MSMED Act Reference vs Contractual Arbitration Clause

Many supply contracts contain a carefully drafted arbitration clause — a chosen seat, a named institution, an agreed procedure. Yet when the supplier is a micro or small enterprise, the Micro, Small and Medium Enterprises Development Act, 2006 opens a parallel statutory route: a reference under Section 18 to the Facilitation Council. This article explains, from the statutory text alone, how the two mechanisms interact and what practically becomes of the contractual clause.

The Section 18 framework in brief

Section 18(1) of the MSMED Act opens with a non-obstante clause: notwithstanding anything contained in any other law for the time being in force, any party to a dispute with regard to any amount due under Section 17 may make a reference to the Micro and Small Enterprises Facilitation Council. Section 17 is the buyer's liability provision — the amount due with interest computed under Section 16.

The Council then follows the two-stage sequence the statute prescribes. First, conciliation under Section 18(2), conducted by the Council itself or through an institution, applying the conciliation provisions of the Arbitration and Conciliation Act, 1996. Second, if conciliation fails, arbitration under Section 18(3): the Council takes up the dispute for arbitration or refers it to an institution, and the 1996 Act applies to that arbitration as if it were pursuant to an arbitration agreement referred to in Section 7(1) of that Act. Section 18(5) directs that every reference be decided within ninety days.

Section 24: the overriding effect

Section 24 of the MSMED Act provides that Sections 15 to 23 shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force. Read with the non-obstante opening of Section 18(1), the design of the statute is unmistakable: the payment discipline of Sections 15 and 16, the liability under Section 17, the reference mechanism of Section 18 and the pre-deposit condition of Section 19 are intended to operate on their own terms, and anything inconsistent gives way to them.

It is worth being precise about what this article does and does not assert. The propositions above are statements of the statutory text. How that text applies to a particular contract, a particular supplier and a particular set of dates raises questions of fact and law on which independent advice should be taken; this explainer deliberately confines itself to the scheme as enacted.

What practically becomes of the arbitration clause

The 1996 Act rests on party autonomy: the parties choose their arbitrators, seat and procedure. The MSMED route substitutes a statutory mechanism for that choice in the class of disputes it covers. Practically, several consequences follow for a buyer holding a contract with an arbitration clause.

• The forum can shift. Under Section 18(4), the Council of the State where the supplier is located has jurisdiction, whatever the seat or exclusive-jurisdiction clause says. A Delhi buyer purchasing from a supplier registered in another State may find itself answering a reference before that State's Council.
• The appointment mechanism is displaced for the reference. In the Section 18(3) arbitration, the Council or the institution it refers the matter to conducts the arbitration; the contractual appointment procedure does not operate within that proceeding.
• The 1996 Act still governs the proceeding. Because Section 18(3) attracts the 1996 Act, the ordinary incidents of arbitration — the conduct of proceedings, the award, and the challenge regime — apply, subject to the MSMED overlay, most notably the seventy-five per cent pre-deposit that Section 19 requires from a non-supplier applicant seeking to set aside an award.
• The clause is not erased. The contract and its clause continue to exist. For disputes or parties outside the scope of Sections 15 to 18 — for instance, where the claimant does not answer the definition of supplier for the transaction — the contractual mechanism remains the operative route.

The counterclaims question

A recurring practical question is what happens to the buyer's own claims — for damages, defective supply, or delay — once the supplier has moved the Council. The statute frames the reference around amounts due to the supplier under Section 17 and does not deal in terms with cross-claims. Framed neutrally: one view is that, since the Section 18(3) proceeding is an arbitration under the 1996 Act, the disputes between the parties can be adjudicated comprehensively within it; another view is that the Council's mandate is confined to the supplier's statutory claim, leaving the buyer to agitate its own claims in the contractual or ordinary forum. A buyer should not assume its claims are automatically preserved by silence — they should be pleaded wherever raised, and protected within limitation in the appropriate forum.

Drafting and response considerations

For buyers, the presence of an arbitration clause is not a reason to ignore a Council notice; the reference must be answered on its merits, with every objection — including any objection to the maintainability of the reference itself — placed on record before the Council. For suppliers, the statutory route offers a time-bound, low-cost forum in their own State, with the interest regime of Section 16 attached. For both sides, the MSMED scheme is a reminder that a contract is read alongside the statutes that operate upon it.

The interplay between a negotiated arbitration clause and the Section 18 mechanism ultimately turns on the definitions and dates in a given transaction. Independent legal advice on specific facts is always advisable.