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Is Section 18 of the MSMED Act Mandatory or Optional?

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Is Section 18 of the MSMED Act Mandatory or Optional?

Introduction

The Micro, Small and Medium Enterprises Development Act, 2006 was enacted to protect micro and small enterprises, particularly in matters relating to delayed payments and dispute resolution. Section 18 of the Act provides a mechanism through the Micro and Small Enterprises Facilitation Council (MSEFC) for resolving disputes between suppliers and buyers. However, in commercial contracts, parties often include arbitration clauses under the Arbitration and Conciliation Act, 1996.

A legal question frequently arises as to whether disputes involving MSME suppliers must necessarily be referred to the Facilitation Council under Section 18 or whether parties can resolve such disputes through contractual arbitration. This issue was addressed by the Delhi High Court in Shristi Infrastructure Development v. Scorpio Engineering Pvt. Ltd., where the Court examined whether arbitration proceedings would be invalid if the dispute was not referred to the MSME Facilitation Council.

Brief Facts

The dispute arose between Shristi Infrastructure Development and Scorpio Engineering Pvt. Ltd. in relation to payments under a commercial contract. The agreement between the parties contained an arbitration clause providing that disputes would be resolved through arbitration.

Scorpio Engineering initiated arbitration proceedings in accordance with the contractual arbitration clause. A sole arbitrator was appointed and an arbitral award was eventually passed in favour of Scorpio Engineering.

Aggrieved by the award, Shristi Infrastructure challenged it before the Delhi High Court. The petitioner argued that Scorpio Engineering was registered as an MSME and therefore any dispute relating to payment should have been referred to the MSME Facilitation Council under Section 18 of the MSMED Act. According to the petitioner, arbitration conducted outside this statutory mechanism was invalid and the arbitral tribunal lacked jurisdiction.

Court’s Observations

The Delhi High Court examined the language of Section 18 of the MSMED Act. The Court noted that the provision states that a party to a dispute “may” refer the matter to the Micro and Small Enterprises Facilitation Council.

The Court emphasized that the use of the word “may” indicates that the provision is directory and not mandatory. Therefore, the Act does not compel parties to approach the Facilitation Council in every dispute involving an MSME supplier.

The Court further observed that the mechanism under Section 18 becomes applicable only when a party chooses to invoke the jurisdiction of the Facilitation Council. If the parties have agreed to resolve disputes through arbitration under their contract and neither party approaches the Facilitation Council, the arbitral tribunal will have valid jurisdiction to decide the dispute.

Conclusion

The decision in Shristi Infrastructure Development v. Scorpio Engineering Pvt. Ltd. clarifies the relationship between arbitration law and the dispute resolution mechanism under the MSMED Act. The Delhi High Court held that reference to the Facilitation Council under Section 18 is optional and not mandatory. Therefore, arbitration proceedings conducted under a contractual arbitration clause remain valid even when the dispute involves an MSME supplier, provided the parties have not invoked the jurisdiction of the Facilitation Council. The judgment reinforces the principle of party autonomy in arbitration while ensuring that the statutory rights of MSMEs remain protected.