MSME rejection does not extinguish arbitration rights under contract, holds Delhi high court

Delhi High Court Rules MSME Rejection Doesn't Nullify Arbitration Rights Under Contract

Newton Engineering and Chemicals Ltd. v. Indian Oil Corporation Ltd. | LPA 254/2026 | Delhi High Court | April 16, 2026

The Delhi High Court has held that a contractor who approaches the Micro, Small and Medium Enterprises Facilitation Council (MSMFC) and receives a rejection on maintainability does not thereby lose the right to invoke arbitration under the original contract. The Division Bench, comprising Chief Justice Devendra Kumar Upadhyaya and Justice Anish Dayal, set aside a Single Judge order that had dismissed a writ petition as non-maintainable and directed Indian Oil Corporation Ltd. to complete the pre-arbitration determination under its own General Conditions of Contract within eight weeks.

Background

The dispute arose from a contract executed in October 2011 between Newton Engineering and Chemicals Ltd. and Indian Oil Corporation Ltd. for Mechanical and Piping Works at Mathura Refinery. Upon completion of the work, disputes arose and the appellant invoked arbitration in June 2019 under Clause 9.0.1.0 of the General Conditions of Contract.

The arbitration clause under the GCC required that only 'notified claims' could be referred to arbitration. Clause 9.0.2.0 provided that the General Manager of Indian Oil Corporation must first decide whether the claim sought to be arbitrated qualified as a 'notified claim', before the arbitrator could proceed with the reference.

After the invocation, Indian Oil Corporation initiated the process under Clause 9.0.2.0 and the appellant was given time to file a reply. However, a hearing scheduled via video conference in September 2020 never took place, as the appellant did not receive any link or call from the respondent. The matter fell into inactivity thereafter.

Left with no progress, the appellant moved the State Level MSMFC under Section 18(1) of the MSME Development Act, 2006. The MSMFC ultimately held, in April 2025, that the appellant did not qualify as a 'supplier' under Section 2(n) of the MSME Act and that the reference was not maintainable. No decision on the merits of the claims was rendered.

The appellant then sent communications to Indian Oil Corporation seeking to restart the arbitration process under the GCC, received no response, and eventually filed a writ petition. The Single Judge held the writ petition to be non-maintainable.

Submissions and Court's Analysis

Before the Division Bench, Indian Oil Corporation argued that by electing to go before the MSMFC, the appellant had abandoned the remedy of arbitration under the GCC, and consequently the process under Clause 9.0.2.0 stood extinguished.

The Court rejected this argument on two grounds. First, the Court noted that no provision under the MSME Act bars a party from availing arbitration under an original contract after receiving a rejection from the MSMFC. Counsel for the respondent could not point to any such exclusionary provision. In the Court's view, it would be impermissible to hold that a party who legitimately attempted to use the MSME mechanism and was turned away is left entirely remediless.

Second, the Court rejected the theory of abandonment as fundamentally inconsistent with the respondent's own conduct. Indian Oil Corporation had agreed to the arbitration clause under Section 9 of the GCC and had itself initiated the Clause 9.0.2.0 process. Having initiated that process and then failed to conduct the hearing or maintain communication, it was not open to the respondent to characterise the situation as an abandonment. The Court held that a party cannot rely on its own omission to complete a contractual process in order to render the other party remediless.

Directions

The Court held that the original invocation of arbitration remained valid and directed the General Manager of Indian Oil Corporation to complete the determination under Clause 9.0.2.0 within eight weeks. The Court further held that the entire period from the original invocation up to the date of the order shall not be counted for the purposes of limitation, given that the MSME proceedings were a legitimate attempt at dispute resolution.

The impugned order of the Single Judge was set aside. The Court clarified that the MSMFC order, which did not go into the merits, would have no effect on further proceedings.