Private Arbitration Clauses Cannot Override Statutory Mandates Under MSMED Act : Supreme Court

Reaffirming that the MSMED Act prevails over the Arbitration Act, as held in Gujarat State Civil Supplies v. Mahakali Foods, the Supreme Court set aside the Karnataka High Court's interference with MSMED proceedings in Delhi, despite the contract naming Bengaluru as the arbitration seat.

The Court clarified that private contractual clauses cannot override the statutory mandate of the MSMED Act. Since the appellant-supplier was registered in Delhi, the Court noted that the Delhi Arbitration Centre had jurisdiction under Section 18(4) of the MSMED Act, regardless of the contract's designation of Bengaluru as the seat of arbitration due to the overriding nature of the MSMED Act.

Background

The bench comprising Justices PS Narasimha and Joymalya Bagchi was hearing the case where a tender was issued by ISRO for construction work in New Delhi.

The contract included dispute clauses, providing that disputes would be settled by arbitration seated in Bengaluru.

The appellant invoked Section 18 of the MSMED Act after a dispute arose, approaching the Delhi Facilitation Council. Upon ISRO's refusal to participate in conciliation, the dispute was referred to arbitration via the Delhi Arbitration Centre, and a sole arbitrator was appointed.

ISRO challenged the jurisdiction of the Delhi Arbitration Centre before the Karnataka High Court, arguing that the arbitration seat was contractually fixed at Bengaluru.

The High Court allowed the writ, holding that the proceedings in Delhi violated the contract, prompting the Appellant to approach the Supreme Court.

Issue

Whether the Delhi Arbitration Centre could assume jurisdiction over a dispute under Section 18 of the MSMED Act, even though the underlying contract specified Bengaluru as the seat of arbitration.

Decision

Answering in the affirmative, the judgment authored by Justice Narasimha reaffirmed that the MSMED Act is a special statute enacted to provide a swift and effective dispute resolution mechanism for MSMEs, and it overrides the Arbitration Act, which is more general in nature.

The Court rejected the Respondent's argument that the parties' choice of arbitration seat in the contract (Bengaluru) could prevail over the statutory procedure under the MSMED Act.

“The issue relating to 'seat of arbitration' in all cases covered under the MSMED Act is settled in view of the pronouncement of this Court in Mahakali. This position is also true by virtue of the specific provision of the MSMED Act, that is, sub-Section (4) of Section 18, which vests jurisdiction for arbitration in the Facilitation Council where the supplier is located..”, the court said.

“It is therefore held that no party to a dispute covered under Section 17 of the MSMED Act, 2006 would be precluded from making a reference to the Facilitation Council under Section 18(1) thereof, merely because there is an arbitration agreement existing between the parties.”, the court observed in Mahakali Foods Pvt. Ltd.

Accordingly, the Court allowed the appeal and restored the arbitral proceedings in Delhi under the MSMED Act.

Case Title: M/S HARCHARAN DASS GUPTA VERSUS UNION OF INDIA

Citation : 2025 LiveLaw (SC) 567

Click here to read/download the judgment

Appearance:

For Petitioner(s) :Ms. Priya Kumar, Sr. Adv. Ms. Renuka Arora, Adv. Mr. Nishant Kumar, AOR

For Respondent(s) :Mr. Vikramjit Banerjee, A.S.G. Mr. Abhishek Singh, Adv. Mr. Raghav Sharma, Adv. Mr. Ishaan Sharma, Adv. Mr. C.K. Sharma, Adv. Ms. Archana Shurve Shinde, Adv. Dr. N. Visakamurthy, AOR