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This article is written by Preeti Pallavi Jena, a student pursuing a Bachelor of Law from the School of Law, KIIT University, Odisha. This article talks about Arbitration, its types, MSME Act.


Freedom to contract is a concept under the Arbitration & Conciliation Act, 1996. As per the statutory interpretation, if there is any inconsistency or ambiguity then the special statutes will prevail over the general one. But this doesn’t make it clear that this principle can be applied in the context of arbitration.

Arbitration can be jurisdictional in nature or can also be contractual in nature. It is contractual because forming it requires the approval of parties and this creates a binding obligation between them. But sometimes it is jurisdictional because it does exclude the jurisdiction of natural courts for deciding the dispute.

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Apart from the arbitration agreement, the contractual relationship is between the parties and arbitration also exists. This contractual relationship performance, formation takes place accordingly and not in a formal nature.

Proponents said that this concept is a fundamental principle of the party and in this party, the arbitrators are considered as service providers.

What is arbitration

The dictionary meaning of arbitration is the process of resolving any argument among people by helping them to come to a conclusion that will be agreed upon by both sides.

Arbitration is a part of an alternative dispute resolution mechanism that will solve the dispute by not going to court because many people don’t want to follow the lengthy process that occurs inside the court. Here there will be an arbitrator for the party (third party), who will decide and everyone needs to agree to whatever he says. This is preferred more because it saves time and also saves resources. There will be many disputes which will not fall under the arbitration category and hence, they have to be resolved in the court itself, no other method is available to solve such disputes arising. These disputes are the criminal offenses caused by any person, offences caused relating to copyright, offenses caused by frauds, competition law and many more. There are 2 types of arbitrations: ad hoc and institutional arbitrations.

Ad Hoc Arbitration

This means to follow the rules made by the tribunals for the nonexistence of agreement between the parties. This helps in control over the arbitration process, which will be quite flexible for deciding the procedure and also making it cost-effective. But this can only be implemented when there is a mutual agreement from both the parties.


Institutional Arbitration

This provides arbitration the important requirements like the management process of the arbitration, appointments that are made, identifications of venues etc. These indian arbitrations can be administered by the international institutions of London, Singapore, etc. These all arbitral institutions are regulated by UNCITRAL or by themselves. This form of arbitration provides a set of rules which are clear and need to be followed.

Arbitration mechanism

In India, arbitration is based on English common law. This is regulated by the Arbitration & Conciliation Act, 1996. This has originated from the 1985 UNCITRAL model. 

In that time, arbitration contained 3 enactments:

These acts were repealed by the Arbitration & Conciliation Act, 1996. This 1996 Act was also amended in 2015 to improve the arbitration of India.

This Act defines Arbitration in Section 2(1)(a) which says that arbitration means any dispute coming out from 2 parties regardless of whether it is regulated by the final arbitral procedure.

Section 2(1)(f) defines International Commercial Arbitration. This section says that any arbitration arising out of the conflict between parties may be contractual or may not be, still will be considered as commercial law in India. Here one party among them needs to be:

  • A person who is a public resident in any country other than India;
  • A body corporate consolidated in any other country;
  • An organization or association whose management and control are made by any other; country except India;
  • The public authority of a foreign country.

Section 7(1) defines an Arbitration agreement. This section was amended in 2015. It states that an issue which is submitted by both the parties for the purpose of arbitration of some portion or all, which have arisen between the parties. The relation between the parties has to be legal. It can be a contractual relationship also, but it must be considered as a legal one. The arbitration agreement has to be made in writing. It can be a separate agreement or it can also be a form of the arbitration clause.

The document must have been signed by both parties. An exchange of information will also include telecommunications. Also, if there is any contract, a reference is made in the report to make the arbitration statement a part of the agreement, such part of the arbitration clause will be an arbitration agreement which can be whole but the contract has to be recorded in hard copy. It should have the intention of making the arbitration clause an agreement.


The long title of MSME Act sets reasons for its implementation to provide for promotion and development and enhance the competitiveness of small, medium enterprises. This Act is made from October 2006 which is made for the development of small, medium enterprises which have very much demand in our country. The small scale industries were and are always being important for our economy. In recent years these small scale services contributed substantially and many workers got employed due to this. Hence, it is necessary worldwide. This Act is made by the government which is called Micro, Small & Medium Enterprises Development Act, 2006. The board is established under Section 3 of the MSMED Act 2006 in Delhi as the head office. Registration of these enterprises is replaced by the filing of the memorandum.

Steel Authority of India

The problem with the arbitration agreement validity arises before the Bombay HC in M/s Steel Authority of India Ltd v. Micro, Small Enterprise Facilitation Council 2012.

