Delhi High Court Says Writ Courts Should Not Pre-empt MSMED Arbitration, Dismisses BSNL Plea

On 26 August, the Delhi High Court dismissed a petition filed by the General Manager, Telecom District, Bharat Sanchar Nigam Limited (BSNL), challenging the Micro and Small Enterprises Facilitation Council's (MSEFC) reference of a dispute to the Delhi International Arbitration Centre (DIAC) and the consequential arbitration proceedings.

Justice Swarana Kanta Sharma held that writ courts should not pre-emptively interfere with arbitration proceedings under the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act) merely because a party challenges the maintainability of a claim or the jurisdiction of the arbitral tribunal, when such objections can be raised before the tribunal itself. She observed:

“The aforesaid objections essentially relate to the maintainability of the claim and the jurisdiction of the forum constituted under the MSMED Act. However, merely because an objection relates to the jurisdiction of the Arbitral Tribunal, the same would not, by itself, justify exercise of jurisdiction under Articles 226 and 227 of the Constitution, particularly when such objection can be raised before and considered by the learned Arbitral Tribunal under the statutory scheme governing arbitration.”

The dispute arose from a 22 June 2015 agreement under which BSNL engaged a contractor to execute telecom infrastructure works in Pathankot, Punjab. The work was completed and the contractor raised its final invoice on 1 February 2018.

The contractor obtained registration as a Micro, Small and Medium Enterprise (MSME) on 26 March 2021, nearly three years after the final invoice, and approached the MSEFC with its claim on 25 July 2022.

The MSEFC referred the dispute to DIAC for arbitration on 16 April 2024. BSNL then approached the High Court under Articles 226 and 227 of the Constitution, seeking to quash the reference and stop the consequential arbitration proceedings.

BSNL argued that the contractor could not invoke the beneficial provisions of the MSMED Act for the 2015 transaction because it obtained MSME registration only after the contract had been completed. Relying on the Supreme Court's decision in Silpi Industries v. Kerala SRTC, it contended that subsequent registration could not confer MSME status or statutory benefits in respect of a transaction that had already concluded.

It also contended that the claim was barred by limitation because the final invoice was raised on 1 February 2018, whereas the contractor approached the MSEFC only on 25 July 2022.

The Court held that these objections concerned the maintainability of the claim and the jurisdiction of the forum under the MSMED Act. It found that the arbitral tribunal could examine both issues under the statutory arbitration framework.

It also relied on the Supreme Court's subsequent decision in Gujarat State Civil Supplies Corporation Limited v. Mahakali Foods Private Limited, noting that objections concerning the status of a party seeking to invoke the MSMED Act and its entitlement to claim the statute's benefits could be raised before the forum conducting the arbitration.

The Bench therefore declined to decide whether the contractor, having obtained MSME registration only on 26 March 2021, could invoke the MSMED Act in relation to the 2015 agreement and work completed in 2018. It left the issue for determination by the arbitral tribunal.

On limitation, it observed that deciding whether the claim was time-barred would require examination of the nature of the claim, the contractual terms and the date on which the cause of action arose. These issues, it held, could also be examined by the arbitral tribunal.

It reiterated that writ jurisdiction under Articles 226 and 227 in relation to arbitral proceedings must be exercised sparingly, particularly where the objections raised by a party can be considered within the statutory arbitration framework.

Accordingly, the High Court dismissed BSNL's petition as not maintainable. It granted liberty to raise all its objections before the arbitral tribunal, including those concerning the contractor's date of MSME registration, the applicability of the MSMED Act to the transaction and limitation. It clarified that it had expressed no opinion on the merits of these objections.

Appearances for petitioner (General Manager Telecom District, BSNL): Advocates Sagar Kumar Pradhan, Samarth Mehrotra, Kartik Yadav, Diptiman Achharya, Aarti Gautam.