The Supreme Court ruled that the Micro, Small and Medium Enterprises (MSMED) Act, 2006 overrides arbitration agreements under the Arbitration and Conciliation Act, 1996, affirming its special law status. It held that the supplier’s location determines arbitration jurisdiction, disregarding contractual seat clauses. The judgment reinforces statutory protection for MSMEs, ensuring disputes proceed before designated Facilitation Councils as per Section 18(4).
Facts Of The Case:
The dispute arose from a construction contract between M/s Harcharan Dass Gupta (Appellant), an MSME-registered supplier, and ISRO (Respondent), following a 2017 tender for staff quarters in Delhi. The agreement included an arbitration clause designating Bengaluru as the seat. When conflicts emerged, the supplier approached the Delhi Facilitation Council under the MSMED Act, which initiated conciliation and later arbitration through the Delhi Arbitration Centre (DAC) after ISRO’s non-cooperation. ISRO challenged DAC’s jurisdiction in the Karnataka High Court, arguing the contractual Bengaluru seat clause prevailed. The High Court ruled in ISRO’s favor, halting the Delhi proceedings.
On appeal, the Supreme Court reversed this decision, emphasizing the MSMED Act’s overriding effect under Section 18(4), which mandates arbitration at the supplier’s location (Delhi). The Court cited its precedent in Gujarat State Civil Supplies Corp. v. Mahakali Foods to reaffirm that the MSMED Act, as a special law, supersedes general arbitration agreements. The judgment prioritizes statutory protections for MSMEs over contractual terms, ensuring disputes are resolved through the MSME Facilitation Council’s jurisdictional framework.
Procedural History:
The case originated when M/s Harcharan Dass Gupta (MSME supplier) initiated arbitration proceedings before the Delhi Facilitation Council under Section 18 of the MSMED Act, 2006, after disputes arose with ISRO over a construction contract. When conciliation failed, the Council referred the matter to the Delhi Arbitration Centre (DAC), which appointed a sole arbitrator. ISRO challenged DAC’s jurisdiction before the Karnataka High Court, arguing the contract’s Bengaluru seat clause prevailed. The High Court, in its April 2024 order, ruled in favor of ISRO, declaring DAC’s proceedings invalid. The supplier appealed to the Supreme Court, which condoned the delay and granted leave in SLP (C) No. 14159/2025. Relying on its 2023 precedent in Mahakali Foods, the Supreme Court reversed the High Court’s decision on 14 May 2025, holding that the MSMED Act’s jurisdictional mandate (Section 18(4)) overrides contractual arbitration clauses. The Court restored DAC’s arbitration, directing ISRO to participate, while clarifying it had not opined on the dispute’s merits. The judgment reaffirms the procedural primacy of MSMED Act mechanisms over general arbitration agreements.
Court Observation:
The Supreme Court made several pivotal observations in its judgment. It emphasized the overriding effect of the MSMED Act, 2006 over the Arbitration and Conciliation Act, 1996, noting that as a special legislation, the MSMED Act prevails in disputes involving MSMEs. The Court highlighted that Section 18(4) explicitly grants jurisdiction to the Facilitation Council where the supplier is located, irrespective of contractual arbitration clauses.
The Bench underscored that private agreements cannot circumvent statutory protections designed for MSMEs, as this would frustrate the legislative intent behind the MSMED Act. It observed that the non-obstante clauses in Sections 18(1), 18(4), and 24 of the MSMED Act clearly demonstrate Parliament’s intent to prioritize its dispute resolution mechanism.
The Court rejected ISRO’s reliance on the contractual Bengaluru seat clause, stating that such terms are subordinate to the MSMED Act’s mandatory framework. It also clarified that the Facilitation Council’s dual role (as conciliator and arbitrator) is permissible under the Act, overriding Section 80 of the Arbitration Act, which otherwise bars such duality.
Ultimately, the judgment reinforced that statutory rights of MSMEs cannot be diluted by private agreements, ensuring access to expedited and cost-effective dispute resolution under the MSMED Act.
Final Decision & Judgement:
The Supreme Court allowed the appeal and set aside the Karnataka High Court’s order that had invalidated the Delhi Arbitration Centre’s jurisdiction. The Court held that the MSMED Act’s provisions (particularly Section 18(4)) override contractual arbitration clauses, mandating that disputes involving MSME suppliers must be adjudicated at the supplier’s local Facilitation Council (Delhi in this case).
Key directives in the final judgment:
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Restoration of arbitral proceedings before the Delhi Arbitration Centre.
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ISRO permitted to raise all legal and factual defenses before the arbitrator.
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No costs awarded, preserving neutrality on the dispute’s merits.
The Bench – comprising Justices Narasimha and Bagchi – reaffirmed the primacy of the MSMED Act’s dispute resolution mechanism, ensuring MSMEs retain statutory protections against adversarial contractual terms. The judgment reinforces precedent set in Mahakali Foods (2023) and aligns with the Act’s objective to expedite MSME dispute resolution.
Case Details:
Case Title: M/s Harcharan Dass Gupta vs. Union of India & Anr. Citation: 2025 INSC 689 (Reportable) Appeal Number: Civil Appeal No. 6807 of 2025 (Arising out of SLP (C) No. 14159 of 2025) Date of Judgment: May 14, 2025 Bench: Justice Pamidighantam Sri Narasimha (Authoring Judge) & Justice Joymalya Bagchi
Download The Judgement Here