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Home › MSMED — Section 18(3) Reference
Delhi High Court · 13 May 2026

After the Council Refers: DIAC Arbitration Under Section 18(3) MSMED Act Upheld

The Court rejected the argument that an arbitrator seized on a Facilitation Council reference lacks authority to render an independent award — the A&C Act framework governs in full.

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In M/s Dewan and Sons & Ors. v. M/s Harsh International, O.M.P. (COMM) 237/2026 (decided 13 May 2026), Justice Harish Vaidyanathan Shankar of the High Court of Delhi dismissed a Section 34 challenge to an award made by a sole arbitrator of the Delhi International Arbitration Centre (DIAC) in a dispute referred by the Micro and Small Enterprises Facilitation Council under Section 18(3) of the MSMED Act, 2006. The award-debtor's central objection was structural: that an arbitrator acting on a Council reference could not render an independent award. The Court rejected it, holding that once the statutory reference is made, the arbitral institution proceeds with full competence under the Arbitration and Conciliation Act, 1996. For Delhi's MSME recovery practice, the decision confirms the legal solidity of the Council-to-DIAC pipeline through which most contested Samadhaan claims now pass.

The dispute

The underlying claim was a supplier's claim for unpaid invoices for stainless steel utensils supplied to the respondent buyer. The buyer's defence was quality: it said the goods were defective, had been rejected by its own customer — Walmart USA — and had necessitated a settlement payment of approximately Rs. 2.29 crores at its end. The supplier invoked the MSMED machinery; conciliation before the Facilitation Council failed; and the Council referred the dispute to the DIAC under Section 18(3), where a sole arbitrator made an award. The buyer then petitioned under Section 34 of the Arbitration and Conciliation Act, 1996.

The structural objection and its rejection

The petition's lead argument did not attack the merits so much as the machinery: the arbitrator, it was said, lacked authority to render an independent award because his mandate originated in a Council reference rather than a consensual arbitration agreement. Justice Harish Vaidyanathan Shankar rejected the premise:

"Once such a statutory reference is made by the Council to an arbitral institution under Section 18(3) of the MSMED Act, the arbitral proceedings necessarily proceed independently in accordance with the provisions" of the Arbitration and Conciliation Act, 1996.

The fiction enacted by Section 18(3) — that the A&C Act applies as if there were an arbitration agreement between the parties — is complete. The institution administers, the arbitrator adjudicates, and the award carries the same force as any other domestic award. The Delhi MSEFC Rules, which contemplate exactly this institutional referral, reinforce the design.

The MSMED dispute pipeline in Delhi

Reference. The supplier files its delayed-payment claim (typically through the MSME Samadhaan portal) before the Delhi MSEFC under Section 18(1).
Conciliation. The Council conducts or refers conciliation under Section 18(2). Settlement ends the matter; failure triggers the next stage.
Arbitration. Under Section 18(3), the Council arbitrates itself or refers to an institution — in Delhi, ordinarily the DIAC — and the A&C Act governs in full.
Award and challenge. The award is enforceable as a decree; a buyer's challenge under Section 34 requires the 75% deposit mandated by Section 19 MSMED Act.

What the decision means for suppliers and buyers

For MSME suppliers. The institutional route is robust: an award obtained through a DIAC reference will not be undone by structural objections to the arbitrator's mandate. Registration, documentation of supplies, and invoice discipline remain the real battlegrounds.
For buyers. Defences on quality and set-off must be fought fully in the arbitration itself — with evidence of rejection, debit notes and correspondence — because the Section 34 court will not re-weigh them, and the Section 19 deposit makes a speculative challenge expensive.
For both. The MSMED overlay changes remedies and economics, not the adjudicative standard: the arbitration is a real arbitration, and its award is as durable as the record built before the arbitrator.

Frequently Asked Questions

What happens when conciliation before the Facilitation Council fails?

Section 18(3) of the MSMED Act requires the Council either to take up the dispute for arbitration itself or refer it to an institution or centre providing alternative dispute resolution services. The provisions of the Arbitration and Conciliation Act, 1996 then apply as if the arbitration arose from an agreement under Section 7(1) of that Act. In Delhi, references to the DIAC are the standard route.

Can an award made on a Council reference be attacked as lacking authority?

Not on that ground alone. The Delhi High Court has held that the statutory reference clothes the institution and its arbitrator with full competence to adjudicate and render an independent award; the challenge, if any, must be within the ordinary Section 34 grounds.

Does the buyer have to deposit money to challenge an MSEFC-route award?

Yes. Section 19 of the MSMED Act requires an applicant seeking to set aside such an award or decree to deposit 75% of the awarded amount, a precondition courts enforce strictly, though the deposited amount can be disbursed to the supplier in instalments as the court directs.

Were the parties' rights under the ordinary arbitration law affected by the MSMED route?

No. The reference imports the whole A&C Act machinery — pleadings, evidence, interim measures, the award, and Section 34 review — with the MSMED Act adding its special features: the interest regime under Sections 15-17, the Section 19 deposit, and the overriding effect of Section 24.

Sources

Note: This article is general information about the law and is not legal advice. It does not create an advocate-client relationship. The position stated is as at 10 September 2026 and may have changed since. Readers should verify any provision or decision referred to against the official text and seek advice on their own circumstances.