Ad hoc arbitration is valid and interest under Section 16 MSMED Act is applicable despite non-invocation of Section 18.

The Petitioner (BSNL) issued a tender for VRLA batteries in 2016, and the Respondent, a registered Small Enterprise under the MSMED Act, was the successful bidder

Following disputes over delayed delivery and price reductions, BSNL unilaterally appointed an arbitrator under the contract’s General Conditions of Contract (GCC)

Upon Respondent's objection, the Bombay High Court substituted the arbitrator with an independent sole arbitrator

The Arbitral Tribunal awarded the Respondent ₹2,76,82,030/-, including interest under Section 16 of the MSMED Act

BSNL challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996, primarily contending that the arbitrator lacked jurisdiction because MSMED disputes must be resolved exclusively by the Facilitation Council under Section 18 of the MSMED Act

Whether a private ad hoc arbitrator is divested of jurisdiction to decide a dispute merely because one party is an MSME entity, in the absence of a reference to the Facilitation Council under Section 18 of the MSMED Act

Whether an Arbitral Tribunal appointed under the Arbitration Act (outside the MSMED statutory machinery) has the power to award compound interest under Section 16 of the MSMED Act

The court applied Section 18 of the MSMED Act, which provides a non-obstante mechanism for MSMEs to refer payment disputes to a Facilitation Council

It relied on the precedent Gujarat State Civil Supplies Corp. Ltd. v. Mahakali Foods Pvt. Ltd., which established that the MSMED Act overrides the Arbitration Act once the Section 18 mechanism is "triggered"

Further, it applied the principle from Porwal Sales v. Flame Control Industries, holding that Section 18 is an optional, not mandatory, remedy for the supplier

Regarding interest, the court followed Indian Highways Management Co. Ltd. v. SOWIL Ltd., asserting that Sections 15 and 16 of the MSMED Act create substantive rights to interest that are independent of the procedural machinery in Section 18

The Court reasoned that the overriding effect of the MSMED Act over the Arbitration Act only manifests once a party actually "triggers" the statutory process by making a reference to the Facilitation Council

In this case, neither party approached the Council; instead, BSNL itself initiated ad hoc arbitration, and both parties consented to the High Court’s appointment of a substitute arbitrator

The Court held that the MSMED Act does not create an absolute bar to private arbitration if the parties choose that forum

Furthermore, the Court determined that the right to compound interest at three times the bank rate under Section 16 is a substantive statutory right for any "supplier" who is not paid on time

This right is not contingent upon the dispute being heard by the Facilitation Council and must be enforced by any Arbitral Tribunal, including an ad hoc one

It further held that the award of interest under Section 16 of the MSMED Act was legally sound regardless of the forum

The Court upheld the award of ₹2,76,82,030/-, ruling that interpretation of contractual price-revision clauses falls within the arbitrator's exclusive domain

All interim applications were disposed of