MSME Act vs Arbitration Act: Conflict and Judicial Approach

Arbitration, MSMEs and Judicial Intervention: An Uneasy Coexistence in Indian Arbitration Law

India’s arbitration framework has undergone significant legislative and judicial evolution with the objective of promoting speedy dispute resolution, party autonomy, and minimal court interference. However, when arbitration intersects with special welfare legislations such as the Micro, Small and Medium Enterprises Development Act, 2006 (“MSME Act”), the promise of uniformity and certainty under the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) becomes blurred.

Objects and Scheme of the Arbitration and Conciliation Act, 1996

The Arbitration Act was enacted to consolidate and modernise Indian arbitration law in line with the UNCITRAL Model Law. It seeks to comprehensively govern domestic arbitration, international commercial arbitration, conciliation, and enforcement of foreign awards. The Act aims to ensure a fair, efficient, and expeditious arbitral process, minimise judicial intervention, and accord finality to arbitral awards by treating them as decrees of court.

The cardinal principle underlying the Act is party autonomy, coupled with limited supervisory jurisdiction of courts, a philosophy reinforced through the 2015 Amendment, which substantially curtailed automatic stays on enforcement of arbitral awards.

Conflict Between the MSME Act and the Arbitration Act

The MSME Act, enacted with a welfare-oriented object to protect micro and small enterprises with limited resources, creates a special dispute resolution mechanism under Section 18, mandating reference of disputes to the MSME Facilitation Council. The Council may conduct conciliation and, upon its failure, either arbitrate the dispute itself or refer it to an arbitral institution.

This statutory mechanism often clashes with contractual arbitration clauses governed by the Arbitration Act. Key areas of conflict include:

Mandatory reference to the Council despite an independent arbitration agreement;
The Council acting as both conciliator and arbitrator, contrary to Section 80 of the Arbitration Act;
Territorial jurisdiction being linked to the supplier’s location;
Stringent pre-deposit conditions imposed on non-MSME parties challenging an award.

Supreme Court Intervention: Gujarat State Civil Supplies Corporation v. Mahakali Foods Pvt. Ltd.

In Gujarat State Civil Supplies Corporation Ltd. v. Mahakali Foods Pvt. Ltd. (2022), the Supreme Court attempted to resolve this conflict by holding that the MSME Act, being a later and special welfare legislation, would override the Arbitration Act. The Court ruled that the existence of an arbitration clause does not oust the jurisdiction of the MSME Facilitation Council and that statutory arbitration under Section 18 prevails over party-agreed mechanisms.

While the judgment strengthens MSME protection, it leaves unanswered questions regarding the continued validity and enforceability of arbitration clauses where one party is an MSME, thereby diluting contractual certainty and party autonomy.

The 2021 Amendment and the Revival of Judicial Intervention

The Arbitration and Conciliation (Amendment) Act, 2021 marked a significant departure from India’s pro-enforcement stance by restoring the power of courts to grant an unconditional stay on enforcement of arbitral awards where the arbitration agreement, contract, or award is prima facie induced by fraud or corruption.

This amendment effectively resurrects a pre-2015 regime that had enabled dilatory tactics through prolonged enforcement challenges. The reintroduction of broad judicial discretion risks multiplicity of proceedings, uncertainty in enforcement, and erosion of finality—fundamental attributes of arbitration.

Conclusion

The coexistence of the MSME Act and the Arbitration Act illustrates the tension between welfare-based statutory protection and commercial certainty through arbitration. While judicial pronouncements such as Mahakali Foods seek to protect MSMEs, they simultaneously undermine party autonomy and predictability in dispute resolution.

Coupled with the 2021 Amendment’s revival of unconditional stays, Indian arbitration faces the risk of increased judicial intervention, delayed enforcement, and renewed litigation at the post-award stage. For a jurisdiction aspiring to become a global arbitration hub, these developments may prove counter-productive unless legislative and judicial clarity is achieved to balance MSME protection with the core principles of arbitration—finality, enforceability, and minimal court interference.