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2025 (5) TMI 1121 - SC - Indian LawsDetermination of jurisdiction to manage arbitral proceedings of the contract - overriding effect of Micro Small and Medium Enterprises (Development) Act 2006 MSMED Act. over the Arbitration and Conciliation Act 1996 Arbitration Act. - HELD THAT - In our view the issue is no more res integra and is covered by the decision of this Court in Mahakali 2022 (11) TMI 91 - SUPREME COURT . The issue relating to seat of arbitration in all cases covered under the MSMED Act is settled in view of the pronouncement of this Court in Mahakali. This position is also true by virtue of the specific provision of the MSMED Act that is sub-Section (4) of Section 18 which vests jurisdiction for arbitration in the Facilitation Council where the supplier is located There is no dispute about the fact that the appellant-MSME is located in Delhi and as such the Facilitation Council (South- West) GNCTD Old Terminal Tax Building Kapashera New Delhi- 110037. In exercise of its power the said Council entrusted the conduct of arbitration through the institutional aegis of the Delhi Arbitration Centre. The conclusions drawn by us are the logical consequence of the statutory regime as also declared by this Court in Mahakali. Thus we allow the present appeal and set aside the impugned order dated 22.04.2024 passed by the Karnataka High Court in Writ Petition and direct conduct and conclusion of arbitral proceedings. The civil appeal is disposed of.
The core legal questions considered by the Court are:
1. Whether the Delhi Arbitration Centre had jurisdiction to conduct arbitral proceedings despite the contract specifying Bengaluru as the seat of arbitration. 2. The interplay between the Micro, Small and Medium Enterprises (Development) Act, 2006 (MSMED Act) and the Arbitration and Conciliation Act, 1996 (Arbitration Act), specifically which statute prevails in disputes involving MSMEs. 3. Whether the statutory provisions of the MSMED Act override any arbitration agreement between parties regarding the seat and forum for arbitration. 4. The validity of the Facilitation Council's role in initiating arbitration proceedings under the MSMED Act, including its power to refer disputes to institutional arbitration centers. 5. The effect of the statutory provisions on the jurisdictional challenge raised by the respondent before the Karnataka High Court. Issue 1: Jurisdiction of the Delhi Arbitration Centre despite contractual seat at Bengaluru The contract between the parties expressly provided that the seat of arbitration shall be Bengaluru. The respondent challenged the jurisdiction of the Delhi Arbitration Centre on this ground, and the Karnataka High Court upheld this objection, holding that the arbitration proceedings in Delhi were without jurisdiction and contrary to the agreement. The Court analyzed this issue in light of the MSMED Act's overriding provisions. Section 18 of the MSMED Act empowers the Facilitation Council to initiate conciliation and, upon failure, to refer disputes to arbitration. Section 18(4) specifically grants jurisdiction to the Facilitation Council or alternate dispute resolution centers located where the supplier is situated, irrespective of any other law to the contrary. The Court noted that the appellant, being an MSME located in Delhi, was entitled to invoke the jurisdiction of the Facilitation Council in Delhi, which then referred the dispute to the Delhi Arbitration Centre. This statutory jurisdiction supersedes the contractual seat agreement under the Arbitration Act. Thus, the Court held that the Delhi Arbitration Centre had valid jurisdiction to conduct the arbitration despite the contract specifying Bengaluru as the seat. Issue 2: Overriding effect of the MSMED Act over the Arbitration Act The Court extensively relied on the binding precedent in the Mahakali case, which clarified the relationship between the MSMED Act and the Arbitration Act. The MSMED Act is a special legislation enacted to protect MSMEs and provides a specific dispute resolution mechanism, including conciliation and arbitration through Facilitation Councils. The Arbitration Act is a general law governing arbitration broadly. The MSMED Act, being a later and special law, contains non obstante clauses in Section 18(1) and (4) and Section 24, which expressly override inconsistent provisions of any other law, including the Arbitration Act. The Court extracted key paragraphs from Mahakali, emphasizing that:
