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2025 Supreme(SC) 1157

SUPREME COURT OF INDIA
PAMIDIGHANTAM SRI NARASIMHA, MANOJ MISRA, JJ.
The Managing Director Bihar State Food And Civil Supply Corporation Limited & Anr. - Appellants
Versus
Sanjay Kumar - Respondent
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Decided On : 05-08-2025

Advocates appeared:
For the Petitioner(s): Mr. Manish Kumar, AOR Mr. Divyansh Mishra, Adv. Mr. Kumar Saurav, Adv.
For the Respondent(s): Mr. Amit Sibal, Sr. Adv. Mr. Rudreshwar Singh, Sr. Adv. Mr. Sumeet Singh, Adv. Mr. Abhiprav Singh, Adv. Ms. Shatakshi Sahay, Adv. Mr. Shivam Singh, Adv. Ms. Deepali Singh, Adv. Ms. Alka Singh, Adv. Mr. Kaushik Poddar, AOR Mr. Kumar Vikram, Adv. Ms. Arpita Mishra, Adv. Ms. Tanishka, Adv. Mr. Abhishek Grover, Adv. Mr. Darpan Sachdeva, Adv. Mr. Vinay P Tripathi, Adv. Mr. Durga Dutt, AOR Mr. Upendra Narayan Mishra, Adv. Mr. Rohit Priyadarshi, Adv. Mr. Santosh Kumar Yadav, Adv. Mr. Pradeep Yadav, Adv. Ms. Ravleen Kaur Kalsi, Adv. Dr. Nirmal Chopra, AOR Ms. Rachitta Rai, AOR Mr. Sameresh Chandra Jha, Adv. Mr. Brajesh Kumar, AOR Mr. Shashibhushan Kumar, Adv. Mr. Vivek Kumar, Adv. Mr. Arjun Prasad Sinha, Adv. Mr. Prakash Kumar Singh, Adv. Mr. Rajeev Singh, AOR Mr. Shantanu Sagar, AOR Mr. Anil Kumar, Adv. Mr. Gunjesh Ranjan, Adv. Mrs. Divya Mishra, Adv. Ms. Niharika Rai, Adv. Mr. Ashok Anand, AOR Mr. Ajay Gupta, Adv. Mr. Mukul Dev Mishra, Adv. Mr. Bipin Bihari Singh, Adv. Mr. Rajesh Kumar, Adv. Mr. Vaibhav Niti, AOR Ms. Madhavi Agrawal, Adv. Mr. Divyanshu Agrawal, Adv. Mr. Madhur Mahajan, Adv. Mr. Jairaj Singh, Adv. Mr. B. Srinivas, Adv. Mr. Neeraj Shekhar, AOR Mrs. Kshama Sharma, Adv. Mr. Ramendra Vikram Singh, Adv. Mr. Ujjwal Ashutosh, Adv. Mr. Kshama Sharma, Adv. Mr. Santosh Kumar - I, AOR Mr. Samir Ali Khan, AOR Mr. Pranjal Sharma, Adv. Mr. Kashif Irshad Khan, Adv.

Disputes involving serious fraud allegations do not preclude arbitration; issues of non-arbitrability and limitations should be resolved by the arbitral tribunal, not courts.

Headnote:(A) Arbitration and Conciliation Act, 1996 - Section 11 - Serious fraud allegations - High Court appointed arbitrators based on contractual arbitration clauses in disputes between the Corporation and rice millers - Impugned order held that limitations defenses and arbitrability are issues for arbitration, not writ proceedings - Court confirms that non-arbitrability cannot be presumed due to pending criminal cases. (Paras 1, 16, 30)

(B) Legal Principles - The mere invocation of criminal proceedings does not preclude arbitration unless allegations affect the fundamental integrity of the arbitration agreement - The concept of 'serious fraud' extends to public implications, affecting the integrity of governance and accountability. (Paras 24-26)

(C) Findings - High Court rightly dismissed arguments against the arbitrability of disputes, confirming that arbitration clauses remain valid and should be adjudicated by arbitrators. (Paras 27-29)

Facts of the case:
Appeals involved the appointment of arbitrators following applications under Section 11 of the Arbitration Act, where rice millers had engaged in supply agreements with the Corporation, leading to allegations of serious fraud over public funds. (Paras 2-8)

