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MSME Has No Jurisdiction to Adjudicate Upon Works Contract: Court Insights

In the realm of business disputes involving micro, small, and medium enterprises (MSMEs), a critical question often arises: Does the MSME have no jurisdiction to adjudicate upon works contracts? This issue pits the protective provisions of the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 against standard arbitration agreements under the Arbitration and Conciliation Act, 1996. Recent court rulings provide clarity, particularly highlighting limitations on Facilitation Councils when dealing with works contracts—agreements primarily involving labor, services, and construction rather than pure supply of goods.

This blog post breaks down key judicial precedents, explaining how courts have generally ruled that MSME bodies lack jurisdiction over works contracts in many cases, while noting exceptions and procedural nuances. Note: This is general information based on case law and not specific legal advice. Consult a qualified lawyer for your situation.

Understanding the MSMED Act and Its Dispute Resolution Mechanism

The MSMED Act, 2006 aims to protect small businesses by ensuring timely payments and streamlined dispute resolution. Under Section 18, disputes can be referred to the Micro and Small Enterprises Facilitation Council (MSEFC), which first attempts conciliation and, if it fails, proceeds to arbitration following the Arbitration Act.

Key features include:
- Overriding effect: The Act's special provisions often prevail over general laws like the Arbitration Act, especially for registered MSMEs. GUJARAT STATE CIVIL SUPPLIES CORPORATION LTD. VS MAHAKALI FOODS PVT. LTD. (UNIT 2) - 2022 Supreme(SC) 1106
- Jurisdiction: Typically based on the supplier's location, overriding contractual clauses. Alfa Therm Limited, 6, Community Centre, Mayapuri, vs Commissioner, Usilampatti Municipality, Usilampatti, Madurai District, Tamil Nadu - 2025 Supreme(Mad) 3679
- Mandatory deposit: Under Section 19, buyers must deposit 75% of the award to challenge it under Section 34 of the Arbitration Act. Aryan Ispat and Power Private Limited vs General Manager O/o The District Industries Centre, Rourkela - 2026 Supreme(Ori) 31

However, this mechanism isn't unlimited. Courts have repeatedly examined whether MSEFCs can handle works contracts, which blend supply of materials with significant service components like construction or installation.

Core Issue: MSME Jurisdiction Over Works Contracts

Works contracts are distinct from pure supply agreements. They involve execution of work, such as building infrastructure, where goods are incidental to services. Multiple High Courts have held that MSEFCs lack inherent jurisdiction over such disputes:

Key Rulings Denying Jurisdiction

• In a case involving a works contract for pipeline erection, the court ruled the MSEFC lacks jurisdiction because the Act targets supply of goods and services, not composite works contracts. The award was set aside due to jurisdictional error. Indian Oil Corporation Ltd. vs Adarsh Nobel Corporation Ltd. - 2025 Supreme(Ori) 780


• Similarly, for a power plant project, the court quashed MSEFC proceedings, stating works contracts cannot invoke the jurisdiction of MSEFC under the MSMED Act, directing parties to conventional arbitration. Bridge and Roof Company (India) Ltd. Kolkata vs State of Orissa - 2026 Supreme(Ori) 42


• Another ruling emphasized: The Facilitation Council cannot adjudicate disputes arising from works contracts, as defined under the MSME Act, and that consent cannot confer jurisdiction where none exists. KMV Projects Limited vs Andhra Pradesh Micro and Small Enterprises Facilitation Council - 2025 Supreme(AP) 391

These decisions underscore that MSEFCs' scope under Sections 2, 7, 8, and 18 is limited to disputes over goods and straightforward services, excluding works contracts which fall under traditional arbitration or civil courts.

Contrasting Views: When Jurisdiction is Upheld

Not all cases align. Some courts have affirmed MSEFC authority even for contracts with works elements:
- Despite an arbitration clause, one court held the Council has jurisdiction to adjudicate disputes in cases of works contracts, liberally interpreting the MSMED Act as beneficial legislation. It relied on the definition in Kone Elevator India Pvt. Ltd. v. State of Tamil Nadu, stating works contracts aren't excluded if they meet MSME criteria. Hindustan Petroleum Corporation Limited VS West Bengal State Micro, Small Enterprises Facilitation Council - 2023 Supreme(Cal) 1161
- In a sub-contractor dispute for bridge construction, the court noted jurisdiction limits but dismissed writ petitions as premature, directing resolution within arbitration post-mediation. Sree Infratech India Private Limited vs The Chairman (MSEFC) & Director (Ind. & Com), Micro and Small Enterprises Facilitation Council (MSEFC) - 2025 Supreme(Online)(Mad) 69900

This split highlights that registration timing matters: Post-contract registration may not always bar claims if supplies occurred afterward. Jaiprakash Associates Ltd. VS Micro And Small Enterprises Facilitation Council (South East) Govt. of NCT of Delhi - 2023 Supreme(Del) 738

MSMED Act vs. Arbitration Act: Which Prevails?