Here, the Bombay High Court observed that, Section 24 of the MSME Act clarifies that Sections 15 to 23 of the MSME Act abrogate any irregularity with another law. 

Section 18(3) of the MSME Act gives that if modification under the MSME Act fails, the MSME Facilitation (MSMEF) Council can either take up the contest for assertion itself or refer it to some other focus or establishment for arbitration. 

The Arbitration Act applies to problems caused in respect of the MSME Council for arbitration and the technique prescribed in the Arbitration Act applies to legally binding or contractual arbitration.

The Bombay HC also said that, “In this manner, we find that it can’t be said that since Section 18 accommodates a discussion of arbitration and arbitration arrangement in between the persons or party will stop to have an impact. There is no doubt of a free arbitration arrangement stopping to have any impact in the light of the fact that there is no irregularity between an arbitration directed by the Council under Section 18 and arbitration led under an individual condition since both are represented by the arrangement of the Arbitration Act, 1996”.

Case laws

Judicial Trends of Steel Authority of India

In the case of Hindustan Wires Limited v. R. Suresh, 2013 the High Court of  Bombay said that, the legal proceedings that come under the current arbitration agreement that exists between the two parties shouldn’t be affected by the MSMED Act’s enactment and should be continued to be governed by the existing agreement. 

In another case of Bharat Heavy Electricals Limited v. State of UP, 2014, the Allahabad High Court watered down the principle set by the Bombay High Court in the case of Steel Authority of India by holding the fact that the proceedings that were put forward had been considered by the Council in the execution of the provisions of the Act. Even though there might be an arbitration agreement signed between both parties, the provisions of Section 18(4) especially contain a non-obstante clause which has the right to empower the Facilitation Council to legally portray as an Arbitrator. Also, Section 24 of the Act states that Sections 15 to Section 23 shall have an effect in spite of anything inconsistent which is contained in any other law which is in force for the time being. 

The very principle set out by SAIL (Steel Authority of India) was further watered down by the High Court of Punjab and Haryana in The Chief Administrator Officer, COFMOW v. MSEFC of Haryana (CWP 277/2015), where the assertion was made that the previously existing independent arbitration agreement between both of the parties provided for a set of procedures to appoint the arbitrator and this must sustain. 

However, in due course, the Court held that this must be considered as an additional method for the appointment of a new arbitrator and this cannot exclude the applications of provisions of this Act. It also stated that a contract for the appointment of a new Arbitrator should be seen as a contract that shall be recognized by the law and that provision will get overshadowed by the non-obstante clause that Section 18 provides for.

In another case of the Principal Chief Engineer v. M/S Manibhai and Brothers (Sleeper) (AIR 2016 Guj 151), the High court of Gujarat precisely stated that it was in disagreement of the view taken by the division bench of the High Court of Bombay in SAIL (Steel Authority of India).

In the case of Principal Chief Engineer v M/S Manibhai and Brothers (Sleeper) (Diary 16845/2017), the Supreme Court of India stood with the decision of the Gujarat High Court, holding the fact that the latter’s interpretation of the situation was totally justified.


Scope of Section 18(3) of MSME Act as per Delhi HC

In the case of Bharat Heavy Electricals Limited v. The Micro and Small Enterprises Facilitation Centre 2017, the High Court of Delhi said that they were not able to go with the view of the judgment of the Bombay HC in M/s Steel Authority of India v. The Micro, Small Enterprise Facilitation Council.

The High Court of Delhi followed the previous decision of Ge T&D India Limited v. Reliable Engineering Projects 2016, where it was held that the MSME Act ruled over the Arbitration Act in such a manner that it will provide a special forum for the disputes that are involving a registered supplier. The court here said that Section 18(3) of the MSME Act deals with institutional arbitration and not ad hoc arbitration.

Similarly in the case of the Steel Authority of India, the Bombay HC held that the arbitration agreement will not be ceased despite giving ad hoc arbitration.

In a very recent case of Mangalore Refinery & Petrochemicals Ltd v Micro and Small Enterprises Facilitation Council, 2019, the High Court of Delhi followed the judgment of Bharat Heavy Electrical Limited which stated that the jurisdiction of the council which is used in disputes are no more covered under the arbitration agreement. The court in many cases held that Section 18 of MSME Act is a statutory reference between the parties.


From the above we definitely came to know that how this arbitration is important and necessary for our growth of the economy. Here parties can submit the disputes in any form. A balance needs to be created as per the special law prevailing the general and the special contracts. This is required for solving the disputes outside the court through the process of arbitration. This makes the life of a person easier.


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