Findings of Court:
The Supreme Court affirmed the High Court's decision to allow arbitration, leaving complex issues regarding fraud, limitations, and jurisdiction for resolution by the arbitral tribunal. (Paras 19, 30)

Issues: Court addressed whether the involvement of criminal cases affects the arbitrability of contractual disputes. (Para 11)

Ratio Decidendi: Establishing that disputes involving serious fraud do not automatically exclude arbitration, the Court reiterated that questions of arbitrability must be determined by the arbitral tribunal, respecting legislative intent under Section 11 of the Arbitration Act. (Para 23)

Result: Appeals dismissed, no costs awarded.

Table of Content
1. overview of facts regarding procurement and alleged fraud. (Para 2)
2. background of the rice procurement agreement and disputes. (Para 3 , 4 , 5 , 6 , 7)
3. criminal proceedings against rice millers for fraud. (Para 10 , 11 , 12 , 13 , 19)
4. court observations on the extent of court's scrutiny under the arbitration act. (Para 16 , 18 , 22 , 23)
5. key arguments presented by the parties. (Para 20)
6. legal principles on arbitrability concerning serious fraud. (Para 21)
7. legal principles governing arbitrability in fraud cases. (Para 25)
8. dismissal of appeals and final decision on arbitration. (Para 29 , 30)

JUDGMENT :

PAMIDIGHANTAM SRI NARASIMHA, J.

Contents

I.

Introduction.

II.

Facts.

III.

Issue.

IV.

Submissions.

V.

Principles governing arbitrability in cases involving allegations of serious fraud.

VI.

Scope

1. Leave granted.

I. Introduction.

2. These appeals arise out of the final judgment and order passed by the High Court of Judicature at Patna allowing applications under Section 11 of the Arbitration and Conciliation Act, 1996 1[Hereinafter referred to as the ‘Arbitration Act.’] and appointing arbitrators in several cases.

2.1 Substantial arguments were centred around the issue of arbitrability in cases of serious fraud. We have considered this issue and laid down the principles that govern this issue. We have also considered the stage at which such questions are to be raised while considering an application under Section 11 of the Arbitration and Conciliation Act. Before we deal with these issues the necessary facts are as follows.

II. Facts.

3. The appellant, Bihar State Food and Civil Supplies Corporation2[Hereinafter referred to as the ‘Corporation’], undertook the work of procurement of paddy from the farmers in the State of Bihar under a scheme evolved by the Food Corporation of India3[Hereinafter referred to as the ‘FCI’]. The scheme provided that the paddy procured by the Corporation from the farmers has to be converted into rice and the rice shall in turn be purchased by the FCI for distribution under PDS schemes. In furtherance of the scheme the appellant entered into agreements with various rice millers across the state for custom milling of paddy procured from the farmers. As per the agreement various quantities of paddy were allotted to the rice millers and they were to deliver rice quantified at 67% of the paddy supplied to them. Relevant clauses of the agreement including clause 16 relating to arbitration, which is the basis for filing applications under Section 11 of the Arbitration Act is as follows:-

    “15. The second party agrees that in case, any amount found recoverable on account of default, loss, damage on the part of the second party, the said recoverable amount with interest will be recovered as Land Revenue under Bihar & Orissa Public Demands Recovery Act, 1914, by instituting Certificate case before the concerned District Certificate Officer.

    16. In case of disputes both parties agree to settle the issue(s) on mutual discussions. Failure to reach agreement the matter will be referred to Arbitrator. It has been also agreed that the Arbitrator will be District Collector of the concerned District whose decision shall be final, concerning the dispute referred to him.”

4. It is evident from the above that under Clause 15, the agreement contemplated recovery of dues as land revenue under the Bihar and Orissa Public Demands Recovery Act, 19144[Hereinafter referred to as the ‘Recovery Act’]. Further, under Clause 16, if an attempt to settle disputes through mutual discussions fails, then dispute will be referred to arbitration.

5. Within a year of entering into the contracts, the Corporation realised that the respondents have failed to supply the agreed amount of milled rice and, therefore, initiated proceedings under the Recovery Act as contemplated under Clause 15 of the agreement. Challenging the legality and v

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