By S&S Co. Advocates & Solicitors · Published 8 July 2026 · Informational content, not legal advice: see our disclaimer
A Statutory Arbitration Route Outside the Ordinary Arbitration Clause
The Micro, Small and Medium Enterprises Development Act, 2006 (the MSMED Act) creates its own, statute-driven dispute resolution mechanism for delayed payment claims by a micro or small enterprise supplier: separate from, and in some respects overriding, whatever dispute resolution clause the parties may have separately negotiated in their commercial contract. Section 18 of the MSMED Act allows a supplier who has not been paid within the statutory timeline to refer the matter to the Micro and Small Enterprise Facilitation Council of the relevant state.
Conciliation First, Then Arbitration: By Operation of Law
On receiving a reference under Section 18, the Facilitation Council first conducts conciliation between the parties, either itself or through an institution or centre it refers the matter to. If the conciliation fails, Section 18(3) provides that the Council either takes up the dispute itself as an arbitrator, or refers it to an institution or centre for arbitration, and the provisions of the Arbitration and Conciliation Act, 1996 then apply to that arbitration as if it had been pursuant to an arbitration agreement between the parties under Section 7(1) of the 1996 Act, even where the underlying commercial contract contains no arbitration clause of its own, or contains one naming a different forum entirely.
Does an Existing Arbitration Clause in the Contract Matter?
This is one of the most litigated aspects of the MSMED framework: where the underlying supply contract already contains its own arbitration clause naming a different forum, courts have generally held that the MSMED Act's statutory mechanism, being a special law enacted to protect micro and small enterprises, prevails over a general, privately negotiated arbitration clause for a delayed-payment claim covered by Section 17 and 18 of the MSMED Act. A buyer cannot simply point to a separate arbitration clause in the purchase order or supply agreement to divert the supplier away from the Facilitation Council route for a claim that falls within the MSMED Act's scope.
Challenging an Award From the Facilitation Council
An award rendered through the Section 18 mechanism is challenged in the same manner as any other arbitral award under Section 34 of the Arbitration and Conciliation Act, but Section 19 of the MSMED Act imposes an additional, more demanding pre-condition: no application to set aside the award can be entertained unless the party challenging it (typically the buyer) first deposits seventy-five percent of the amount awarded, a pre-deposit condition intended to discourage delaying tactics by buyers seeking merely to postpone payment.
Frequently Asked Questions
Can a buyer avoid the Facilitation Council by pointing to a separate arbitration clause in the purchase order?
Generally not for a claim covered by the MSMED Act's delayed-payment provisions: courts have treated the MSMED Act's statutory mechanism as prevailing over a separately negotiated arbitration clause for such claims.
Is conciliation mandatory before arbitration under the MSMED Act?
Yes: Section 18 requires the Facilitation Council to first attempt conciliation, and the statutory arbitration route is triggered only if that conciliation fails.
Does the 75% pre-deposit apply to every Section 34 challenge in arbitration, or only MSMED awards?
It is specific to a challenge against an award made under Section 18 of the MSMED Act: an ordinary contractual arbitration award is challenged under Section 34 without any equivalent statutory pre-deposit requirement.
Who can invoke the Facilitation Council route?
Only a supplier registered as a Micro or Small Enterprise under the MSMED Act can invoke Section 18 for delayed payment by a buyer; the mechanism does not extend to Medium Enterprises for this specific delayed-payment remedy.
References & Further Reading
This article references the following statutory provisions. It is educational content, not advice on any specific dispute.
- Micro, Small and Medium Enterprises Development Act, 2006, Sections 15-19: delayed payment and the Facilitation Council mechanism.
- See our Arbitration & Dispute Resolution practice area and our guide to MSME delayed payment claims for further reading.