Introduction
Meaning And Role Of MSMEs
“MSME” stands for “Micro, Small, and Medium Enterprise” which denotes enterprises engaged in the production, manufacturing and processing of goods and commodities. MSMEs form the backbone of most economies, contributing significantly to employment, innovation, and trade.
Legal Classification Under Indian Law
Under the Micro, Small and Medium Enterprises Development Act, 2006, enterprises are classified based on investment thresholds:
| Category | Manufacturing Investment | Services Investment |
|---|---|---|
| Micro Enterprises | Up to ₹25 lakh | Up to ₹10 lakh |
| Small Enterprises | ₹25 lakh–₹5 crore | ₹10 lakh–₹2 crore |
| Medium Enterprises | ₹5–10 crore | ₹2–5 crore |
MSMEs In Global Trade
Despite their increasing participation in global trade, their engagement in cross-border commerce exposes them to risks comparable to those faced by large corporations—ranging from currency fluctuations and distance-related costs to legal uncertainties and enforcement challenges.
For MSMEs, however, the stakes are disproportionately higher. Their financial resilience is limited, and the absence of accessible dispute resolution often results in abandoned claims or prohibitive transaction costs. As a result, barriers to entry in international markets remain significant for smaller enterprises, undermining their potential contributions to regional and global value chains.
Contractual Failure And Commercial Risk
One of the fundamental realities of the human condition is that agreements fail. Given the wide diversity of agreements across industries, values, and forms, it is difficult to measure how often they fail. What is clear is that contracts are made and breached countless times each day in almost every context.
For smaller enterprises, any strategies to manage such risks increases transaction costs. Once we make some simple assumptions, then, we can logically conclude even without adequate empirical research, that the lack of access to commercial justice results in barriers to entry for MSMEs wishing to do business across borders.[1]
Relational Contracts And MSME Limitations
The UK High Court, in Yam Seng Pte. Ltd. v. International Trade Corp Ltd.[2], pointed out that relational contracts “require a high degree of communication, cooperation and predictable performance based on mutual trust and confidence and involve expectations of loyalty which are not legislated for in the express terms of the contract but are implicit in the parties’ understanding and necessary to give business efficacy to the arrangements.”
This is desirable but not possible for small businesses attempting to engage in business across borders with limited resources.
Challenges For MSMEs in Cross-Border Dispute Resolution
Dispute resolution is one area of important growth for MSMEs in trade. Small businesses experience the same risks in trading across borders as their larger contemporaries—currency, distance, language, trade usage, risk of loss in transit, and, of course, legal risks and contract enforcement risks—but, for small businesses, the financial stakes are typically much higher and more personal, and their access to commercial justice for smaller disputes is virtually non-existent.
Large multinational corporations usually have legal teams operating in several countries where they conduct business. This allows them to rely on a contracting partner’s domestic courts if a dispute arises. They also tend to hold assets in multiple jurisdictions, giving them wider options for enforcement without necessarily relying on cross-border mechanisms.
While arbitration is generally seen as preferable, such corporations are less disadvantaged if they must proceed before national courts without an arbitration agreement. By contrast, MSMEs often depend on local legal support and rarely have assets outside their home state.
If a dispute occurs without an effective arbitration clause, they have to face a difficult choice. Confronted with these unattractive options, many MSMEs abandon their claims. For this reason, arbitration may hold even greater value for MSMEs than for larger multinational enterprises.
Key Hurdles Faced by MSMEs in Cross-Border Disputes
- The costs of litigation or arbitration (such as fees, travel, and translation) are disproportionate to the typically low and mid-value claims;
- Complexity of procedures and lack of legal expertise make such mechanisms even less accessible;
The Micro, Small and Medium Enterprises Development Act, 2006
The Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 was enacted to promote, facilitate, and protect MSMEs in India. A key feature of the Act is its dispute resolution mechanism for delayed payments under Chapter V (Sections 15–25).
The Act empowers MSMEs to approach the Micro and Small Enterprises Facilitation Council (MSEFC) for conciliation and arbitration. Awards passed are binding and enforceable under the Arbitration and Conciliation Act, 1996.
