DIAC Arbitration or MSME Facilitation Council: Which Route for a Supplier?

The short answer

For a micro or small supplier registered under the MSMED Act, the MSME Facilitation Council is usually the cheaper route. It also gives you a real hold over the buyer. The buyer can't challenge a Council award without first depositing 75 percent of it. If you're a medium enterprise, aren't registered, or registered only after the contract, the Council door is either shut or uncertain. DIAC arbitration (or a commercial suit) is then the safer bet.

DIAC, the Delhi International Arbitration Centre, is the Delhi High Court's own creation. It has operated from the High Court premises in New Delhi since 2009, running arbitrations under its rules with arbitrators drawn from its panel. An MSEFC, or Micro and Small Enterprises Facilitation Council, is a different animal. State governments set these up under Section 20 of the MSMED Act, so each one is a statutory body. Conciliation comes first. When that fails, the Council either arbitrates the dispute itself or passes it to an arbitration institution.

Don't assume either one is faster. Councils are meant to decide a reference within 90 days, but in Delhi NCR that rarely happens. DIAC works to the statutory clock in Section 29A of the Arbitration Act, with the award due within 12 months of pleadings closing. The real differences lie elsewhere. Cost, for one. How good and predictable the arbitrators are. The 75 percent deposit. And whether you qualify for the Council in the first place.

The two routes side by side

Who can actually use the Council?

Section 18 for delayed payment is open only to suppliers that are micro or small enterprises. Medium enterprises register on the very same Udyam portal, yet they're left out. Which category you fall in depends on investment in plant and machinery or equipment, and on turnover, as the current notification sets them. Your Udyam certificate shows the category. If your turnover has grown since registration, check it again.

There's a paperwork condition too. The supplier must have filed its memorandum, or registered, under Section 8 of the Act, and Udyam took over from Udyog Aadhaar in July 2020. The real fight is usually about when you registered. Silpi Industries v. Kerala SRTC (2021) is the Supreme Court judgment buyers quote: no registration before the contract, no benefits. In NBCC (India) Ltd v. State of West Bengal (January 2025) a different bench disagreed. It took the view that lack of registration alone isn't a reason to throw out a Section 18 reference, and sent the issue up to a larger bench. As of October 2026, that larger bench hadn't ruled. Find out the current position before you bank on a late registration.

On the ground, Councils and buyers still raise the registration date at the very first hearing. If you registered after the purchase order, expect that objection, and keep DIAC or a suit ready as a fallback. Traders are a separate worry. Retail and wholesale traders were let onto Udyam in 2021 for priority sector lending, and there's real doubt whether they can claim delayed-payment protection. Take advice before you file as a trader.

The buyer can be anyone at all. A private company, a partnership, a PSU, a government department. That's one reason Section 18 is so popular with suppliers to big buyers in Noida, Gurugram and Delhi who habitually pay in 90 or 120 days.

The law behind each route

Can the Council override your DIAC clause?

Yes, as long as the supplier is eligible and chooses the Council. The leading case is Gujarat State Civil Supplies Corporation v. Mahakali Foods (2022). The Supreme Court ruled there that Chapter V of the MSMED Act sits above both the Arbitration Act and any private arbitration agreement. So when a qualifying supplier files under Section 18, the buyer has no right to drag the matter back to DIAC. High Courts, in rulings during 2025 among others, have followed the same line.

The choice belongs to the supplier, not the buyer. Section 18 says a party 'may' make a reference. It doesn't push a supplier into the Council. A registered micro supplier with a DIAC clause can still go to DIAC if it would rather have a panel arbitrator, and many do for bigger claims. What you shouldn't do is run both at once on the same invoices. Parallel cases invite objections, double your costs and risk two awards that don't agree.

Sometimes the buyer gets in first, say with a DIAC claim for damages over defective goods. That doesn't shut the supplier out. It can still file its own Section 18 reference for the unpaid price, and for that claim the Council route generally prevails. Silpi Industries confirmed that a buyer's counter claim can be heard by the Council, so the buyer can raise it there. Either way, the opening months tend to go on a fight about which forum proceeds. Plan for it.

How a Section 18 reference actually runs

The broad pattern is the same in Delhi, UP and Haryana. Each state has its own rules and habits, though.

1. Check you qualify, and do the maths

   Confirm your Udyam category and registration date. List every unpaid invoice with its acceptance date, and work out when each payment fell due under Section 15. Then calculate Section 16 interest invoice by invoice. The Council will ask for it.

2. Send a demand notice

   It isn't compulsory. But a clear notice listing the invoices, due dates and statutory interest often gets you paid, or gets you a written admission. It also puts the buyer's response on record, which helps if quality complaints suddenly appear later.

3. File the reference

   References usually go in online through the MSME Samadhaan portal, and then to the Council for the state where your unit sits, with the invoices, delivery proof, ledger and Udyam certificate attached. Some Councils want a hard copy set too. Check what your state currently does.

