When Statute Prevails Over Contract: The Delhi High Court On MSMED Arbitration

The interplay between the Micro, Small and Medium Enterprises Development Act, 2006 ("MSMED Act") and the Arbitration and Conciliation Act, 1996 ("Arbitration Act") continues to give rise to legal tension, particularly where statutory protections under the MSMED Act intersect with the underlying arbitration agreements.

In Dalmia Cement (Bharat) Ltd. v. M/s Ess Ess Technofabs Pvt. Ltd,¹ the Delhi High Court authoritatively reaffirmed the trajectory of the Supreme Court's jurisprudence on this issue. The Court held that upon a valid invocation of Section 18 of the MSMED Act by a supplier, the statutory dispute resolution framework prescribed therein assumes primacy and overrides any pre-existing contractual arbitration clause between the parties.

Factual Background

The dispute arose from work orders issued in 2020 by Dalmia Cement ("the Petitioner") to Ess Ess Technofabs ("the Respondent"). The underlying contracts contained an arbitration clause providing for resolution of disputes by a sole arbitrator, with New Delhi designated as the seat of arbitration.

Subsequently, disputes emerged concerning alleged non-payment of dues. Instead of invoking the arbitration clause provided under the work orders, the Respondent initiated proceedings before the Micro and Small Enterprises Facilitation Council ("MSME Facilitation Council" ), Mohali, under Sections 17 and 18 of the MSMED Act.

The Petitioner challenged the jurisdiction of the Council on multiple grounds, which are as follows:

• The agreements were in the nature of works orders and therefore, fell outside the ambit of the MSMED statutory mechanism;
• The Respondent did not qualify as a MSME at the relevant time; and
• The contracts contained a binding arbitration clause specifying New Delhi as the seat of arbitration.

While these jurisdictional objections remained pending before the Council, the Petitioner approached the Delhi High Court under Section 11 of the Arbitration Act, seeking appointment of an arbitrator in terms of the arbitration clause provided in the work orders.

Issues framed by the court

The Court framed the following issues for consideration:

1. Whether the statutory dispute resolution mechanism under Section 18 of the MSMED Act, read with Section 24 thereof, overrides a contractual arbitration clause between the parties?
2. Whether, in circumstances where proceedings under the MSMED Act are pending before the Facilitation Council and the Council has been directed to adjudicate jurisdictional objections, a petition under Section 11 of the Arbitration Act for appointment of an arbitrator is maintainable?
3. Whether the Respondent was entitled to invoke the statutory protections under the MSMED Act, specifically, whether it qualified as a registered MSME at the relevant point in time?

Arguments of the Parties

It was the Petitioner's case that the agreements in question were in the nature of composite works orders, involving both goods and services, and therefore, prima facie fell outside the ambit of the MSMED Act. Further, Clause 28 of the work orders expressly designated New Delhi as the seat of arbitration. On this basis, it was argued that the contractual stipulation as to the seat ought to prevail and that the statutory jurisdiction of the Micro and Small Enterprises Facilitation Council, Mohali, stood excluded.

In response, the Respondent placed reliance on Section 24 of the MSMED Act, which accords overriding effect to the statutory dispute resolution mechanism provided thereunder, over any inconsistent law, including private agreements. In this regard, reliance was placed on the Hon'ble Supreme Court's judgment in Silpi Industries v. Kerala State Road Transport Corporation,² to contend that the provisions of the MSMED Act are mandatory in nature and that any party to a dispute that qualifies as a MSME is entitled to make a reference under Section 18 of the MSMED Act.

Further, reliance was placed on Gujarat State Civil Supplies Corporation Ltd. v. Mahakali Foods Pvt. Ltd.³ to submit that it is now a settled position that the MSMED Act, being a special legislation, prevails over the Arbitration Act. Accordingly, it was contended that an arbitration clause in a contract cannot oust the statutory arbitration contemplated under the MSMED Act. It was argued that upon invocation of the jurisdiction of the MSME Facilitation Council as per Section 18 of the MSMED Act, any independent arbitration agreement stands eclipsed.