Limitations of the MSMED Act in Cross-Border Context
However, this Act has no provision for cross-border disputes, leaving MSMEs reliant on general contract law, arbitration, or foreign courts. The Act does not extend to cross-border disputes.
This lack of a statutory cross-border mechanism creates significant risks and create gaps. Introducing provisions for mandatory contract clauses, international arbitration access, or a special MSME cross-border dispute cell could fill this gap and strengthen India’s export ecosystem.
Summary of MSME Cross-Border Dispute Challenges
| Area | Challenge |
|---|---|
| Access to Justice | Limited availability of affordable and effective remedies for small-value cross-border disputes |
| Cost Factors | High litigation and arbitration costs relative to claim value |
| Legal Infrastructure | Dependence on local legal support and lack of international enforcement options |
| Statutory Framework | No dedicated cross-border dispute resolution mechanism under the MSMED Act, 2006 |
Suggestive Measures for Cross-Border Disputes of MSMEs
Alternative Dispute Resolution Mechanisms in Practice
For Indian MSMEs engaged in cross-border commerce, selecting the appropriate dispute resolution mechanism is a critical strategic decision. The choice between litigation, arbitration, and mediation involves a complex trade-off between cost, speed, enforceability, and control. While the Indian legal system provides a spectrum of options, each comes with distinct advantages and disadvantages that must be carefully weighed against the specific circumstances of the dispute and the MSME’s resources.
International Commercial Arbitration as the Preferred Route
Arbitration has emerged as the most popular and widely accepted method for resolving cross-border commercial disputes, and for sound reasons. Its primary advantages lie in its neutrality, confidentiality, flexibility and the near-global enforceability of the arbitral awards under the New York Convention on Recognition and Enforcement of Foreign Arbitration Awards, making it a more reliable option than relying on national court systems.
Institutional vs. Ad-Hoc Arbitration
For MSMEs, there is a strong case to be made for preferring institutional arbitration over ad-hoc proceedings. Institutions like the Singapore International Arbitration Centre (SIAC), the International Chamber of Commerce (ICC) or the London Court of International Arbitration (LCIA) provide a comprehensive set of procedural rules, administrative support for case management, and established panels for qualified arbitrators.
- This structured environment removes the burden from the parties to design the entire arbitral process from scratch.
- It provides a clear framework, which is invaluable for an MSME that lacks deep legal expertise.
- Ad-hoc arbitration, while potentially more flexible, can lead to procedural deadlocks and disputes over the appointment of arbitrators, adding layers of cost and delay.
Choosing a Seat of Arbitration
The choice of the “seat” (or legal place) of arbitration is one of the most critical decisions in drafting an international contract. The seat determines the procedural law that governs the arbitration and which country’s courts will have supervisory jurisdiction over the proceedings.
- MSMEs should strongly advocate for a neutral, well-regarded, and arbitration-friendly jurisdiction such as Singapore, London or Dubai.
- This choice must be strategically aligned with India’s list of “notified territories” under the ACA.
- Proper alignment ensures that a favourable award can be easily enforced in India under the streamlined Part II procedure.
Mediation and Conciliation: The Pre-Emptive Strike
Before resorting to binding, adjudicative processes like arbitration or litigation, mediation and conciliation offer a highly effective first line of defence. These non-binding, negotiation processes are designed to help parties reach a mutually acceptable settlement.
Core Benefits
- Low cost
- Speed
- Confidentiality
It is a voluntary process that allows parties to maintain control over the outcome and explore creative business solutions that an arbitrator or judge could not order. Crucially, it can preserve long-term business relationships that would likely be destroyed by adversarial proceedings.
Legislative and Judicial Support
India has shown a strong policy commitment to promoting mediation. The Commercial Courts Act, 2015, mandates pre-institution mediation for certain commercial disputes where no urgent interim relief is sought. The recent enactment of the Mediation Act, 2023, further formalizes and strengthens the legal framework for mediation, aiming to make it a mainstream method of dispute resolution.
Tiered Dispute Resolution Clauses (Med-Arb)
A highly recommended best practice for MSMEs is the inclusion of “tiered” or “multi-step” dispute resolution clauses in their contracts. These clauses obligate the parties to first attempt to resolve their disputes through negotiation or mediation for a specified period (e.g., 30–60 days) before they are permitted to commence arbitration.