A recurring theme is the MSMED Act's precedence as special legislation:
- Supreme Court: MSMED Act provisions override Arbitration Act in specific contexts, allowing claims under MSMED Act despite existing arbitration agreements. GUJARAT STATE CIVIL SUPPLIES CORPORATION LTD. VS MAHAKALI FOODS PVT. LTD. (UNIT 2) - 2022 Supreme(SC) 1106
- High Courts echo this for non-works disputes, but carve out exceptions for works contracts. For instance, statutory remedies take precedence over private arbitration if the claimant is a registered MSME at contract execution. Dalmia Cement (Bharat) Limited vs ESS ESS Technofabs Private Limited - 2026 Supreme(Del) 194

However, for works contracts, courts intervene via Article 226 writs when MSEFCs act without inherent jurisdiction. Indian Oil Corporation Ltd. vs Adarsh Nobel Corporation Ltd. - 2025 Supreme(Ori) 780 Bridge and Roof Company (India) Ltd. Kolkata vs State of Orissa - 2026 Supreme(Ori) 42

Procedural Safeguards and Challenges

• Seat of Arbitration: Determines supervisory court jurisdiction; MSEFC arbitration follows supplier's location. Geniemode Global Pvt. Ltd. vs Priyanka Impex Private Limited - 2026 Supreme(Del) 73


• Non-Signatories: Referral courts must prima facie check if non-signatories are bound by arbitration agreements. Hindustan Petroleum Corporation Ltd. VS BCL Secure Premises Pvt. Ltd. - 2026 1 Supreme 622


• Deposit Requirement: Mandatory for challenging awards, protecting MSMEs from delays. Aryan Ispat and Power Private Limited vs General Manager O/o The District Industries Centre, Rourkela - 2026 Supreme(Ori) 31

Registration Requirements: A Prerequisite?

Courts differ on whether Section 8 registration is mandatory before contract execution:
- One ruling: Not a prerequisite for Section 18 reference; any party can approach the Council. Referred to larger bench. NBCC (India) Ltd. VS State of West Bengal - 2025 Supreme(SC) 86
- Others: Applicable if registered at execution time. Dalmia Cement (Bharat) Limited vs ESS ESS Technofabs Private Limited - 2026 Supreme(Del) 194

Practical Implications for Businesses

• MSMEs: Register early and assess contract nature. For pure supplies, leverage MSEFC for faster resolution.


• Buyers: Challenge jurisdiction early if it's a works contract; prefer arbitration clauses.


• Dispute Strategy:


• Attempt conciliation under MSEFC if eligible.


• Raise jurisdiction objections before the tribunal. V.K.S. Constructions vs State of Telangana - 2025 Supreme(Telangana) 10


• Appeal under Section 37 if needed, avoiding premature writs.

Public procurement adds layers: MSE policies don't apply to works contracts or where core services are by non-MSEs. Thoughtsol Infotech Private Limited vs Union Of India - 2025 Supreme(All) 59

Key Takeaways

• Generally, MSME Facilitation Councils lack jurisdiction over pure works contracts, pushing disputes to arbitration under the 1996 Act. Indian Oil Corporation Ltd. vs Adarsh Nobel Corporation Ltd. - 2025 Supreme(Ori) 780 KMV Projects Limited vs Andhra Pradesh Micro and Small Enterprises Facilitation Council - 2025 Supreme(AP) 391


• The MSMED Act overrides arbitration agreements for eligible supply/service disputes, promoting MSME protection. GUJARAT STATE CIVIL SUPPLIES CORPORATION LTD. VS MAHAKALI FOODS PVT. LTD. (UNIT 2) - 2022 Supreme(SC) 1106


• Registration and contract nature are pivotal; courts liberally interpret for MSME benefit but respect jurisdictional limits.


• Seek expert advice: Outcomes vary by facts, registration status, and jurisdiction. Larger benches may clarify ambiguities. NBCC (India) Ltd. VS State of West Bengal - 2025 Supreme(SC) 86

In summary, while the MSMED Act empowers MSEFCs powerfully, msme has no jurisdiction to adjudicate upon works contract in many scenarios, ensuring disputes fit the right forum. Stay informed on evolving case law to navigate these complexities effectively.

Disclaimer: This post summarizes judicial trends and is for informational purposes only. Legal outcomes depend on specific facts; professional counsel is recommended.