A small supplier sells goods worth lakhs to a big buyer. The buyer doesn’t pay for months. The supplier thinks of sending a notice to the Micro and Small Enterprises Facilitation Council. The buyer shows the contract and says: “I told you. You agreed to private arbitration. You cannot approach the MSEFC. If the payment dispute falls under the delayed-payment provisions of the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006, having an independent arbitration clause in the contract with the buyer does not per se bar reference to the MS Med Act, Section 18. The Supreme Court has ruled multiple times that the statutory remedy under the MSMED Act overrides conflicting contractual arbitration agreements. Such relief has been especially helpful to micro and small businesses that are being crushed by delayed invoices. Strictly speaking, the MSEFC remedy exists only for qualifying micro & small enterprises under the MSMED Act. Do NOT take for granted that because your business qualifies as an MSME, you automatically get the same delayed-payment remedies that qualifying micro & small enterprises do. There could still be thorny issues involving the nature of the enterprise, supply, invoices, limitation, jurisdiction, timing of registration, setoffs and counterclaims and the true amount payable. An arbitration clause would just be one factor in that analysis. Advocate BK Singh can help analyze the contract and payment history in cases where a buyer tries to invoke an arbitration clause to avoid MSEFC action. Arbitration clauses are common in commercial contracts. Many of these are drafted by big purchasers well before a payments dispute surfaces. They mandate the arbitral institution, seat, procedure and appointment mechanism. The micro or small enterprise discovering its receivables blocked may then uncover the MSMED Act separately grants a statutory dispute-resolution mechanism. Section 18 starts with a non-obstante clause. It allows a reference with respect to any amount due under Section 17. Conciliation is first attempted and, failing that, arbitration by the Council, or such institution or centre to which the matter is referred, is provided for. Jurisdiction is separately granted to the Council if the supplier is located within its territorial jurisdiction and the buyer is located anywhere in India, under Section 18(4). If you are running an enterprise that is short of cash, the question of forum matters because payment dues impact salaries, raw-material supply orders, GST payments, borrowing capacity and daily business activity. Advocate BK Singh can help you figure out if your dispute squarely falls under this statutory framework or if it falls under the arbitration mechanism agreed in your contract. The MSMED Act has a built-in payment-protection mechanism for MSMEs. Under Section 15 the buyer must make payment on the date agreed to in writing. Notwithstanding the agreement for credit, the period agreed cannot be more than 45 days from the date of acceptance or deemed acceptance. If payment is not made in compliance with Section 15, Section 16 mandates payment of compound interest with monthly rests at three times the bank rate declared by RBI. Section 17 allows the buyer to be sued for the principal amount as well as that interest. Section 18 provides the dispute resolution mechanism next. Notice the order. The MSEFC route isn’t an arbitration clause the parties have happily tucked into their contract. It’s provided by statute. BK Singh Advocate will then look at invoices, proof of delivery and payment terms before determining the procedural forum. More often than not, manufacturers, sellers, consultants, technology service providers, fabricators, contractors and other small businesses which provide goods or supply services against deferred payment terms fall within the ambit. Buyers too should tread carefully. One can ill afford to receive an MSEFC reference with reliance solely on the arbitration agreement in the contract and face procedural roadblocks if the dispute at hand takes exception to the interpretation of Section 18 by the Supreme Court. Simultaneously, the mention of “MSME registered” should not be considered as a blanket reply to every jurisdictional objection raised. Since Section 2(n) defines “supplier” only in relation to micro and small enterprises as well as the designated categories. Therefore chapter V which deals with delayed-payment cannot be a receivable forum for all those who fall under the wide definition of MSMEs. Senior Lawyer Advocate BK Singh can determine the predicament in which the claimant pleads the statute. Essential review will usually include: Documents should always be reviewed holistically. The complainant may have strong invoices but weak evidence of delivery. The buyer may have quality complaints which were not raised until after the non-payment dispute started. Advocate BK Singh can use the chronology of documents to pinpoint the true nature of dispute prior to arguments being made in the forum. If the buyer is attempting to rely on an arbitration clause to oust MSEFC jurisdiction, the parties have initiated private arbitration, registration occurred after the contract was entered into, the buyer is disputing that the claimant is entitled to Chapter V protection, or