Therefore, the MSMED Act's provisions prevail over any arbitration agreement and the Arbitration Act in disputes involving MSMEs. Issue 3: Effect of statutory provisions on arbitration agreements The respondent argued that the arbitration agreement specifying Bengaluru as the seat should prevail, and the Facilitation Council's arbitration in Delhi was invalid. The Court rejected this argument, holding that the statutory mechanism under Section 18(1) of the MSMED Act is an enabling provision that gives the MSME party a right to approach the Facilitation Council irrespective of any prior arbitration agreement. The absence of the word "agreement" in Section 18(1) is not a legislative omission but a deliberate provision to override any arbitration agreement. The Court emphasized that allowing an arbitration agreement to defeat the statutory dispute resolution mechanism would frustrate the purpose of the MSMED Act, which is to protect MSMEs and ensure timely resolution of disputes. Thus, the statutory provisions override any inconsistent arbitration agreement, including the seat of arbitration. Issue 4: Role and powers of the Facilitation Council in arbitration under MSMED Act The Court addressed the contention that the Facilitation Council, having acted as conciliator, could not assume the role of arbitrator or refer disputes to arbitration, citing Section 80 of the Arbitration Act, which bars a conciliator from acting as arbitrator in the same dispute. The Court held that the provisions of the Arbitration Act are overridden by the MSMED Act's Chapter V, including Section 18 read with Section 24. The Facilitation Council's power to take disputes to arbitration or refer them to an institution is expressly provided by the MSMED Act. Once the Facilitation Council refers the dispute to arbitration, the arbitration is treated as if pursuant to an arbitration agreement under the Arbitration Act, and all procedural safeguards and powers under the Arbitration Act apply to the arbitral tribunal, including jurisdictional rulings. This interpretation ensures a seamless statutory mechanism for dispute resolution under the MSMED Act. Issue 5: Jurisdictional challenge before the Karnataka High Court and its setting aside The respondent challenged the jurisdiction of the Delhi Arbitration Centre before the Karnataka High Court, which stayed and then quashed the arbitration proceedings on the ground of lack of jurisdiction due to the contractual seat at Bengaluru. The Supreme Court, relying on the above analysis and binding precedent, held that the High Court erred in holding that the Delhi Arbitration Centre lacked jurisdiction. The statutory provisions under the MSMED Act override the arbitration agreement and confer jurisdiction on the Facilitation Council and the institution it appoints based on the supplier's location. The Court set aside the High Court's order and restored the arbitration proceedings at the Delhi Arbitration Centre. Significant holdings and principles established: "The Arbitration Act, 1996 in general governs the law of Arbitration and Conciliation, whereas the MSMED Act, 2006 governs specific nature of disputes arising between specific categories of persons, to be resolved by following a specific process through a specific forum. Ergo, the MSMED Act, 2006 being a special law and the Arbitration Act, 1996 being a general law, the provisions of the MSMED Act would have precedence over or prevail over the Arbitration Act, 1996." "A private agreement between the parties cannot obliterate the statutory provisions. Once the statutory mechanism under sub-section (1) of Section 18 is triggered by any party, it would override any other agreement independently entered into between the parties, in view of the non obstante clauses contained in sub-sections (1) and (4) of Section 18." "No party to a dispute covered under Section 17 of the MSMED Act, 2006 would be precluded from making a reference to the Facilitation Council under Section 18(1) thereof, merely because there is an arbitration agreement existing between the parties." "When the Facilitation Council or the institution or the centre acts as an arbitrator, it shall have all powers to decide the disputes referred to it as if such arbitration was in pursuance of the arbitration agreement referred to in sub-section (1) of Section 7 of the Arbitration Act, 1996 and then all the trappings of the Arbitration Act, 1996 would apply to such arbitration." "Notwithstanding anything contained in any other law for the time being in force, the Micro and Small Enterprises Facilitation Council or the centre providing alternate dispute resolution services shall have jurisdiction to act as an Arbitrator or Conciliator under this section in a dispute between the supplier located within its jurisdiction and a buyer located anywhere in India." In conclusion, the Court held that the MSMED Act's statutory dispute resolution mechanism overrides any arbitration agreement, including the seat of arbitration clause, and the Facilitation Council located where the MSME supplier is situated has jurisdiction to conduct or refer arbitration proceedings. The Delhi Arbitration Centre's assumption of jurisdiction was valid, and the High Court's order setting aside the arbitration was set aside. The arbitral proceedings were restored with directions to allow the parties to raise all legally permissible questions of law and fact.
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