Understanding Arbitration under the MSME Act

The Micro, Small and Medium Enterprises Development (MSME) Act, 2006 is a crucial legislation that aims to promote and develop the MSME sector in India. The Act provides for a variety of measures to support the growth and development of MSMEs, including the provision for arbitration. In this blog post, we will discuss arbitration under the MSME Act, its benefits, and how it can help MSMEs resolve disputes effectively.
Arbitration under the MSME Act: Section 18 of the MSME Act provides for the establishment of a Micro and Small Enterprises Facilitation Council (MSEFC) in every state. The MSEFC is tasked with resolving disputes between MSMEs and their buyers arising out of the supply of goods or services. The disputes can be referred to the MSEFC for arbitration by either party to the dispute.

Benefits of Arbitration under the MSME Act:

1. Speedy Resolution: Arbitration under the MSME Act is a time-bound process, with disputes being resolved within 90 days of the reference being made to the MSEFC. This ensures that MSMEs can get a quick resolution to their disputes without having to go through lengthy court proceedings.
2. Cost-Effective: Arbitration under the MSME Act is a cost-effective process as compared to court proceedings. This is particularly beneficial for MSMEs who may not have the resources to engage in prolonged court battles.
3. Expertise: The MSEFC comprises experts in the field of MSMEs, which ensures that disputes are resolved by knowledgeable and experienced professionals.
4. Confidentiality: The arbitration proceedings under the MSME Act are confidential, which ensures that the dispute is resolved without affecting the reputation of the parties involved.
5. Pre- Deposit: Before filing an appeal against the award a pre-deposit of 75% of the awarded amount is mandatory as per Section 19 of the MSME Act and as upheld by the Hon’ble Supreme Court of India in M/s Tirupati Steels v. M/s Shubh Industrial Component & Anr., Civil Appeal No. 2941 of 2022.

Procedure for Arbitration under the MSME Act:

1. Notice: The party initiating the arbitration is required to send a written notice to the other party, providing details of the dispute and the relief sought.
2. Reference to MSEFC: If the parties are unable to resolve the dispute through negotiations within 15 days of the notice, the dispute can be referred to the MSEFC for arbitration.
3. Appointment of Arbitrator: The MSEFC will appoint an arbitrator to hear the dispute.
4. Award: The arbitrator will pass an award within 90 days of the reference being made to the MSEFC. The award is binding on both parties.

Arbitration under the MSME Act is a quick, cost-effective, and efficient way of resolving disputes between MSMEs and their buyers. It provides an expert and confidential forum for resolving disputes, which can help MSMEs avoid costly and time-consuming court proceedings. The provision for arbitration under the MSME Act is a significant step towards promoting and supporting the growth of the MSME sector in India.