“Samuel Goldwyn said “A verbal contract isn’t worth the paper it’s written on.” Buyers who drafted arbitration clauses against small suppliers are finding that written ones can be just as flimsy.”
Does an arbitration clause override the MSMED Act? No. The act overrides the clause, once the supplier presses the button.
MAHAKALI: THE EARTHQUAKE
In Gujarat State Civil Supplies Corporation V. Mahakali Foods (2023) 6 SCC 401, the SC held that Chapter V of the MSMED Act overrides the Arbitration Act. Section 18(1) lets a party approach the facilitation council despite an existing arbitration agreement. The non-obstante clauses in Section 18(1) and 18(4) mean a private agreement cannot erase statutory provisions. Even the Arbitration Act’s bar on a conciliator turning arbitrator stands superseded. The Council can conciliate before lunch and arbitrate after it.
Ambrose Bierce called litigation “a machine which you go into as a pig and come out of as a sausage.” Defaulting buyers meet the grinders.
ISRO MEETS SECTION 18(4)
In Harcharan Dass Gupta V. Union of India 2025, the contract fixed Bengaluru as the seat. The supplier was registered in Delhi, so the Delhi Arbitration Centre had jurisdiction under Section 18(4). The Karnataka High Court sided with the buyer, but the SC restored the Delhi proceedings. Bengaluru is a lovely city, and legally irrelevant.
THE HIGH COURT PILE ON
The Gauhati High Court held that invoking Section 18 prevails over the arbitration clause in a GEM contract including the agreed seat.
The Bombay High Court held that once a Section 18 reference is made, it overrides a Section 11 appointment request.
The Delhi High Court reaffirmed that the statutory framework cannot be displaced by a contractual clause.
THE LESSON IS TO FILE FIRST AND ARGUE LATER.
Section 18(1) is an enabling provision, so it is the supplier’s choice, not a buyer’s escape hatch. And the protection applies to eligible micro and small suppliers, not automatically to every business called an MSME.
THE NUMBER BEHIND THE DRAMA
Why do suppliers rush to the Council? Because buyers are slow. As of 14 August 2026, MSME Samadhaan showed 256,892 delayed payment applications worth ₹55,244 crore, with ₹20,979 crore still pending. About 40,580 applications were unresolved for over a year. Caseloads very widely: Rajasthan’s nine councils average 1,767 applications each, against 397 for Karnataka’s 35 councils.
The law itself is blunt: buyers must pay within 45 days, and delay attracts interest at three times the bank rate.
THE 2026 PLOT TWISTS
Parliament has now amended the Act. The bill passed the Rajya Sabha on 3 August and the Lok Sabha on 7 August, without debate in the Lok Sabha. Parliament moved faster than a buyer’s accounts department. Key changes include:
1. Mediation must be completed within 90 days.
2.Courts must release at least 50 per cent of the disputed awarded amount to the MSME if an appeal lingers past six months.
WHAT TO DO ON MONDAY
Buyers: Treat your arbitration clause as a speed bump, not a wall. Pay inside 45 days, because delayed payments to MSME’s also hurt your tax position under Section 43B(h).
Suppliers: Keep your Udyam registration in order and document your invoices. If payment stalls, invoke Section 18 before the other side files a Section 11 petition.
VERDICT
An arbitration clause is a contract between equals, while the MSMED Act is a statute written for the unequal. When they collide, courts have been consistent: the statute wins, the seat clause shrugs, and the Council takes the file.
Or in Bierce’s terms, the pig has been warned.
FREQUENTLY ASKED QUESTIONS
Q1. What is the MSME Act ?
It is the 2006 law that protects small businesses from being paid late. It sets payment deadlines and penalty interest, and it creates a special forum, the Micro and Small Enterprises Facilitation Council to recover dues.
Q2. Does the arbitration clause in my contract become useless?
Not entirely. It still works for disputes the MSMED mechanism dosen’t cover, and it can still apply if the supplier chooses not to go to the council. But once an eligible supplier invokes Section 18, courts have held that the statutory route prevails over the clause.
Q3.Who can use this route: any MSME?
No. The delayed payment protection is for eligible micro and small suppliers, not medium enterprises, and not every business that calls itself an MSME. The supplier needs a valid Udyam registration. Courts have generally looked at whether the supplier was registered when the contract was made, so check this before signing.
Q4. How long does a buyer have to pay?
If there is a written agreement, within the agreed period, which cannot exceed 45 days. If there is no agreement, within 15 days of acceptance of goods or services.
Q5. I am a buyer. How do I protect myself?
Pay within 45 days, keep clean records of acceptance and quality disputes, and don’t count on the arbitration clause to shield you from a supplier’s Section 18 filing.
Q6. What happens if the buyer pays late?
The buyer owes interest at three times the bank rate notified by the RBI, compounded monthly.
BIBLIOGRAPHY :
https://www.businessworld.in/article/pending-msme-payment-reaches-rs-21108-cr-data-537926
https://dailypioneer.com/news/lok-sabha-msme-development-amendment-bill-passed