Ad hoc arbitration is valid for MSME disputes where statutory mechanism under Section 18 is not triggered.

The Petitioner (BSNL) awarded a tender to the Respondent (a registered MSME) for the supply of batteries in 2016.

Following disputes over delayed delivery and price reductions, BSNL unilaterally appointed an arbitrator under Clause 20 of the GCC.

The Respondent challenged the unilateral appointment before the Bombay High Court, which, with BSNL’s consent, appointed an independent sole arbitrator on November 25, 2021.

After the Arbitral Tribunal awarded the Respondent ₹2,76,82,030/- plus interest under the MSMED Act on May 3, 2024, BSNL challenged the award under Section 34 of the Arbitration Act.

BSNL contended for the first time in written submissions that the ad-hoc arbitrator lacked jurisdiction as the matter should have been referred to 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 1996 can award compound interest at three times the bank rate as prescribed under Section 16 of the MSMED Act.

The court primarily applied Section 18 of the MSMED Act, which provides a statutory mechanism for dispute resolution for MSMEs but is triggered only when a party makes a reference.

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

Furthermore, it applied the principle from *Porwal Sales v. Flame Control Industries*, establishing that Section 18 is an optional remedy and does not create an absolute bar to ad-hoc arbitration if no reference is made to the Council.

Regarding interest, the court applied Sections 15 and 16 of the MSMED Act, which create substantive rights to interest for suppliers independent of the forum of adjudication, as affirmed in *Shristi Infrastructure Development v. Scorpio Engineering*.

The court reasoned that while the MSMED Act has an overriding effect, this priority is only activated when a party "triggers" the statutory mechanism by making a reference to the Facilitation Council.

In this case, neither party approached the Council; instead, BSNL itself initiated ad-hoc arbitration and later consented to a court-appointed arbitrator.

The court held that *Mahakali Foods* does not divest an ad-hoc arbitrator of jurisdiction if the parties voluntarily opt for that route and no statutory reference is pending.

On the issue of interest, the court determined that Sections 15 and 16 of the MSMED Act are substantive provisions intended to ensure liquidity for small enterprises.

Since these are substantive rights, an ad-hoc arbitrator is bound to apply them to any "supplier" under the Act, regardless of whether the arbitration was conducted under the aegis of the Facilitation Council.

On the second issue, it held that the award of interest under Section 16 of the MSMED Act by an ad-hoc arbitrator is legally valid.

The court dismissed the Petition, upholding the arbitral award of ₹2,76,82,030/- and the application of MSMED interest rates.

All interim applications were disposed of accordingly.