This structured approach ensures that an attempt at amicable settlement is made before incurring the significant costs of arbitration.
Litigation: The Method of Last Resort
While always an option, pursuing litigation in national courts, especially foreign ones, is generally the least attractive path for an Indian MSME involved in a cross-border dispute. The challenges to litigation are numerous and significant.
- Foreign court proceedings can be slow, expensive and procedurally unfamiliar.
- There is also the risk of perceived or actual judicial bias in favour of the local party.
- Jurisdictional battles are common, where parties first litigate the preliminary question of which court has the authority to hear the case, adding years and substantial cost before the merits of the dispute are even considered.
- Courts may apply the doctrine of forum non conveniens to decline jurisdiction if a more appropriate forum exists elsewhere.
Even if an MSME succeeds in obtaining a favourable judgment from a foreign court, enforcing it in India is not automatic. The Code of Civil Procedure, 1908, governs this process and distinguishes between judgments from “reciprocating territories” and “non-reciprocating territories”.
| Type of Territory | Enforcement Position in India |
|---|---|
| Reciprocating Territory | Judgment can be executed directly in India as if it were a domestic decree. |
| Non-Reciprocating Territory | Requires filing of a fresh civil suit in India, with the foreign judgment serving only as evidence, making the process significantly more arduous. |
Online Dispute Resolution (ODR) – An Emerging Solution
Several initiatives have emerged to make cross-border dispute resolution more accessible for MSMEs. At the international level, the CISG framework and related commentaries stress the importance of accessible commercial justice mechanisms for small enterprises.
Online Dispute Resolution (commonly referred to as “ODR”) has gained prominence as a tool to bridge the justice gap for MSMEs in cross-border trade. By relying on digital platforms for filing, communication, and hearings, ODR reduces costs tied to travel and paperwork, while also enabling faster resolution of disputes.[3]
Its scalability allows MSMEs to resolve low- and mid-value claims efficiently, regardless of geographic distance. By combining digital platforms with simplified arbitral procedures, policymakers and institutions can create dispute resolution systems that are both cost-effective and enforceable.
UNCITRAL ODR Framework And Enforceability
UNCITRAL’s Technical Notes on ODR provide a framework that emphasizes accessibility, transparency, and fairness in digital proceedings.[4] Scholars highlight that ODR can democratize access to justice by offering MSMEs a viable alternative to traditional litigation and arbitration.[5]
However, questions remain around enforceability of ODR outcomes, given the reliance on domestic recognition systems.
Today, an award as the end product of international arbitration proceedings is generally enforceable around the world pursuant to a relatively streamlined process under the New York Convention. This is important, because an unpaid arbitral award is of little value, absent the availability of judicial enforcement in any location in which the award debtor has assets.
As explained below, none of the more modest innovations mentioned above should present any challenges to enforcement. However, the use of non-human arbitrators might well raise some challenging questions.[6]
ODR And MSMEs: A Pragmatic Middle Path
For MSMEs, ODR represents a pragmatic middle path, i.e. less formal than arbitration but more structured than direct negotiation, allowing them to safeguard cross-border commercial relationships without prohibitive expense.
Existing ODR mechanisms are not targeting B2B disputes, mainly for B2C disputes (consumer protection). There is a gap in the development of an ODR platform for MSMEs B2B disputes.
While self-regulation remains an important principle, government should be more proactive in guiding and supporting the development of such a platform.
ODR In India
India has a MSME ODR Portal of its own that aims to provide a streamlined, efficient and accessible dispute resolution process for Micro and Small Enterprises. The portal has an online system for filing, managing and tracking cases and is facilitated by MSEFCs/ADR Institution to help parties reach a mutual settlement.
This enables easy access through virtual hearings, thus eliminating the need for physical travel and redundant expenses.[7]
Two-Stage ODR Process
The portal offers an end-to-end dispute resolution process in two stages:
- Pre-MSEFC (Micro & Small Enterprises Facilitation Councils): This stage is a voluntary, out-of-court solution undertaken with the consent of both parties. Should either or both parties opt out of the pre-MSEFC process, they will proceed to the next stage, carried out according to the procedure defined under the MSMED Act, 2006. It comprises of two processes, namely Digital Guided Pathway and Unmanned Negotiation.
