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Delhi High Court: MSME Arbitration Inapplicable for Disputes Prior Registration

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Published on: February 11, 2024 at 17:22 IST

The Delhi High Court, led by Justice Subramonium Prasad, reiterated that entities registered under the Micro, Small and Medium Enterprises Development Act, 2006 (MSME Act) after initiating a contract cannot be referred to arbitration by the MSME Council for claims arising before their registration.

The Court emphasized that such objections should be raised before the arbitrator under the Arbitration & Conciliation Act, 1996.

The case stemmed from a dispute where Respondent No. 3 sought arbitration from the MSME Council against Mahanagar Telephone Nigam Ltd. (Petitioner) due to non-payment for Architectural Consultancy Services in a construction project.

The Petitioner contested this decision, arguing that, at the contract’s inception, it wasn’t registered as an MSME, thus rendering the MSME Council’s referral of the dispute to arbitration invalid.

The High Court highlighted Sections 17 and 18 of the MSME Act, providing a cost-effective dispute resolution mechanism for recovering unpaid dues, particularly for micro, small, and medium-level enterprises.

It noted that these sections grant the right to such enterprises to adjudicate disputes through Facilitation Councils, regardless of any contractual provisions.

Addressing the issue of retrospective application of MSME Act benefits, the High Court referred to Supreme Court judgments, emphasizing that if registration occurs subsequently, it has a prospective effect. Therefore, the MSME Act applies only to goods and services supplied after registration.

In this case, where the contract began in 2006, and Respondent No. 3 registered as a micro-enterprise in 2018, the High Court concluded that the benefits under the MSME Act do not apply retroactively.

The Court advised addressing issues related to services rendered post-registration and the contract’s nature before the arbitrator under the Arbitration & Conciliation Act, 1996.

The Court dismissed the writ petition, emphasizing the necessity of raising pertinent questions of law and facts before the arbitrator.

Case Title: Mahanagar Telephone Nigam Ltd. vs Delhi International Arbitration Centre, Through Its Co-Ordinator & Ors.