Most delayed-payment references under Section 18 of the Micro, Small and Medium Enterprises Development Act, 2006 do not settle at conciliation. What follows is the stage that actually produces an enforceable outcome: statutory arbitration under Section 18(3). The Facilitation Council either takes up the dispute itself or refers it to an institution, and the Arbitration and Conciliation Act, 1996 applies as though the parties had an arbitration agreement — even though they never signed one. This article walks through that stage from reference to award.
The pivot from conciliation to arbitration
Section 18 builds a two-chamber process. The first chamber is conciliation — conducted by the Council itself or through an institution, on the lines of the conciliation provisions of the 1996 Act. It is non-adjudicatory: no evidence is weighed, no findings are recorded, and anything conceded there cannot be used later. The second chamber opens only when conciliation "does not lead to settlement" and stands terminated. The Council then moves the dispute into arbitration under Section 18(3) — a distinct proceeding with a different character, even when conducted by the same body.
The transition point matters legally. A composite order that blurs conciliation and arbitration — deciding the dispute in what was still the conciliation stage — is vulnerable, because the two stages carry different powers. Parties should insist that the record show conciliation terminated before arbitration began.
How the arbitral stage runs
What makes MSMED arbitration different from ordinary arbitration
| Feature | Ordinary arbitration | Section 18(3) arbitration |
|---|---|---|
| Source of jurisdiction | Arbitration agreement between parties | The statute itself; no agreement needed |
| Forum choice | Parties choose arbitrators and seat | Council of the supplier's location takes up or refers the matter |
| Interest | Contract or Section 31(7) of the 1996 Act | Section 16 MSMED — compound, monthly rests, three times bank rate — overriding by virtue of Section 24 |
| Challenge to award | Section 34 simpliciter | Section 34 with 75% pre-deposit under Section 19 |
| Timeline | Section 29A of the 1996 Act | Ninety-day direction under Section 18(5) |
One more distinction deserves emphasis: an independent arbitration clause in the parties' contract does not oust the Council's jurisdiction. The statutory mechanism, being special law with overriding effect, prevails over the private clause for disputes the Act covers — a point buyers repeatedly test and repeatedly lose.
The buyer's position at this stage
The arbitration stage is where a buyer's substantive defences are actually heard — quality objections raised in time, short delivery, payments already made, and counterclaims. What the buyer cannot do is boycott the proceeding and hope to fight later: an ex parte award followed by the seventy-five per cent deposit requirement is a far worse position than a contested defence. Participation, with documents, is the rational strategy even for a buyer who disputes liability root and branch.
After the award
An unchallenged award is enforced as a decree. A challenge goes to the court under Section 34 — in Delhi, ordinarily the Commercial Court — accompanied by the statutory deposit, and thereafter along the familiar arbitration appellate track under Section 37. The deposit requirement gives the supplier real leverage: courts commonly permit release of a portion of the deposited amount to the supplier during the challenge, subject to restitution safeguards.
Takeaways
Treat conciliation and arbitration as distinct stages, and keep the record clean at the transition.
Buyers should contest on merits and plead counterclaims — abstention is the costliest strategy.
Suppliers should present a computed, document-backed claim to enable a swift award.
Budget for the Section 19 deposit before deciding to challenge an award.
This article is general information about MSMED Act arbitration and is not legal advice in any individual matter.
Frequently Asked Questions
How can there be arbitration without an arbitration agreement?
Section 18(3) is a statutory fiction: once conciliation fails, the Act provides that the Arbitration and Conciliation Act, 1996 applies to the dispute "as if" there were an agreement under Section 7(1) of that Act. The consent that ordinary arbitration requires is supplied by the statute itself, which is why buyers cannot resist the reference on the ground that they never agreed to arbitrate.
Who actually arbitrates — the Council or someone else?
Section 18(3) gives the Council a choice: take up the arbitration itself, or refer it to any institution or centre providing alternative dispute resolution services. Both models operate; in either, the proceeding is governed by the 1996 Act, with pleadings, evidence and a reasoned award.
Is there a time limit for deciding the reference?
Section 18(5) directs that every reference be decided within ninety days from the making of the reference. The period is directory in practice — many references take longer — but it anchors applications for expedition and reflects the summary character the legislature intended.
How is a Section 18(3) award challenged?
Through a setting-aside application under Section 34 of the 1996 Act — but with the MSMED Act's distinctive gatekeeper: Section 19 requires the applicant challenging the award to deposit seventy-five per cent of the awarded amount before the application is entertained. Courts can release part of the deposit to the supplier pending the challenge.