- MSEFC: This stage is the statutory procedure for resolving delayed payment applications under the MSMED Act, 2006, and includes Conciliation/Mediation and Arbitration.
Accessibility, Equality, And Cultural Diversity
The potential benefits of ODR do not have to be limited to the economically advantaged individuals from urban areas, with easy access to technology, but also to the marginalised and less privileged.
It is also necessary that ODR platforms account for the cultural diversity of its users both within India and during cross-border ODR. The principle of accessibility encourages platforms to develop tools that can cut across and also be responsive to the heterogeneous identities of all its potential end users.
In terms of ensuring equality, the technology should not be allowed to become a barrier for one or both the parties to present their case before the Neutrals. This would also require the entities that use the platforms ensure that the parties are given sufficient notice and training to effectively participate in online processes.[8]
Obstacles To Online Dispute Resolution (ODR)
One of the main obstacles to developing modern dispute resolution lies in traditional legal frameworks that no longer reflect current realities. For instance, Indonesian arbitration law still requires parties to appear in person and to file physical documents.
Indonesia is also not a member of key treaties such as the UN Convention on Contracts for the International Sale of Goods, nor has it adopted the UNCITRAL Model Arbitration Law.
Its legal framework further permits arbitrators to carry out physical inspections of disputed property and allows parties to request in-person meetings outside the designated seat of arbitration.
Similar provisions can be found in the laws of several other developing and even developed countries, and these would need reform to enable more efficient cross-border dispute resolution.
Additional barriers include questions about due process in AI-driven proceedings, restrictions on cross-border legal practice, and data privacy concerns.
Business Vs Consumer Transactions
A particularly difficult challenge relates to the distinction between business and consumer transactions. Many jurisdictions prohibit consumers from waiving their right to court proceedings, making it complicated to extend ODR or arbitration to such contexts.
Although ODR could be restricted to business-to-business disputes, drawing a clear line is not always possible. For example, if someone buys a computer that is used partly for business and partly for personal purposes, how should that purchase be classified?
Without clarity, ODR rules for B2B cases may clash with domestic consumer protection laws, and harmonisation will be essential for these systems to function effectively.[9]
Conclusion
For MSMEs to participate meaningfully in global trade, cross-border dispute resolution must be redesigned with accessibility, affordability, and enforceability at its core.
- Wider adoption of ODR platforms and simplified arbitration schemes can reduce procedural burdens and level the playing field against larger firms.[10]
- Policymakers should also promote capacity building, so MSMEs are aware of contractual safeguards and dispute resolution options.[11]
Barriers and the Need for a B2B ODR Framework
The existing dispute resolution mechanisms for cross-border disputes prove to be a major barrier for the success of MSMEs.
A B2B ODR framework would undoubtedly be important for and useful to MSMEs in cross-border trade so that concrete steps should be taken without delay to start building such an ODR pilot platform in coordination with interested dispute resolution bodies and to work out the relevant procedural rules.
A B2B ODR framework would also carry the benefits of providing more data and facilitating further research through such a pilot platform and from the practical experience on using the pilot platform. End Notes:
- https://cisg-online.org/files/commentFiles/Walter_THE-CISG-AND-CROSS-BORDER-ACCESS-TO-COMMERCIAL-JUSTICE.pdf
- [2013] EWHC 111 (QB)
- https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2812344
- https://uncitral.un.org/sites/uncitral.un.org/files/media-documents/uncitral/en/v1700382_english_technical_notes_on_odr.pdf
- Supra Note 1
- Supra Note 3
- https://odr.msme.gov.in/#/
- https://www.niti.gov.in/sites/default/files/2023-03/Designing-The-Future-of-Dispute-Resolution-The-ODR-Policy-Plan-for-India.pdf
- https://dai-global-developments.com/articles/can-online-dispute-resolution-change-the-way-global-msmes-do-business/
- Supra Note 3
- Supra Note 1
