“Seat Subservient to Statute” – The Supreme Court affirms the overriding effect of the MSMED Act on contractual arbitration clauses in M/S HARCHARAN DASS GUPTA v. Union of India (2025)

1. Introduction

This commentary examines the Supreme Court of India’s decision in M/S Harcharandas Gupta v. Union of India (2025 INSC 689), a judgment that crystallises the hierarchy between the Micro, Small and Medium Enterprises Development Act, 2006 (“MSMED Act”) and the Arbitration and Conciliation Act, 1996 (“Arbitration Act”)—particularly where parties have contractually designated a different “seat” of arbitration.

The appellant, a Delhi-based micro-enterprise contractor, entered into a 2017 agreement with the Indian Space Research Organisation (ISRO) for construction of staff quarters in New Delhi. While the contract’s arbitration clause fixed Bengaluru as the seat, the appellant later invoked Section 18 MSMED Act before the Delhi Facilitation Council (DFC). When the DFC referred the matter to institutional arbitration at the Delhi Arbitration Centre (DAC), ISRO challenged the proceedings in the Karnataka High Court, which sided with ISRO, holding that the contractual seat (Bengaluru) prevailed. The Supreme Court has now reversed that view.

2. Summary of the Judgment

Key Findings

• The MSMED Act is a special and later statute vis-à-vis the Arbitration Act, hence it prevails in case of inconsistency (Sections 18(1), 18(4) & 24 MSMED Act).
• Non-obstante clauses in Section 18 override private agreements on dispute resolution, including seat of arbitration.
• The “legal fiction” created by Section 18(3) treats the Facilitation Council’s arbitration as if pursuant to an arbitration agreement under Section 7 Arbitration Act—thereby importing arbitral “trappings” without ceding control over jurisdiction.
• The decision in Gujarat State Civil Supplies Corp. Ltd. v. Mahakali Foods Pvt. Ltd. (2023) 6 SCC 401 is binding and directly applies.

3. Detailed Analysis

3.1 Precedents Cited

1. Gujarat State Civil Supplies Corp. Ltd. v. Mahakali Foods Pvt. Ltd., (2023) 6 SCC 401 (“Mahakali”)
   

   Mahakali settled that (i) MSMED Act overrides the Arbitration Act; (ii) Facilitation Councils may act as conciliator and arbitrator; (iii) contractual arbitration agreements cannot oust Section 18 jurisdiction.

2. Silpi Industries v. Kerala SRTC, (2021) 18 SCC 790
   

   Recognised statutory primacy of MSMED Act in matters of delayed payments and counter-claims.

3. K. Prabhakaran v. P. Jayarajan, (2005) 1 SCC 754
   

   Cited for the principle that a statutory “legal fiction” should be carried to its logical end.

By faithfully reproducing paragraphs 42-48 of Mahakali, the Court treats the present controversy as “no more res integra”. In doing so, it signals continuity and stability in MSME jurisprudence.

3.2 Legal Reasoning

1. Statutory Hierarchy & Non-obstante Clauses
   Sections 18(1) and 18(4) of the MSMED Act begin with “Notwithstanding anything contained in any other law…”. Section 24 extends that priority to Sections 15-23. Applying the generalia specialibus non derogant rule (special law prevails over general law) and the principle of later law over earlier law, the Court holds that the MSMED Act trumps both the Arbitration Act and the private contract.
2. Seat of Arbitration vs. Statutory Forum
   The Court makes a conceptual distinction: “seat” is a creature of party autonomy under the Arbitration Act, while Section 18(4) MSMED Act is a statutory conferment of jurisdiction, non-derogable by contract. Once Section 18 is triggered, the forum cannot shift by reference to a contractual seat.
3. Legal Fiction under Section 18(3)
   By deeming the arbitration to be “as if” under Section 7 Arbitration Act, Parliament intended to graft procedural provisions of the Arbitration Act onto MSMED proceedings only after jurisdiction is vested by Section 18. Therefore, Section 16 competence (tribunal’s power to rule on its jurisdiction) still applies, but the foundational jurisdiction cannot be contracted away.
4. Judicial Review under Article 226/227
   Although not elaborated, the Supreme Court implicitly curtails the High Court’s intervention, re-emphasising the principle of minimal judicial interference with arbitral processes—particularly statutory arbitrations.

3.3 Impact of the Decision

• Clarity in Contract Drafting – Government bodies and private buyers must recognise that any arbitration clause fixing a different seat cannot override Section 18 where the supplier is an MSME.
• Forum Predictability for MSMEs – Registered suppliers gain certainty that disputes will be administered in the State/UT of their registration, lowering cost and logistical burdens.
• Reduced Litigation over Jurisdiction – The decision, coupled with Mahakali, is likely to reduce challenges to Facilitation Council references, expediting MSME payment disputes.
• Dichotomy between “Arbitration Act arbitrations” and “MSMED arbitrations” – The judgment accentuates two parallel regimes, urging future legislative or judicial harmonisation—particularly on procedural timelines, challenge grounds, and enforcement.
• Government Contracting Policies – Public procurement entities (e.g., ISRO, PSUs) may have to revise standard form contracts or issue disclaimers acknowledging statutory overrides.

4. Complex Concepts Simplified

Seat of Arbitration

The legal “home” of the arbitration, determining the procedural law and courts of supervisory jurisdiction.

Non-obstante Clause

A legislative device that begins with “notwithstanding anything contained…”, signifying that the provision will prevail even if it conflicts with other laws or agreements.

Legal Fiction

A statutory assumption that treats an imagined state of affairs as real to achieve a purpose. Section 18(3) MSMED Act assumes there is an arbitration agreement even when none exists.

Special vs. General Law

A “special” law targets a specific subject matter (MSMED Act for MSME disputes), whereas a “general” law applies broadly (Arbitration Act). When inconsistent, the special law overrides.

Facilitation Council

State-level statutory body under the MSMED Act tasked with conciliating and/or arbitrating payment disputes between MSMEs and buyers.

5. Conclusion

With M/S Harcharandas Gupta v. Union of India, the Supreme Court cements a simple yet powerful proposition: private party autonomy cannot displace the statutory protections conferred on micro and small enterprises. The judgment reinforces the protective architecture of the MSMED Act by ensuring that:

• MSME suppliers may invoke their local Facilitation Council despite contrary arbitration clauses.
• The statutory non-obstante framework possesses real and operative force, not merely declaratory value.
• High Courts should exercise restraint in interfering with MSME arbitrations, recognising the special legislative intent.

Practitioners must now approach MSME contracts and disputes with the firm understanding that the MSMED Act is sui generis, possessing procedural supremacy over the Arbitration Act. This development aligns with legislative policy to foster the growth and protection of India’s MSME sector—an engine of economic activity and employment. Future disputes and contractual drafting will necessarily revolve around this embedded statutory hierarchy, thereby providing MSMEs a more predictable, less onerous path to realising their dues.