Works Contract Payment Dispute Can Proceed In MSME Arbitration: Madras High Court

The Madras High Court has refused to interfere with an order of the Micro and Small Enterprises Facilitation Council rejecting a Section 16 jurisdictional objection, holding that a payment claim arising from services under a civil works contract falls within the scope of the MSMED Act and can be adjudicated in arbitration before the Council.

Justice S. Sounthar observed that while courts ordinarily do not intervene when an Arbitral Tribunal rejects a jurisdictional objection, this case required scrutiny as Chennai Petroleum Corporation Limited had questioned the very applicability of the MSME law itself. The Court noted:

“In normal course, this Court would not have entertained the Civil Revision Petition and relegated the parties to workout the remedy under Section 34 of Arbitration Act, in view of Section 16(6) of Arbitration and Conciliation Act. The very applicability of MSMED Act for the claim made by the second respondent is questioned… and the same is going to the root of the matter.”

The dispute arose from a contract awarded by Chennai Petroleum Corporation Limited to M. Govindaraj Contractor and Earth Movers for piling and civil works connected to silos forming part of the company's coke handling system.

The contractor began work in October 2019 and was expected to complete the project by September 2020. According to the contractor, payments remained outstanding for work already executed. M. Govindaraj therefore approached the Micro and Small Enterprises Facilitation Council seeking recovery of Rs. 5,76,71,471.

Conciliation between the parties failed, after which the Council proceeded to arbitration under the MSMED Act on the reference filed by the contractor.

Chennai Petroleum then filed a Section 16 application before the Council, challenging the Tribunal's jurisdiction. The company argued that the dispute arose from a civil works contract and therefore fell outside the MSMED Act. The Council rejected this objection and, in an order dated 18 November 2024, held that the claim was maintainable.

Aggrieved, Chennai Petroleum filed a Civil Revision Petition before the High Court, asserting that the MSME law applies only to payment disputes involving supply of goods, not civil works.

M. Govindaraj countered that the statute permits recovery of dues for services rendered by micro and small enterprises, and that the civil works executed clearly constituted a service under the law.

The High Court examined the scheme of the MSME law and held that suppliers are entitled to recover payments arising from services rendered to a buyer. The Court noted that the contract involved execution of civil works at the company's site and therefore amounted to a service contract. The Court observed:

“Therefore, it is a service contract, the second respondent is entitled to recover the cost of the service rendered by it to the petitioner under the provisions of MSMED Act.”

Rejecting the argument that works contracts fall outside the MSME framework, the Court added:

“The submission made by the learned senior counsel… that the contract between the petitioner and the second respondent is a work contract and therefore it is outside the purview of MSMED Act is not acceptable to me.”

Holding that the contractor's payment claim was maintainable under the MSME dispute resolution mechanism, the Court dismissed Chennai Petroleum Corporation Limited's revision petition and declined to interfere with the Council's decision rejecting the jurisdictional objection.

Arbitration before the Council will therefore continue.

For petitioner (Chennai Petroleum Corporation Limited): Senior Advocate Om Prakash for Advocates Ragavendra Ross Dirakar and A. Ramalingam.

For respondent (Micro and Small Enterprises Facilitation Council): Government Advocate C. Sathish.

For respondent (M. Govindaraj Contractor and Earth Movers): Advocate P. Saravana Sowmiyan.