a significant counterclaim is raised, a legal review can still be helpful. It can also be prudent to seek a legal review promptly upon receiving a notice of conciliation/arbitration from MSEFC. Many questions regarding Section 18 are both jurisdictional and financial in nature. Waiting until after an award is rendered can significantly change the practical outcome due to Section 19. Advocate BK Singh can be reached through MSME Lawyers to provide document review of delayed-payment and MSEFC claims. MSME Lawyers can help suppliers and buyers with purchase order review, arbitration clauses, invoices, MSME registrations records and correspondence for delayed-payment disputes. BK Singh can help determine if Section 18 is applicable, whether the contract arbitration clause displaces any remaining disputes, what jurisdictional objections must be raised and if the matter is at conciliation, arbitration or award challenge stage. Legal representation does not assure recovery of money or defeat of a claim against you. Each situation depends on the contract, evidence, enterprise status and governing law. Ans. No. Arbitration clause cannot by itself prevent a Section 18 reference. As per Supreme Court ruling in Foods, if a valid Section 18 reference is initiated, the proceedings can continue despite the existence of a standalone arbitration agreement. Ans. MSMED Act prevails over Arbitration Act in matters covered under Chapter 5. The Apex Court has ruled that the MSMED Act has an overriding effect in relation to the Arbitration and Conciliation Act to the extent of any inconsistency. Ans. Conciliation is the first step in this statutory mechanism. Failing conciliation, the Council tries to arbitrate. Failing arbitration, the Council can refer the dispute to an ADR institution or an ADR centre for arbitration. Ans. Yes. As per Section 18(4), the Council or the ADR centre (as the case may be) within whose jurisdiction the supplier has a residence or place of business is empowered to entertain the dispute even if the buyer is situated elsewhere in India. Ans. Delayed-payment provisions are subject to meticulous compliance with statutory definition of “supplier”, which refers specifically not only to micro and small enterprises, but also to other defined categories. Ans. 45 days from the date of acceptance or deemed acceptance. As per Section 15, the period of payment agreed to in writing between the buyer and supplier cannot exceed 45 days. Ans. Triple the bank rate notified by RBI. As per Section 16, the interest on delayed payments is calculated as compound interest with monthly rests at a rate of three times the notified bank rate. Ans. It was assumed to be so till not so long ago. NBCC in 20 25 passed doubt on considering pre-registration as a per-condition requirement for filing a Section 18 reference. The issue was referred to a larger Bench. As per a recent update from the Delhi High Court in April 2026, the matter is pending before that Bench. Ans. Partially. As per Section 19, if a party (other than the supplier) challenges the decree/order/award by filing an application to set aside the same, no court is supposed to entertain the application, unless 75% of the amount as deemed fit by the court is deposited. Ans. Yes, Advocate BK Singh can help you with contract review, determining MSME status, recovering pending invoices from defaulting buyers, raising jurisdictional objections, handling conciliation proceedings, arbitration related issues etc. The nature of legal remedy depends on facts and documents of each case. The existence of an arbitration clause would not per se oust the jurisdiction of MSEFC from being approached by an MSME. Section 18 imports a statutory process for resolving a qualifying delayed- payment dispute even in the face of an arbitration agreement entered into separately by contract. Enterprise-status issues, date of registration, nature of supply, jurisdictional issues and evidence required to show outstanding dues are generally the tougher queries. BK Singh can be contacted for advice where these issues need a legal analysis based on the documents.Does Arbitration Clause Prevent an MSME from filing a claim with the MSEFC?
Why This Question Matters for MSMEs in 2026
Quick Facts
Where does the MSMED Act provide for delayed payments?
Who should Carefully Consider MSEFC Jurisdiction?
Documents That Matter in an MSEFC Dispute
When Should You Consult an MSME Lawyer?
How Can MSME Lawyers Help?
Frequently Asked Questions
Q1. Can a sole arbitration clause prevent an MSME from approaching MSEFC ?
Q2. Does the MSMED Act prevail over the Arbitration Act?
Q3. What is the procedure followed after Section 18 reference?
Q4. Can MSEFC entertain disputes where the buyer is situated in another State?
Q5. Are all MSME’s eligible for delayed-payment protection?
Q6. What is the maximum period for payment that can be agreed upon by parties under the MSMED Act?
Q7. What rate of interest can be claimed for delayed payments to MSME’s?
Q8. Must the MSME have been registered at the time of contract?
Q9. Must one deposit 75% of the awarded amount to file a challenge against an MSEFC award?
Q10. Can Advocate BK Singh help with MSEFC related arbitrations?
Conclusion
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