4. Conciliation

   The Council sends notice to the buyer and holds conciliation sittings. A lot of buyers settle or pay something at this stage, PSUs especially. If they do, get the terms in writing, because a conciliation settlement can be enforced.

5. Arbitration by the Council or an institution

   If conciliation goes nowhere, the Council either arbitrates itself, usually through a bench of its members, or refers the case to an arbitration centre. Pleadings, documents and hearings follow, often squeezed into a shorter form.

6. The award, and the 75 percent deposit

   It's an ordinary arbitral award. If the buyer wants to challenge it under Section 34, the court won't hear the challenge until 75 percent of the award is deposited. If no challenge is filed in time, the supplier executes the award under Section 36.

And the same claim at DIAC

This is the quick version. Each stage is covered properly in our guide to the DIAC arbitration process.

1. Notice invoking arbitration

   You send the buyer a notice under the arbitration clause. Arbitration commences when the buyer receives it (Section 21). That stops limitation running.

2. Request to DIAC, and the fee deposit

   You file the request with the Centre and pay the filing and administrative charges. The Centre then fixes the deposit towards the arbitrators' fees, normally split equally between the two sides.

3. The tribunal is formed

   A sole arbitrator or a three-member tribunal is appointed from the DIAC panel, as the clause and the rules provide. Neither party gets to appoint the arbitrator on its own.

4. Pleadings and hearings

   Statement of claim, defence and any counter claim. Then documents, evidence by affidavit, cross-examination and arguments. Hearings happen at the Centre or by video conference, so check current practice.

5. The award

   It's due within 12 months of pleadings closing, extendable by six months by consent, and beyond that only by the court. Once made, it's open to a Section 34 challenge within three months.

Time and money on each route

Will DIAC also give me three times the bank rate?

Your right to this interest is created by the statute. It doesn't depend on the forum. Read Sections 16 and 17 together and a registered micro or small supplier can claim it in a DIAC arbitration, or in a civil suit, and the tribunal must deal with the claim. What changes is the practice. At the Council, Section 16 interest is routine. A DIAC tribunal will want to examine your eligibility, your registration date and the agreed payment terms before it awards anything.

Three times the RBI bank rate is a big number. Compounded with monthly rests, it usually comes out well above what a civil court would give. Check the bank rate the RBI notified for each period of delay, because it moves with policy decisions. On old invoices, the interest can overtake the principal. That's exactly why buyers fight eligibility so hard.

Not eligible for Section 16? You still get interest, just a different kind. Section 31(7) of the Arbitration Act lets a DIAC tribunal award interest at the contract rate, or at a reasonable rate if there isn't one. After the award, unless the tribunal says otherwise, interest runs at 2 percent over the current rate of interest. Where no statutory rate applies, courts have their own way of fixing commercial interest, and our guide on interest on unpaid dues explains it.

Where your case gets heard: Delhi, Ghaziabad, Noida, Gurugram, Faridabad

With the Council, geography follows you, the supplier. Section 18(4) gives jurisdiction to the Council for wherever the supplier is located, and the seat or court clause in the contract doesn't change that. Say your unit is in Sahibabad or Loni. You'd file with the Council that covers Ghaziabad. A unit in Okhla or Narela files with the Delhi Council, which sits under the Department of Industries. Manesar means the Haryana Council for that region. UP and Haryana organise their councils by region, so confirm which one handles your district before you file.

DIAC cases are normally seated in New Delhi, since that's what the clause, or the Section 11 order, says. Challenges under Section 34 are filed in Delhi, then. Above Rs 2 crore, that's the Commercial Division of the Delhi High Court. Below it, the district Commercial Court, though you should check the current limit. Compare a Council award made in Ghaziabad. It's challenged before the court designated as Commercial Court for that district, and appeals go up to the Allahabad High Court.

People underestimate this. A Ghaziabad supplier fighting a Mumbai buyer gets a forum down the road through the Council. Put a DIAC clause in the same contract and that supplier is travelling to Delhi or appearing by video. From inside the NCR, that's easy enough. For a supplier based outside Delhi, it's a real cost.

When the Council is the better fit

The Council works well for a registered micro or small supplier whose paperwork is clean. Purchase orders, goods delivered or services completed, invoices accepted, and no written complaints from the buyer. The claim tends to be modest, often below Rs 1 crore, and the supplier can't afford a large fee deposit. In that situation the low cost, the routine award of statutory interest and the 75 percent deposit add up to real pressure on the buyer. Buyers feel it.

PSU buyers are another good fit. A government company will often settle in front of a statutory Council more readily than it'll agree a private payment, and the Section 19 deposit makes its finance team set the money aside. Advocate B.K. Singh's first check on a supplier's file against a PSU is simple. Registration date, next to purchase order date. That single comparison tells you whether the Council is a safe choice, and on more files than you'd think, it isn't.

