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Bombay High Court rules MSME Act 2006 Does Not Restrict Private Arbitration Between the Parties

Overview

In this case, the Bombay High Court addressed a dispute in which BSNL tried to challenge an arbitral award on the ground that the arbitrator acted beyond the jurisdiction to decide the matter. The issue arose as the respondent company was registered under the Medium Enterprises Development Act, 2006 (MSME Act), and BSNL argued that the disputes in regards to the same should only be decided by the Facilitation Council.

The situation became more complicated because both the parties already moved forward with the arbitration before an arbitrator. The Court had to examine whether BSNL could raise objections as to the jurisdiction at a later stage and whether the MSME law completely restricts arbitration.

 

Facts of the Case

The dispute arose from a tender floated by BSNL, the petitioner herein, in 2016 for supply of VRLA batteries. Microtex Energy, the respondent, being a small enterprise secured the contract and supplied the batteries. Although there was a delay in the delivery, the petitioner granted certain extensions.

Later, it again calculated the prices and claimed that it overpaid the respondent based on the rates from another circle, and demanded a refund of ?34 lakh. The respondent denied this claim and instead asked for some pending dues. BSNL invoked and encashed the performance bank guarantee.

Dispute arose as to the same, and the matter went to arbitration. At first the petitioner appointed an arbitrator on its own, but it was challenged. The High Court later appointed an arbitrator in 2021 and both the parties agreed to his appointment.

During the arbitration, the petitioner fully participated in the proceedings and filed its defence without raising any issue as to jurisdiction. At the stage of final arguments in 2024, the petitioner argued that the arbitrator had no authority since the dispute should have been dealt with by the MSME Facilitation Council.

The arbitrator rejected this argument and an award was passed in favour of the respondent. The petitioner then approached the High Court under Section 34 of the Arbitration and Conciliation Act, 1996 to set aside the award.

 

Legal Issues

  1. Whether disputes involving MSME must necessarily be decided only by the Facilitation Council.
  2. Whether the MSME Act completely restricts private arbitration, even when both the parties agree to the same.
  3. Whether a party can raise objections as to jurisdiction of the tribunal after already participating in the arbitration proceedings.
  4. Whether the arbitrator’s interpretation of the terms of the contract was unreasonable or perverse warranting interference under Section 34 of the Act.

 

Decision

The Bombay High Court dismissed the petition and upheld the arbitral award passed in favour of the respondent.

The Court held that the MSME Act does not prevent the parties from choosing a mode of dispute resolution. It was clarified that the special mechanism under the act is applicable only when the Facilitation Council is approached by a party. Since neither of the parties approached it, and instead agreed to arbitration, the arbitrator had complete jurisdiction to deal with the same.

The Court also noted that BSNL already participated in the arbitration proceedings for years without raising any objection as to jurisdiction. Raising such objections at the final stage was not acceptable.

As to the issue of interest, the Court held that MSME suppliers have a right to claim higher interest for delayed payments, which can also be granted in private arbitration.

At last, the Court refused to interfere with the arbitrator's understanding of the contract. It was found that BSNL trying to revise prices after the delivery, was unfair. Since there was no serious illegality, the award was upheld by the Court.

 

Case Reference:- Bharat Sanchar Nigam Ltd.(Petitioners) Vs.  Microtex Energy Pvt. Ltd. (Respondents) Comm. Arbitration Petition (L.) No. 33928 of 2024  with  Interim Application (L.) No. 59 of 2025 (SJB, Delivered by Sandeep V. Marne, J.