Mandatory Arbitration Referral upon Failed Conciliation under Section 18(3) MSME Act

1. Introduction

This commentary examines the Karnataka High Court’s decision in M/S Enmas GB Power Systems Projects Ltd. v. Micro and Small Enterprises Facilitation Council (2025), which clarified the jurisdictional limits of the Micro and Small Enterprises Facilitation Council (“MSEFC”) under Section 18 of the Micro, Small and Medium Enterprises Development Act, 2006 (“MSME Act”).

Facts at a glance:

Petitioner: M/S Enmas GB Power Systems Projects Ltd. (“EGB”), a supplier of power‐system components.
Respondents: (i) Karnataka MSEFC, (ii) Lotus Power Gear Pvt. Ltd. (“Lotus”).
Transaction: Purchase order dated 14 February 2013 for materials worth ₹2.25 crore (gross ₹2.58 crore).
Dispute: Balance payment dispute leading to conciliation under Section 18 MSME Act.
Relief Sought: Quash the MSEFC award of 14 March 2017 and direct proper compliance with Section 18(3).

2. Summary of the Judgment

The High Court allowed the writ petition under Articles 226 and 227 of the Constitution. It held that once conciliation under Section 18(2) has failed, the MSEFC must terminate conciliation proceedings and refer the matter to arbitration (either in‐house or via an ADR institution) as mandated by Section 18(3). The Council’s direct grant of an “award” without formal termination and arbitration referral was held to be a jurisdictional error. Relying on Whirlpool Corporation v. Registrar of Trade Marks, Mumbai, (1998) 8 SCC 1, the court quashed the award dated 14 March 2017 and remitted the matter for proper arbitration‐referral within 30 days.

3. Analysis

3.1 Precedents Cited

The Court primarily relied upon:

Whirlpool Corporation v. Registrar of Trade Marks, Mumbai, (1998) 8 SCC 1 – Established that a writ court may intervene under Article 226 when a statutory body acts beyond its jurisdiction, ensuring basic justice and preventing “usurpation of power.”

No other cases were expressly cited, but the decision implicitly engages the Arbitration and Conciliation Act, 1996 (“A&C Act”), particularly Parts I and III, which govern arbitration and conciliation procedures.

3.2 Legal Reasoning

The Court’s reasoning proceeds in three logical steps:

Non‑Obstante Clause & Section 18(1)–(2): Section 18(1) empowers any party to refer a dues dispute to the MSEFC “notwithstanding anything contained in any other law.” Sub‑section (2) requires that upon receipt, the Council must conduct conciliation (itself or via an ADR institution), applying Sections 65–81 of the A&C Act.
Mandatory Arbitration Referral (Section 18(3)): If conciliation fails, sub‑section (3) mandates termination of conciliation and either an in‑house arbitration or a referral to an ADR body “as if the arbitration was in pursuance of an arbitration agreement” under Section 7(1) A&C Act. In the present case, no termination notice was issued, nor was any arbitration reference made.
Jurisdictional Error & Writ Remedy: By awarding relief after a failed conciliation without compliance with Section 18(3), the MSEFC acted beyond jurisdiction. Relying on Whirlpool, the Court held that the writ jurisdiction under Article 226 is available to correct such excess of power.

3.3 Impact

This ruling carries significant implications:

For MSEFCs Nationwide: They must carefully follow the two‑stage process—conciliation first, then arbitration—prescribed by Section 18, failing which any award may be struck down.
For Suppliers & Buyers: Parties can insist on a formal termination of conciliation before arbitration, ensuring fair opportunity to present detailed objections and evidence.
For Arbitration Practice: Reinforces the A&C Act’s primacy in post‑conciliation arbitration under the MSME Act, thus harmonizing MSME dispute resolution with broader arbitration norms.

4. Complex Concepts Simplified

To clarify key legal terms:

Non‑Obstante Clause: A provision prefaced by words like “notwithstanding anything contained in any other law” that takes precedence over conflicting statutes.
Conciliation vs Arbitration:
- Conciliation is a voluntary, non‑binding process to achieve settlement (A&C Act Part III, Secs 65–81).
- Arbitration is a binding adjudicatory process where an arbitrator issues an award enforceable like a court decree (A&C Act Part I, Secs 7–37).
Jurisdictional Error: When a statutory body acts beyond or contrary to the scope of power granted by law, its acts are void and subject to judicial review.
Article 226 Writ: Empowers High Courts to issue directions if a public authority exceeds its statutory powers or denies fundamental justice.

5. Conclusion

The Karnataka High Court’s decision in EGB v. MSEFC cements a clear two‑step statutory regime under Section 18 of the MSME Act: complete conciliation first, then arbitral referral upon failure. Bypassing this mandatory pathway constitutes a jurisdictional breach, readily remedied by a writ under Article 226. This ruling will guide MSEFCs to respect procedural safeguards, preserve parties’ rights to full hearing in arbitration, and align MSME dispute resolution with established arbitration norms.