Idemia Syscom India Pvt.Ltd. Vs. M/S Conjoinix Total Solutions Pvt.Ltd: DHC Upholds Primacy of MSMED Act Over Arbitration Act in Dispute Resolution

Introduction:

The Delhi High Court, in a significant ruling, reiterated that the Micro, Small, and Medium Enterprises Development Act, 2006 (MSMED Act), being a special legislation, prevails over the Arbitration and Conciliation Act, 1996 (A&C Act) when disputes involving MSMEs arise. The judgment underscores that once an MSME supplier invokes the jurisdiction of the MSME Facilitation Council under Section 18 of the MSMED Act, the process mandated therein must be followed, even if there exists a pre-agreed arbitration clause in the contract between the parties. The Court, while dismissing the arbitration petition filed under Section 11 of the A&C Act, held that the statutory mechanism under the MSMED Act cannot be sidestepped in favor of private arbitration.

Background:

Idemia Syscom India Private Limited (Petitioner) had engaged M/S Conjoinix Total Solutions Private Limited (Respondent), an MSME entity, to provide IT services for a vehicle tracking project awarded by the State Transport Department of Orissa. The parties formalized their business relationship through a Service Framework Agreement dated 09.02.2022, which included an arbitration clause for dispute resolution.

Disputes arose when the Petitioner alleged breaches and non-performance by the Respondent. In response, the Respondent, via an email dated 01.07.2024, invoked arbitration and proposed the appointment of a Sole Arbitrator. However, due to the Petitioner’s reservations, the appointment of the arbitrator could not be finalized. Subsequently, the Petitioner approached the Delhi High Court under Section 11 of the A&C Act, seeking the Court’s intervention in the appointment of an arbitrator.

Meanwhile, the Respondent, being a registered MSME, initiated proceedings before the MSME Facilitation Council under Section 18 of the MSMED Act. This led to the present legal battle regarding the applicability and primacy of the MSMED Act over the A&C Act.

Question of Law:

1. Whether the MSMED Act, 2006, which governs disputes involving MSMEs, overrides the provisions of the A&C Act, 1996?
2. Whether the presence of an arbitration clause in a contractual agreement between the parties can negate the statutory mechanism under Section 18 of the MSMED Act?
3. Whether the Court can intervene under Section 11 of the A&C Act when proceedings under the MSMED Act have already been initiated?

Findings and Rationale:

1. Primacy of MSMED Act Over Arbitration and Conciliation Act: The Court reaffirmed that the MSMED Act is a beneficial legislation containing non-obstante clauses under Sections 18 and 24, giving it precedence over other laws, including the A&C Act. The Court relied on Silpi Industries and Ors. v. Kerala SRTC (2021 SCC OnLine SC 439) and Gujarat State Civil Supplies Corporation Ltd. v. Mahakali Foods (P) Ltd. (2023) 6 SCC 401, wherein the Supreme Court categorically held that the MSMED Act overrides the A&C Act when it comes to dispute resolution involving MSMEs.The Court observed: "The provisions of the MSMED Act would become ineffective if, by way of an independent arbitration agreement between the parties, the process mandated in Section 18 of the MSMED Act is sidestepped."Thus, the Respondent, having invoked the jurisdiction of the MSME Facilitation Council, was entitled to the statutory remedy, and the arbitration clause in the agreement could not override this statutory right.
2. Limited Scope of Section 11 Petitions in Light of MSMED Act: The Court held that the jurisdiction of the MSME Facilitation Council extends beyond merely facilitating conciliation but also includes conducting arbitration as per Section 18(3) of the MSMED Act. The statutory mechanism provided under this section prevails over any private arbitration agreement between the parties. It was further noted that the Petitioner’s argument that it had approached the Court under Section 11 of the A&C Act before the Respondent initiated MSME proceedings was immaterial. The Court observed: "The MSMED Act does not carve out any exception to the non-obstante clause based on who approached which forum first."
3. Dispute Over the Nature of the Contract: A Question for the Arbitral Tribunal: The Petitioner argued that the contract in question was a works contract, which is excluded from the MSMED Act. The Respondent countered that the contract pertained to service provisions, which are covered under the MSMED Act. The Court held that this issue required a detailed appreciation of evidence, which is beyond the scope of a Section 11 petition. Relying on SBI General Insurance Co. Ltd. v. Krish Spinning (2024 INSC 532), the Court emphasized that jurisdictional questions must be decided by the arbitral tribunal, stating: "Since the dispute in question would require detailed appreciation of evidence and interpretation of the terms of the contract, it would not be appropriate for this Court at the stage of a petition under Section 11 of the A&C Act to undertake the same."
4. Facilitation Council’s Jurisdiction to Decide Its Own Authority: The Court clarified that if the Petitioner disputes the jurisdiction of the MSME Facilitation Council, the proper recourse is to raise this objection before the Facilitation Council itself, which has the authority to decide its own jurisdiction under Section 16 of the A&C Act. The Court referred to Mahakali Foods (Supra), where it was held that: "Once the statutory mechanism under Section 18 of the MSMED Act is triggered, it overrides any other arbitration agreement between the parties."
5. Dismissal of the Petition: Given the overriding effect of the MSMED Act and the pendency of proceedings before the MSME Facilitation Council, the Court dismissed the arbitration petition filed under Section 11 of the A&C Act.

Conclusion:

The Delhi High Court reaffirmed the supremacy of the MSMED Act over the Arbitration and Conciliation Act in disputes concerning MSMEs. The Court held that once a supplier registered under the MSMED Act invokes the jurisdiction of the MSME Facilitation Council, the statutory dispute resolution mechanism under the MSMED Act must be followed. A pre-existing arbitration agreement cannot override the statutory right granted to MSMEs under Section 18 of the MSMED Act. The ruling ensures that the protective framework established for MSMEs remains effective, preventing larger contracting entities from bypassing statutory protections through private arbitration clauses.

Thus, the petition filed under Section 11 of the A&C Act was dismissed, and the MSME Facilitation Council was affirmed as the appropriate forum for dispute resolution in the present case.

Disclaimer:

This post is for educational and informational purposes only. It is not intended to defame, discredit, or tarnish the reputation of any individual, entity, or organization. The opinions expressed are based on publicly available judicial decisions and are aimed at fostering a better understanding of legal principles. For specific legal advice, readers are encouraged to consult a professional.