Summary: The recent decision in GEA Westfalia highlights the importance of an exclusive jurisdiction clause in contracts involving MSMEs, particularly for determining the court with the jurisdiction to hear challenges to awards passed as part of the mandatory statutory arbitration under the MSMED Act.
Introduction
Party autonomy is a fundamental component of arbitration. However, statutes mandating reference to arbitration override an arbitration agreement that may already have been agreed upon by the parties. One such mandate is provided by the Micro, Small, and Medium Enterprises Development Act, 2006 (“MSMED Act”).
Legal landscape
The MSMED Act is aimed at supporting micro, small, and medium enterprises (“MSMEs”). The mode and manner of resolution of disputes involving an MSME is outlined by Section 18 of the MSMED Act, which mandates statutory arbitration, after an unsuccessful mediation, by the Micro and Small Enterprises Facilitation Council (“Facilitation Council”) with jurisdiction over the supplier’s location.
Any such arbitration under the MSMED Act is deemed to be conducted as if in pursuance of an arbitration agreement under the Arbitration and Conciliation Act, 1996 (“A&C Act”). As a special law, the MSMED Act overrides the A&C Act by providing for a specific dispute resolution mechanism for a particular category of persons and disputes. Consequently, the arbitration agreement is eclipsed by Section 18 of the MSMED Act.
Facts of the GEA Westfalia case
In the recent GEA Westfalia[1] case, the Bombay High Court (“Court”) addressed a conflict between party autonomy at the root of an arbitration and statutory mandate under the MSMED Act. The dispute was between a Pune-based supplier and a Vadodara-based buyer. Their arbitration agreement stipulated that any dispute would exclusively be referred to “arbitration in Mumbai” in accordance with the ICADR Arbitration Rules. However, when the dispute arose, the Facilitation Council based in Pune conducted an arbitration and passed an award in terms of Section 18 of the MSMED Act.
The Petitioner approached the Court seeking setting aside of the award. The Respondent raised a preliminary objection against the territorial jurisdiction of the Court to decide on challenge under Section 34 of the A&C Act against the arbitral award passed by the Facilitation Council in Pune.
The Petitioner argued that since the parties agreed to designate Mumbai as the seat of the arbitration, Pune was only a convenient venue. The Petitioner relied on the judgment of the division bench of the Court in Gammon Engineers,[2] where the statutory arbitration was conducted in Shimla, but the Court determined Mumbai to be the seat based on a clause in the agreement between the parties granting exclusive jurisdiction to courts in Mumbai over all matters.
The Court, however, held that the arbitration proceedings were conducted pursuant to the MSMED Act and had no connection with the arbitration agreement between the parties. It concluded that every activity in the arbitration proceeding indicated that Pune should be considered the seat. Consequently, the appropriate court to deal with challenge to the award would be the relevant court in Pune.
Analysis
The Court distinguished Gammon from the instant case based on the existence of an exclusive jurisdiction clause, which was absent in the latter. In Gammon, the Court held that Section 18 of the MSMED Act would not obliterate the exclusive jurisdiction clause that contractually binds the parties. In this case, however, in the absence of an exclusive jurisdiction clause, the Court considered statutory territorial jurisdiction to be a strong factor for determining Pune as the seat of arbitration. It dismissed reliance on the arbitration clause in the absence of an exclusive jurisdiction clause for determining the seat of arbitration. This approach places contracts containing neither arbitration nor exclusive jurisdiction clauses on the same footing as contracts with an arbitration clause but without an exclusive jurisdiction clause for the purposes of determining the appropriate forum for challenging an award passed under the MSMED Act. In both scenarios, the venue of the Facilitation Council, i.e., the supplier’s place of business, becomes the primary determinant of the seat of the arbitration and, consequently, the appropriate court for challenging the award.
Key takeaways
The decision has practical implications on parties dealing with MSMEs in the event of a dispute. First, the statutory arbitration mechanism under the MSMED Act is mandatory and replaces any arbitration agreement the parties enter into.[3] Consequently, if an MSME is involved, parties to the dispute have no alternative but to participate in the arbitration proceedings before the Facilitation Council with territorial jurisdiction over the supplier (or before an institution chosen by that Facilitation Council).
Second, the appropriate court for challenging an arbitral award so passed depends on how the contract between the parties is structured. Three situations may arise based on whether the agreement between the parties contains clauses for exclusive jurisdiction and arbitration:
| Structure of the agreement between the parties | Factor for determining the seat | Appropriate court to consider challenge to the award |
| No arbitration clause[4] | Location of the Facilitation Council | The court with jurisdiction over the location of the Facilitation Council |
| An arbitration clause but not an exclusive jurisdiction clause[5] | ||
| Both, an arbitration clause and an exclusive jurisdiction clause[6] | Exclusive jurisdiction clause | The court the parties have chosen to confer exclusive jurisdiction on |
Conclusion
The arbitration agreement between the parties is deemed to be overridden by the scheme provided under the MSMED Act. Consequently, an arbitration clause, especially on its own, appears to be irrelevant for determining the seat court in disputes covered under the MSMED Act, making the exclusive jurisdiction clause crucial for such determination. Given the evolving landscape around party autonomy and statutory arbitration, parties may consider maintaining the arbitration clause in their agreements with MSMEs. Therefore, careful drafting of agreements is crucial to ensure that parties retain their autonomy in approaching the court that they agreed upon.
For further information, please contact:
Sara Sundaram, Partner, Cyril Amarchand Mangaldas
sara.sundaram@cyrilshroff.com
[1] GEA Westfalia Separator India (P) Ltd. v. SVS Aqua Technologies LLP, 2025 SCC OnLine Bom 3157.
[2] Gammon Engineers and Contractors Private Limited v. Rohit Sood 2024 SCC Online Bom 3304.
[3] Gujarat State Civil Supplies Corpn. Ltd. v. Mahakali Foods (P) Ltd., (2023) 6 SCC 401.
[4] Ahluwalia Contracts (India) Ltd. v. Ozone Research & Applications 2023 SCC Online Del 518.
[5] GEA Westfalia (n 2).
[6] Gammon Engineers (n 3).
