Delhi HC Addresses Legal Intersection of MSMED Act and Arbitration Act in Landmark Ruling

New Delhi, Oct 4 (KNN) In a significant ruling, the Delhi High Court has clarified key legal principles concerning the interplay between the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act), and the Arbitration and Conciliation Act, 1996.

Justice Sanjeev Narula delivered the judgment while hearing a petition seeking to quash notices issued in arbitration proceedings, bringing much-needed clarity on the limitation period under Section 18(5) of the MSMED Act and the impact of MSME registration after contract issuance.

In its detailed judgment, the Court held that the MSMED Act applies to services provided after the registration of a supplier as an MSME, even if the contract was issued beforehand.

The bench stated that MSME registration obtained post-contract applies prospectively to goods and services rendered post-registration.

It emphasised that these factual disputes are best resolved through arbitration, not under the Court's writ jurisdiction.

Finally, the bench clarified that the limitation period under Section 18(5) of the MSMED Act concerns the reference to arbitration and does not apply to the arbitration timeline itself. Any extensions or breaches of timelines under Section 29A must be examined by the arbitral tribunal, not the court.

The Division Bench later dismissed an appeal challenging this judgment, reinforcing the Single Judge Bench's decision.

The case stems from a contractual dispute between Corrtech International Pvt. Ltd (the petitioner) and Respondent No. 3, which was referred to arbitration by the Delhi International Arbitration Center (DIAC).

Respondent No. 3, a subcontractor engaged in work under a tender issued by GAIL, filed a complaint with the Micro and Small Enterprise Facilitation Council (MSEFC) alleging non-payment of dues. The conciliation process under Section 18 of the MSMED Act failed, leading to the initiation of arbitration proceedings.

The petitioner challenged the DIAC's communications, particularly notices dated 13 May 2024, 2 July 2024, and 2 August 2024, arguing that the arbitral proceedings should be deemed terminated due to the expiration of time limits under Section 18(5) of the MSMED Act and Section 29A of the Arbitration Act.

Since Respondent No. 3 continued to provide services after its MSME registration, its claims fell within the jurisdiction of the MSEFC.

The Court also addressed the petitioner’s argument about privity of contract, rejecting the contention that no direct agreement existed between the petitioner and Respondent No. 3.

This ruling underscores the importance of arbitration in resolving fact-intensive disputes and clarifies the rights of MSMEs in contractual claims arising after registration.

(KNN Bureau)