Kiran Raj

The Supreme Court of India Division Bench of Justice Pamidighantam Sri Narasimha and Justice Manoj Misra has declared that the presence of an arbitration agreement is sufficient for referral under Section 11(6) of the Arbitration and Conciliation Act, 1996, regardless of pending criminal proceedings involving serious fraud. The Court dismissed the civil appeals challenging the High Court's appointment of arbitrators, holding that the judicial inquiry under Section 11(6A) must be confined to the examination of the existence of an arbitration agreement. The Court further directed that all jurisdictional issues, including limitation and non-arbitrability due to alleged fraud, shall be left to be decided by the arbitral tribunal.

The appellant, Bihar State Food and Civil Supplies Corporation (the Corporation), entered into agreements with various rice millers for the custom milling of paddy procured from farmers under a scheme designed by the Food Corporation of India (FCI). As per the agreement, the millers were required to return 67% of the paddy as Custom Milled Rice (CMR). The agreements contained two key clauses: Clause 15 provided for recovery of dues through the Bihar and Orissa Public Demands Recovery Act, 1914, while Clause 16 allowed arbitration by the concerned District Collector in the event of unresolved disputes.

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Within a year, the Corporation alleged that several rice millers failed to supply the agreed quantity of rice. It then initiated proceedings under the Recovery Act. These were challenged by the respondents through writ petitions in the Patna High Court, which held on 22.07.2014 and 23.07.2014 that arbitration was the appropriate remedy. The Division Bench affirmed this on 17.04.2015, stating that "once the parties have agreed to a particular mode of resolution of dispute, that too, those covered by Arbitration and Conciliation Act, 1996, the question of entertaining the writ petition, in relation to that very dispute, does not arise."

Subsequently, the Corporation filed approximately 1200 FIRs against the rice millers, alleging a massive fraud causing losses exceeding a thousand crores. The FIRs included allegations under Sections 420 and 409 IPC. In one FIR, it was stated that a rice miller had failed to deposit over 4,000 quintals of rice worth more than Rs. 96 lakh. The FIR also mentioned that despite repeated warnings, the rice was not deposited, leading to defalcation of government property.

Following investigation, charge sheets were filed confirming fraud and embezzlement. The Supreme Court in State of Bihar v. Divesh Kumar Chaudhry noted the gravity of the alleged crime and stated, "there is misappropriation to a huge extent. In such circumstances, grant of anticipatory bail/bail will seriously hamper the investigation/trial resulting in huge loss to the State."

The Court directed trials to be held only in five designated locations, with the High Court instructed to appoint officers of appropriate rank. In a related proceeding, the High Court on 10.03.2017 noted that 1202 criminal cases were pending and that the misappropriation involved nearly Rs. 1500 crores. A Special Investigation Team (SIT) was constituted under the guidance of the Additional Director General, CID, to coordinate and monitor investigations.

In parallel, the rice millers filed applications under Section 11 of the Arbitration Act. The High Court allowed these applications on 03.07.2020, holding that the agreements were freely entered into and that the arbitration clause was valid. It rejected the Corporation's contention that the dispute had become non-arbitrable due to the criminal allegations. The High Court also rejected the argument that invocation of arbitration in 2019 was time-barred, stating that limitation issues could be addressed by the arbitral tribunal.

The High Court further held that proceedings under the Recovery Act did not bar arbitration, as both remedies operated in different fields. It stated, "even if there is any conflict, the Arbitration Act would override the Recovery Act since the former is a central legislation." It also stated that failure to attempt mutual discussions before invoking arbitration did not constitute a bar under Clause 16.

These findings were challenged before the Supreme Court in the present appeals.

"There is an arbitration agreement. The matter must end here."

The Supreme Court began by outlining the principles governing arbitrability in cases involving fraud. It observed "same set of facts may lead to civil and criminal proceedings... The mere fact that criminal proceedings can or have been instituted in respect of the same incident(s) would not per se lead to the conclusion that the dispute which is otherwise arbitrable ceases to be so."

The Court reviewed previous judgments including A. Ayyasamy v. A. Paramasivam, Rashid Raza v. Sadaf Akhtar, and Avitel Post Studioz Ltd. v. HSBC PI Holdings, restating the settled principles: "Disputes involving allegations having criminal law implications transcend inter se disputes between the contracting parties and attain public implications... shall not be submitted to arbitration." However, such findings must be assessed in accordance with Section 11(6A), which limits the referral court’s role.

Addressing the scope of judicial scrutiny under Section 11(6), the Court referred to the seven-judge bench decision in Interplay Between Arbitration Agreements, stating: "The Referral Court is not the appropriate forum to conduct a mini-trial by allowing the parties to adduce the evidence in regard to the existence or validity of an arbitration agreement... it is evident that the Referral Court is only required to examine the existence of arbitration agreements, whereas the Arbitral Tribunal ought to rule on its jurisdiction."

Further, the Court noted: "It is just as necessary to follow a precedent as it is to make one."

Thus, despite acknowledging the extensive arguments regarding fraud and public interest, the Bench concluded that: "There is an arbitration agreement. The matter must end here."

The Supreme Court dismissed all appeals arising from the High Court’s order appointing arbitrators under Section 11 of the Arbitration and Conciliation Act, 1996.

It held that the examination under Section 11(6A) of the Act is limited to determining the existence of an arbitration agreement. All objections regarding limitation, non-arbitrability, or allegations of fraud are to be decided by the arbitral tribunal.

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The Court declared: "All the issues raised by Mr. Ranjit Kumar, senior counsel are kept open for being raised and contested before the arbitral tribunal."

It added: "The issues that we have not taken up and left it to the arbitral tribunal are jurisdictional issues, involving barring of the arbitral proceedings due to limitation or for the reason that they are non-arbitrable. These issues shall be taken up as preliminary issues and the arbitral tribunal will consider them after giving opportunity to all the parties."

The Supreme Court accordingly directed that all matters arising from the arbitration clause be decided by the arbitral tribunal and not the courts.

Case Title: The Managing Director Bihar State Food and Civil Supply Corporation Limited & Anr. v. Sanjay Kumar

Neutral Citation: 2025 INSC 933

Case Number: Civil Appeal Arising out of SLP (C) No. 10455 of 2020 & Batch

Bench: Justice Pamidighantam Sri Narasimha, Justice Manoj Misra