Managing Director Bihar State Food And Civil Supply Corporation Limited vs Sanjay Kumar

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.

Legal Category Hierarchy

1. Agreement for custom milling of paddy — Dispute over delivery — Initiation of recovery proceedings and criminal cases for fraud — Application for appointment of arbitrator under Section 11, Arbitration Act. (Para 3 , 4 , 5 , 8 , 9 )

2. Whether criminal proceedings and allegations of serious fraud render disputes non-arbitrable — Whether recovery proceedings bar arbitration — Whether application is barred by limitation. (Para 19 )

3. Referral court's power under Section 11(6A) is limited to prima facie determination of the existence of an arbitration agreement, leaving substantive validity to the tribunal. (Para 23 , 24 , 25 , 26 , 27 )

4. Scrutiny by courts under Section 11(6) and Section 8 of the Arbitration Act must be confined to the examination of the existence of the arbitration agreement. (Para 27 )

5. Appeals dismissed — Issues of limitation and non-arbitrability referred to the arbitral tribunal for determination as preliminary issues. (Para 29 , 30 )

6. Does the initiation of criminal proceedings per se render a dispute non-arbitrable?

No. The mere fact that criminal proceedings are instituted does not automatically make an otherwise arbitrable dispute non-arbitrable. Arbitration can proceed simultaneously, and any subsequent conviction rendering the contract void can be used to resist the enforcement of the award. (Para 21 )

7. What constitutes serious fraud that excludes a dispute from arbitration?

Serious fraud occurs if the arbitration agreement itself is challenged as non-existent or fraudulent, or if allegations involve public law implications affecting governance, accountability, or national security, transcending inter se disputes between the contracting parties. (Para 21 )

8. What is the scope of examination for a referral court under Section 11(6A) of the Arbitration Act?

The referral court's scrutiny is strictly confined to the examination of the existence of the arbitration agreement. This is a prima facie determination and not a mini-trial; substantive existence and validity are decided by the arbitral tribunal under Section 16. (Para 23 , 25 , 27 )

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, 1996¹[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 validity of initiation of the recovery proceedings, the respondents filed Writ Petitions under Article 226 of the Constitution challenging the demand notices issued under the Recovery Act. These petitions came to be disposed of by the High Court by its orders dated 22.07.2014 and 23.07.2014 by holding that there is a parallel remedy of arbitration provided under the agreement.

6. Dissatisfied with the orders passed by the Single Judge, the respondents approached the Division Bench of the High Court by filing the Writ Appeals. The Division Bench disposed of the appeals by its order dated 17.04.2015, affirming the decision of

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2025 Supreme(SC) 1157

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

Legal Category Hierarchy

Table of Contents

6. Does the initiation of criminal proceedings per se render a dispute non-arbitrable?

7. What constitutes serious fraud that excludes a dispute from arbitration?

8. What is the scope of examination for a referral court under Section 11(6A) of the Arbitration Act?

2025 Supreme(SC) 1157

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

Legal Category Hierarchy

Table of Contents

6. Does the initiation of criminal proceedings per se render a dispute non-arbitrable?

7. What constitutes serious fraud that excludes a dispute from arbitration?

8. What is the scope of examination for a referral court under Section 11(6A) of the Arbitration Act?

Cases Referred (15)

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