What is Statutory Arbitration? 

There are various statutes providing for dispute resolution by way of arbitration, even though parties did not have an express arbitration clause between them i.e., Section 7-B of Telegraph Act,1885, Section 52 of Electricity Act, Section 76(2) of Electricity (Supply) Act, etc. In the same manner even Section 18 of The Micro Small Medium Enterprises Development Act, 2006 provides for dispute resolution by way of arbitration. 

MSME: MSME stands for Micro, Small, and Medium Enterprises.

Prior to COVID 19 reforms announced in the month of May 2019, the enterprises under Micro, Small, and Medium Enterprises Development (MSMED) Act in 2006 were classified into two divisions. Manufacturing enterprises (engaged in the manufacturing or production of goods in any industry) and Service Sector. However, now this has been removed.

Contractual Arbitration:  

The term “Contractual” means, a contract between two parties doing business or entering into any legal transaction under the laws of India. Any business transaction which is of legal in nature is a contract, either in writing or oral. However, it is always advisable to have contract in writing or at least if not, then action shall be written such as supplying the goods on written work order or purchase order, having delivery challan as proof of supply, email correspondence, etc. further, it is also meant the terms the business parties have agreed too. The term “Arbitration” means a private process set up by the parties as a substitute for court litigation to obtain a decision on their dispute. The Arbitration in India is regulated by Arbitration and Conciliation Act, 1996 (as amended). The term “Contractual Arbitration” means, wherein the business parties have agreed in writing either in form of Purchase Order or separate agreement dealing with terms of business or separate arbitration agreement and contains the clause of referring the disputes to arbitration means contractual arbitration. The term “contractual arbitration” itself speaks of its binding force under the Laws of India. The business contracts are regulated by Indian Contract Act, 1872.

Business entity registered under MSME are entitled to claim their money through MSME Council Arbitration and this is termed as Statutory Arbitration and has the same effect as Contractual Arbitration. In the event, there are two arbitrations co-existing, Aggrieved Party if MSME member has the choice of selecting arbitration method, whether Statutory or Contractual

Statutory Arbitration (MSME) Contractual Arbitration
Only registered member of MSME and who files their Memorandum can approach for Statutory Arbitration. This can be availed only if there is a clause on referring to Arbitration and the Contract shall be worked upon. Separate Agreement for Arbitration is also legally valid
There is no requirement of any arbitration clause Clause is mandatory. Parties can agree by executing agreement later if clause is not there or they can modify as they want
It can be approached even without any notice, but issuing notice complies Section 21 of Arbitration and Conciliation Act, 1996 Notice under Section 21 of Arbitration and Conciliation Act, 1996 is mandatory and better ensure that what is being claimed under Section 21 is similar to what Statement of Claim will be filed
Within a period of 180 days Within a period of one year (can be extended only upon mutual consent of all parties)
There are set of documents prescribed by MSME required for filing Petition under MSME There is no such set of documents prescribed. It starts from filing Statement of Claim
Penalty 3 times RBI interest at compound rate is claimable plus other expenses Interest be claimed as per contractual terms and if not, then as per Interest Act and can claim all other expenses
Generally one Arbitrator Depends on clause on number of arbitrators agreed between and by the Parties
Defined period on payment of invoice and raising defect on goods and services As per contractual terms
No time consuming on appointment of arbitration If Arbitration is Ad-hoc and appointment of three or sole arbitrator is mutual or dependent on other party, then in absence of both parties co-operation, appointment of arbitrator becomes little lengthy process and little expensive.

If Arbitration is Institutional, process is well defined and less time consuming

No Court Fees
Arbitration Expenses can be claimed
Assurance of Result in limited time and no way the dates are managed or adjourned
Future is Arbitration and in fact majority of Big Companies are now moving to Arbitration
Being a MSME member only adds value to success of Business Growth

Whether it is mandatory for the Business Entity to be a registered entity under MSME to avail Dispute Resolution remedy:

In India, most of the Micro, Small & Medium Enterprises/Industries become unviable mainly because of the delayed payments from the Parties. Due to huge pendency of cases normal commercial litigation takes very long time to get finality.

It is sad but a fact that even in this technology and consulting era most of the MSMEs do not understand the importance of arbitration clauses while entering contracts as they don’t prefer taking the advice of Legal Professionals with the only aim of avoiding Legal costs and hence when disputes arise they are left with litigations only. The Government has taken various efforts to support and protect the interests of MSME as they are the backbone of Indian GDP.

However, there was and is confusion whether a unregistered MSME Business entity can avail the benefits of MSME in regard to claiming of money via Arbitration Proceedings. This particular situation was dealt in case GET & D India Limited Vs Reliable Engineering 2017 SCC Online 6978, which came up before Hon’ble Justice Muralidhar of Delhi High Court. In the said case, the Parties had Two Supply Contracts and one of which had an arbitration clause also. On the complaint of the Respondent Small Industry, after hearing both the parties, the MSMED council passed an arbitration award and the appellant chose to challenge the said award before the Delhi High Court under Section 34 of the Arbitration & Conciliation Act,1996. The respondent challenged the said award on various grounds but the author has chosen three important questions which are relevant for this Article. Hence among the questions raised by the appellants, the following are relevant here:

  1. Whether the dispute resolution prescribed U.S.19 of the MSME Act, 2006 over rides the arbitration clause in the contract?
  2. Whether the requirement of deposit of 75% of the value of the MSME award to challenge the same under S.34 of the Arbitration and Conciliation Act,1996 can be waived by the High Court, on its discretion?
  3. Whether an Industry Which could not register itself under the MSME Act, within the 180 days’ time given in the Act, can claim the benefits under the said Act, by registering later?

The Court held that since MSMED Act is a special act, providing special dispute resolution mechanism providing beneficial provisions to MSMEs and Arbitration and Conciliation Act,1996 is a general legislation governing the arbitration space, MSMED Act the beneficial legislation should be given preference over the general act. More over a contractual clause cannot override the statutory provision. Hence relying of the above proposition, it further held that the dispute resolution mechanism provided in the MSME Act over rides the arbitration clause incorporated in the Contract. The Court held that the benefits of the said Act would be available only after the registration of the industry under the said Act but registration of the old industries can be done later also. This is a beneficial clarification in favour of MSMEs of India

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Qualification: LL.B / Advocate
Location: Navi Mumbai, Maharashtra, India
Member Since: 01 May 2020 | Total Posts: 44
I have been in Law Practice for more than 15 Years. My practice areas include: (a) Drafting of Commercial and Non-commercial Agreements/Contracts; (b) Recovery Matters before all Forums/Courts; (c) Arbitration and Conciliation; (d) Cross-Examination, Admission and Interim Stay; (d) Devising Strategy View Full Profile

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April 2021