Lastly, the it was contended that the Petitioner was indulging in forum shopping by approaching the Delhi High Court after the Punjab and Haryana High Court had already entertained the matter and directed the MSME Facilitation Council to adjudicate the jurisdictional challenge under Section 16 of the Arbitration Act.

The Court's Reasoning and Findings

Upon due consideration of the pleadings, statutory framework, and the binding precedents governing, the Court undertook a structured analysis of the issues arising in the present matter. The Court's findings may be summarised as follows:

Primacy of the MSMED Act as a Special Statute

The Court held that the position regarding MSMED Act's supremacy is no longer res integra. Placing reliance on Harcharan Dass Gupta v. Union of India⁴ and Gujarat State Civil Supplies Corporation Ltd. v. Mahakali Foods Pvt. Ltd.⁵, it was reaffirmed that the MSMED Act constitutes a special legislation, governing disputes of a defined class through a statutorily prescribed forum and procedure. It was also observed that in contrast with the MSMED Act, the Arbitration Act is a general law regulating arbitration. Accordingly, it was observed that by applying the settled principles of statutory interpretation, it is clear that the provisions of the MSMED Act prevail over those of the Arbitration Act in cases where the dispute resolution mechanism contemplated under Section 18 of the MSMED Act is invoked by a party qualifying as a MSME. In consequence, once the statutory mechanism is validly invoked, the remedy under the MSMED Act overrides any pre-existing contractual arbitration arrangement.

The "Prism" of Interpretation and Judicial Prudence

The Court drew a nuanced distinction in respect of the procedural posture of the proceedings. It observed that, the Petitioner had approached the Delhi High Court by invoking Section 11 of the Arbitration and Conciliation Act, 1996 for appointment of an arbitrator. However, the jurisdictional objections pending consideration before the Micro and Small Enterprises Facilitation Council were required to be examined within the statutory scheme and in light of the provisions of the MSMED Act. Accordingly, it was held that since the Punjab and Haryana High Court had already directed the MSME Facilitation Council to adjudicate the Petitioner's challenge under Section 16 of the Arbitration Act, entertaining a parallel petition under Section 11 of the Arbitration Act would be contrary to principles of judicial discipline and comity of courts.

Kompetenz-Kompetenz of the Facilitation Council

The Court underscored that, when acting as an arbitral tribunal under Section 18 of the MSMED Act, the Micro and Small Enterprises Facilitation Council is vested with the competence to rule on its own jurisdiction, in consonance with the principle of kompetenz–kompetenz embodied in Section 16 of the Arbitration Act. Accordingly, in light of the application already pending under Section 16 of the Arbitration Act challenging the jurisdiction of the MSME Facilitation Council, the Court declined to entertain or adjudicate upon identical jurisdictional objections raised in the Petitioner's petition under Section 11 of the Arbitration Act. The Court further clarified that the Petitioner would remain at liberty to avail such remedies as may be available in law upon the MSME Facilitation Council rendering its determination on the application preferred under Section 16 of the Arbitration Act.

Judicial Holding and Conclusion

In this case, the Hon'ble Delhi High Court reaffirmed settled jurisprudence and concluded that the dispute resolution framework under the MSMED Act operates with overriding effect and cannot be displaced by a contractual arbitration clause. Upon invocation of the said mechanism by a MSME, the MSME Facilitation Council acquires jurisdiction, including the authority to rule on its own competence. In such circumstances, recourse to Section 11 of the Arbitration Act for the appointment of an arbitrator is unwarranted. Thus, the judgment consolidates the position that the MSMED Act constitutes a self-contained statutory regime intended to protect micro and small enterprises, and that its statutory mandate prevails over inconsistent private agreements.

Footnotes

1. Dalmia Cement (Bharat) Ltd. v. M/s Ess Ess Technofabs Pvt. Ltd. (ARB.P. 1723/2024 & 1725/2024, decided on 7 February 2026)

2. Silpi Industries v. Kerala State Road Transport Corporation, (2021) 18 SCC 783

3. Gujarat State Civil Supplies Corporation Ltd. v. Mahakali Foods Pvt. Ltd., (2023) 6 SCC 401.

4. Harcharan Dass Gupta v. Union of India, 2025 SCC OnLine SC 1111.

5. Supra Note 2

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