When DIAC is the better fit

Large or technical disputes are where DIAC earns its fee. An IT rollout buried in change requests. A construction subcontract where the measurements are disputed. A claim that adds damages and lost profit to the unpaid price. Put a panel arbitrator with commercial experience together with a fixed procedure and a statutory timeline, and you usually get a better-reasoned award, one that's easier to defend under Section 34.

For some suppliers DIAC is the only door. Medium enterprises. Businesses with no registration. Traders whose eligibility is shaky, and anyone whose registration date the buyer is sure to attack. Losing a year at the Council over jurisdiction, and then starting again, is worse than filing at DIAC on the first day. DIAC also helps when you need something urgent, for instance security from the buyer. You get an emergency arbitrator, and a tribunal with power to make orders under Section 17, on top of the court's own power under Section 9.

Cost is the trade-off. DIAC's fee depends on the sum in dispute and is shared by both sides. If the buyer refuses to pay its half, though, you may have to pay it yourself to keep the case moving. Read our guide on DIAC arbitration fees before you set a budget.

Is there a deadline on either route?

Yes. On both routes, the arbitration stage has the same three-year limit. The Supreme Court decided in Sonali Power Equipments v. Maharashtra State Electricity Board (2025) that conciliation under Section 18 isn't governed by the Limitation Act. You can ask for conciliation on old dues. The arbitration that comes after is a different story, because limitation applies there. So if conciliation fails, a claim that's out of time won't be awarded.

At DIAC, the test date is the day the buyer receives your notice invoking arbitration. Your claim must be in time on that day. Most supply and service claims have three years, counted invoice by invoice from the due date. A written acknowledgment extends it. So does a part payment, if made while time was still running. Our guide on limitation for recovery of money covers the articles and how acknowledgments work. If your oldest invoices are nearly three years old, move this month, whichever route you take.

Papers to pull together before you choose

Where suppliers go wrong with this choice

• Assuming Udyam covers old contracts. If you registered after the purchase order, the buyer will object. And the law on that point is sitting before a larger bench of the Supreme Court.
• Filing at the Council and at DIAC together. Two cases on the same invoices waste money and hand the buyer a jurisdiction argument for free. Pick one, and write down why.
• Forgetting the Council is for micro and small units only. A unit that's grown into the medium category may lose eligibility for new supplies. Check your category for the period of the contract.
• Ignoring limitation because conciliation has no deadline. You can seek conciliation on stale dues. But if it fails, the arbitration stage is barred for claims older than three years.
• Under-budgeting DIAC. Fees are assessed on claim plus counter claim. A buyer that won't pay its share can leave you paying both halves, or facing termination of the claim.
• Thin invoice evidence. Councils and tribunals both want proof of delivery and acceptance. An invoice on its own, with no challan or goods receipt, invites a non-supply defence.

If you're the buyer facing a Section 18 reference

Pointing to the DIAC clause won't stop an eligible supplier's reference. What you can do, and should, is test eligibility right at the start: the supplier's category, its registration date compared with each order, and whether it's really a trader. Raise all of this in writing at the first sitting, not after conciliation fails. File your counter claim before the Council rather than starting a separate DIAC arbitration. Silpi Industries allows it. Splitting forums helps nobody.

Budget for the deposit early. Lose, and any challenge needs 75 percent of the award sitting in court before your Section 34 petition is even heard. That figure includes the compounded interest. There's a tax angle too. Payments due to micro and small enterprises that you make after the MSMED Act period aren't allowed as a deduction (Section 43B(h) of the Income-tax Act, 1961, carried into the new Income-tax Act). Your chartered accountant should look at it. In many buyer-side files that reach Advocate B.K. Singh, agreeing a payment plan during conciliation costs less than fighting the award to the end.

What to do this week

Begin by writing three dates next to each other. When you registered on Udyam. When each purchase order was placed. When each unpaid invoice fell due. If registration came first and nothing is older than three years, the Council is open to you, and for a claim of moderate size it deserves a serious look. If you registered later, or you're a medium enterprise, plan on using your DIAC clause. Where the contract has no arbitration clause at all, the real comparison is Council against commercial suit. Our guide on DIAC arbitration versus a commercial suit sets that out.

Then get a short legal notice for recovery out to the buyer. List the invoices, the due dates and the interest you claim, and ask them to confirm the balance. Gather the papers listed above in one folder. If your DIAC clause is flawed, for instance because one side appoints the arbitrator alone, read our notes on the DIAC arbitration clause and on how a DIAC award gets challenged. A bad clause can cost you the award down the line. How we take on these files is explained on our DIAC arbitration lawyer page.

If you'd like your Udyam certificate, purchase orders and invoices checked before you pick a forum, you can send them to Advocate B.K. Singh's team through the contact page.