The MSMED Act’s dispute-resolution machinery — conciliation and then arbitration through the Facilitation Council under Section 18 — is meant to deliver small suppliers a quick, enforceable outcome. That promise is tested when the buyer attacks not the merits of the award but the person of the arbitrator. In a judgment of 28 September 2026, the Delhi High Court has drawn a clean line: an alleged violation of the arbitrator’s own service rules is not the “statutory ineligibility” that voids a mandate under Section 12(5) of the Arbitration and Conciliation Act, 1996.
The journey of an MSME claim
Airport Handling Services, a micro/small enterprise, rendered customs and freight services to IIT Kanpur between 2003 and 2017, raising invoices of roughly Rs. 21.29 crore, of which about Rs. 21.16 crore was paid. For the balance, the firm invoked the Micro and Small Enterprises Facilitation Council. When conciliation failed, the Council referred the dispute to arbitration in June 2023 under Section 18 of the MSMED Act, 2006. The sole arbitrator, a former judge, made an award of Rs. 27.76 lakh in the supplier’s favour in February 2024.
The buyer’s challenge did not attack the arithmetic. It attacked the arbitrator: at the relevant time she held office in a consumer commission, and the buyer argued that the service rules attached to that office barred her from acting as arbitrator, invalidating the mandate. The challenge prevailed at the Section 34 stage, and the supplier carried the matter to the Division Bench under Section 37.
The Division Bench’s reasoning
Justices Anil Kshetarpal and Shail Jain restored the award on 28 September 2026. The core of the reasoning:
Also underlying Section 12(5): its rigours can be waived only by an express agreement in writing made after the dispute arises. The provision is about party-relationships, not employment law.
Why this matters for the MSMED ecosystem
| Stage | Provision | What this judgment protects |
|---|---|---|
| Reference and conciliation | Section 18(1)–(2) MSMED Act | The Council’s process leading to arbitration |
| Arbitration | Section 18(3) MSMED Act with the 1996 Act | The arbitrator’s mandate against collateral attack |
| Challenge | Section 34 (with Section 19 MSMED pre-deposit) | Challenges confined to genuine statutory grounds |
| Appeal | Section 37 | Appellate correction where a challenge overreached — as here |
Delay is the enemy of small suppliers. An award set aside on a technicality returns the parties to square one, often years after supply. By holding the line on what counts as ineligibility, the Division Bench has kept the Section 18 route meaningful for the constituency it was built to serve.
Takeaways
For buyers: object to an arbitrator early and on statutory grounds — Section 12 disclosures, Seventh Schedule relationships, or jurisdiction — not through after-the-fact attacks on the arbitrator’s service terms. For suppliers: an award under Section 18 carries the full protection of the 1996 Act, and appellate courts will restore it where the challenge strays beyond Section 34’s limits.
This article is for general information only and is not legal advice. MSMED and arbitration remedies are deadline-driven; parties should obtain advice on their own matter.
Frequently Asked Questions
What was the dispute about?
An MSME firm provided customs clearance and freight services to IIT Kanpur over many years and claimed unpaid dues. The Micro and Small Enterprises Facilitation Council took up the reference and, conciliation having failed, the dispute went to arbitration under Section 18(3) of the MSMED Act. The sole arbitrator awarded the supplier Rs. 27.76 lakh in February 2024.
Why was the award under attack?
The buyer contended that the arbitrator — a former judge then holding office in a consumer commission — could not have acted as arbitrator consistently with the service rules governing that office, and that her mandate was therefore invalid. The challenge succeeded before the Section 34 court, and the supplier appealed under Section 37.
What did the Division Bench decide?
The Bench restored the award. It distinguished de jure inability from statutory ineligibility: Section 12(5) read with the Seventh Schedule voids a mandate only for the specified relationships with parties, counsel or the dispute. A service-rule restriction attached to the arbitrator’s office does not fall in that category and does not, by itself, invalidate the award.
What does this mean for MSME suppliers?
It protects the integrity of Facilitation Council references: buyers cannot unwind an adverse award through collateral objections to the arbitrator’s employment terms. Challenges must fit the narrow statutory grounds.