration U/S 11, Even Without Council's Response: Delhi High Court

Brief Facts:

Respondent No. 2 and 3 approached M/s Smartschool Education Private Limited (“Petitioner”) to lease the software. An agreement was entered into between the Petitioner and Respondent No. 1. The Petitioner decided to lease the software under this agreement. After the Petitioner spent a substantial amount on developing the software, the Respondents failed to fulfill their obligations under the agreement. The Petitioner invoked arbitration under Clause 11.2.2 of the agreement. The Respondent replied to this notice. The Petitioner initially approached the MSMED Council for redressal but withdrew the application. It stated that the case was not maintainable before the Council. Then, the Petitioner filed an application under Section 11 of the Arbitration Act before the High Court for the appointment of an arbitrator.

The Respondent contended that Clause 11.2.1 of the agreement is not a binding arbitration clause as it lacks a clear intent to refer disputes to arbitration. He argues that the clause only allows for arbitration if amicable resolution fails. The Respondent also argued that the petition is not maintainable because there was a pending reference under the MSMED Act 2006. The Petitioner filed an application before the MSMED Council in April 2024 and sought to withdraw it in July 2024. However, there was no communication from the Council granting leave to withdraw or file afresh. Therefore, it contended that once the MSMED Act is invoked, recourse to ad hoc arbitration is not available.

Observations by the High Court:

The High Court held that Clause 11.2.2 of the agreement contained a valid arbitration clause specifying New Delhi as the seat of arbitration.

The Court held that:

“This Court is of the opinion that Clause 11.2.2 of the agreement contains an arbitration clause which provides that the seat of arbitration shall be at New Delhi. The Petitioner issued notice dated 02.03.2023 followed by another notice dated 30.05.2024 invoking arbitration. The Respondent has chosen to deny its liability and therefore there is no question of making any attempt to settle the disputes amicably. The Petitioner has therefore approached this Court for appointment of arbitration and this Court has issued notice in the matter on 05.08.2024.”

Further, the High Court held that the absence of correspondence from the MSMED Council accepting the withdrawal does not bar the Petitioner from approaching the High Court under Section 11 of the Arbitration Act.

The Court held that:

“Admittedly, the Petitioner had approached the MSMED Council but the Petitioner has withdrawn from the MSMED Council vide Letter dated 18.07.2024 and the fact that there is no correspondence from the MSMED Council accepting the withdrawal does not mean that the Petitioner cannot approach this Court under Section 11 of the Arbitration & Conciliation Act.”

Therefore, the High Court held there was a clear arbitration clause. Cosequenelty, the court decided to appoint an arbitrator to adjudicate the disputes. Accordingly, the court appointed Mr. R. Sudhinder Advocate as the Sole Arbitrator to resolve the disputes between the parties.

Case Title: M/S Smartschool Education Private Limited Vs M/S Bada Business Pvt. Ltd And Ors

Citation: 2025 LiveLaw (Del) 320

Case Number: ARB.P. 1178/2024

Advocate for the Petitioner: Mr. Sachin Dhamija and Ms. Ashmeet Kaur, Advs.

Advocate for the Respondent: Mr. Aditya Vardhan Sharma, Mr. Yash Singhal, Advocates for R-1, R-3 & R-4

Date of Judgment: 07.03.2025

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