In a significant judgement, the Delhi High Court bench, led by Justice Subramonium Prasad, has reaffirmed the legal stance regarding the applicability of the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006, to disputes arising before an entity’s registration under the Act. The court elucidated that claims predicated on transactions occurring prior to the entity’s MSME registration are not eligible for arbitration under Sections 17 and 18 of the MSMED Act. The bench noted that this objection should be raised before the arbitrator under the Arbitration & Conciliation Act, 1996. This clarification was made in the context of a dispute between Mahanagar Telephone Nigam Ltd. and a service provider over unpaid dues for architectural consultancy services, with the latter seeking arbitration through the MSME Council post-registration.

Facts of the case

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

Case Number: W.P.(C) 14515/2023 & CM APPL. 57558/2023

The dispute centers on Mahanagar Telephone Nigam Ltd. (Petitioner) and Respondent No. 3, contracted for architectural consultancy services for a construction project, with fees set at 2.95% of the project’s estimated cost. Respondent No. 3 received a Letter of Intent from the petitioner. Despite receiving the architectural drawings and services, the Petitioner failed to pay, leading Respondent No. 3, post their MSME registration, to claim unpaid dues of Rs. 2,15,96,273.86 through MSME arbitration.

The dispute was referred to the Delhi International Arbitration Centre (DIAC). The Petitioner contested the arbitration referral, arguing that MSME Act benefits, including arbitration, could not be claimed due to the lack of MSME registration at the contract’s commencement.

Observations by the High Court

The Delhi High Court outlined the scope of Sections 17 and 18 of the MSME Act, emphasizing their role in offering a cost-efficient dispute resolution mechanism for suppliers, especially MSMEs to recover unpaid dues.

The Court highlighted these provisions to ensure the right of MSMEs to have their disputes adjudicated by Facilitation Councils, overriding any contradictory contractual clauses. It draws upon Supreme Court verdicts in Silpi Industries v. Kerala State Road Transport Corporation [2021 (18) SCC 790] and Gujarat State Civil Supplies Corporation Limited v. Mahakali Foods Private Limited [2023 (6) SCC 401], underscoring that MSME Act benefits, including arbitration, apply only from the registration date, hence not retroactively. to affirm that the MSME Act’s benefits apply prospectively, not retrospectively.

The Court noted the contract’s initiation in 2006 and Respondent No. 3’s subsequent MSME registration in 2018, indicating that only services rendered after this registration could be considered under the MSME Act. It was determined that issues regarding services post-registration and contract nature involved legal and factual questions best suited for arbitration under the Arbitration & Conciliation Act, 1996, leading to the dismissal of the writ petition.

Judgement Highlights

  • Prospective Application of MSMED Act: The court clarified that the benefits under the MSMED Act, including the right to arbitration, apply prospectively from the date of MSME registration.
  • Precedent Reference: The judgement referred to Supreme Court rulings, reinforcing the principle that MSMED Act benefits are not retrospective.
  • Exclusion of Pre-registration Disputes: The judgement explicitly stated that disputes arising before MSME registration cannot be arbitrated under the Act.
  • Role of Arbitration & Conciliation Act: For disputes involving services rendered after MSME registration, the court indicated that such matters should be adjudicated under the Arbitration & Conciliation Act, 1996.

To Conclude

The Delhi High Court’s judgement reaffirms the prospective application of the MSME Act’s arbitration provisions, clearly stating that entities not registered as MSMEs at the time of contract initiation cannot retrospectively claim the Act’s dispute resolution benefits. This decision underscores the importance of timely MSME registration for entities seeking the Act’s protective measures and arbitration mechanisms.
It also emphasizes the role of the Arbitration & Conciliation Act, 1996, in addressing disputes arising from contracts entered into before MSME registration, thereby providing a clear legal pathway for the adjudication of such matters.

Read the Judgement