Introduction
In a recent judgement concerning The Managing Director, Bihar State Food and Civil Supplies Corporation Ltd. & Anr. v. Sanjay Kumar,1 the Supreme Court reiterated the scope of judicial scrutiny under Section 11(6A) of the Arbitration and Conciliation Act, 1996 while addressing the interplay between arbitration agreements, statutory recovery proceedings, and criminal prosecutions. Further, it restated principles on arbitrability in cases involving allegations of fraud, ultimately reinforcing the limited role of referral courts in arbitration matters.
Facts of the Case
The Bihar State Food and Civil Supplies Corporation entered into agreements with rice millers for custom milling of paddy procured under a scheme of the Food Corporation of India. The agreements stipulated delivery of 67% rice from the supplied paddy and contained an arbitration clause alongside a recovery mechanism under the Bihar & Orissa Public Demands Recovery Act, 1914. Within a year, the Corporation alleged that millers failed to deliver the agreed quantity, initiating recovery proceedings under the Bihar & Orissa Public Demands Recovery Act, 1914. Rice millers challenged these proceedings before the Patna High Court, which directed parties to avail the contractual arbitration remedy. Subsequently, large-scale fraud involving alleged misappropriation exceeding a thousand crores was unearthed, leading to over 1,200 FIRs and criminal proceedings under Sections 420 and 409 of the Indian Penal Code. Despite pending criminal cases and earlier proceedings, in 2019, rice millers sought appointment of arbitrators under Section 11 of the Arbitration and Conciliation Act, 1996, which the Patna High Court allowed. It is pertinent to note that a similar application under Section 11 of the Arbitration and Conciliation Act was also allowed by the Patna High Court in 2017.2 The Order allowing the said application was challenged in an SLP that stood dismissed in 2018. However, the Review Petition against the same remains pending as on the date of adjudication of the present matter. The present appeals arise out of the final judgment and order passed by the High Court of Judicature at Patna allowing the applications under Section 11 of Arbitration and Conciliation Act, 1996 filed in 2019.
Issues Framed Based on Arguments
On analysing the submissions of the made by the parties, the court formulated six issues to be considered viz., first, the arbitrability of the dispute in view of the initiation and pendency of the criminal cases. Second, the bar on initiation of proceedings under the Arbitration Act in view of the invocation of the Recovery Act. Third, considering the limitation for filing application under Section 11(6) and fourth, issues related to validity and legality of arbitral proceedings in view of the Order passed in Sadhna Kumari v. Bihar State Food & Civil Supplies Corporation Ltd. Fifth, considering whether the decision in the order of Bihar Public Works Contracts Disputes Arbitration Tribunal operates as res judicata and last, whether all the issues should be left to the arbitral tribunal to decide in view of Section 11(6A) of the Arbitration Act.
Analysis of the Court
The Supreme Court reaffirmed the settled legal position on the arbitrability of disputes where allegations of fraud and criminality are involved. The Court traced the jurisprudential distinction between "fraud simpliciter" and "serious fraud," noting that while ordinary allegations of fraud arising out of contractual relationships do not preclude arbitration, serious fraud, particularly where it affects the validity of the arbitration agreement itself or raises issues in the public law domain, may render disputes non-arbitrable. Further, the Hon'ble Court elaborated that serious fraud includes instances where the allegations have criminal law implications that directly or indirectly affect non-parties and undermine integrity in public service or administration. However, the Court also clarified that the mere pendency of criminal proceedings based on the same facts as the civil dispute does not, by itself, extinguish the jurisdiction of an arbitral tribunal. Civil and criminal remedies may run in parallel, with arbitration proceeding independently. Further, in case that a subsequent criminal conviction affects the enforcement of the arbitral award, remedies against the same could be sought under Section 34 of the Arbitration and Conciliation Act, 1996.
While considering the interplay between the Bihar & Orissa Public Demands Recovery Act, 1914 and the Arbitration and Conciliation Act, 1996, the Court agreed with the High Court's conclusion that the two statutes operate in distinct domains. On one hand the Recovery Act provides a mechanism for recovering public debts through a summary statutory process, while the Arbitration Act governs the consensual resolution of disputes arising out of contractual obligations on the other. The mere fact that recovery proceedings have been invoked does not automatically displace the parties' contractual right to seek resolution of disputes through arbitration. Even where some overlap exists, the central legislation in the form of the Arbitration Act would prevail in the absence of an express statutory exclusion.
Subsequently, while considering the scope of judicial intervention at the referral stage under Section 11(6A) of the Arbitration Act. Placing reliance on the seven-judge bench decision in Interplay Between Arbitration Agreements under the Arbitration and Conciliation Act, 1996 and the Stamp Act, 1899, In Re,3 the Court emphasised that the legislature had consciously confined the jurisdiction of the referral court to a prima facie examination of the existence of an arbitration agreement as defined in Section 7 of the Act without delving into contested factual inquiries or conducting a mini-trial. Substantive questions concerning the validity of the arbitration agreement, arbitrability of the dispute, limitation, and jurisdictional bars are to be determined by the arbitral tribunal under the competence-competence principle embodied in Section 16 of the Arbitration Act. The referral court is not the appropriate forum to adjudicate upon such issues at the threshold stage.
Conclusion
The Supreme Court dismissed the appeals, upholding the High Court's order appointing arbitrators, holding that the arbitration clause was valid and binding as agreed upon by the parties, and there was no allegation that the clause itself was vitiated by fraud or invalidity. The only task before the Court under Section 11(6A) was to determine the existence of such a clause, and upon finding it to be present, the statutory remit was exhausted. Further the Hon'ble Court left all other objections raised by the Corporation, including the plea of serious fraud in light of the magnitude of the alleged misappropriation, the pendency of criminal proceedings, the applicability of the Recovery Act, limitation, and the bar of res judicata arising from prior proceedings before the Bihar Public Works Contracts Disputes Arbitration Tribunal, open to be raised and decided before the arbitral tribunal as preliminary issues.
The decision reinforces the legislative mandate to limit referral court scrutiny and affirms party autonomy in choosing arbitration as a dispute resolution mechanism, even amidst parallel criminal and recovery proceedings.
Footnotes
1. The Managing Director, Bihar State Food and Civil Supplies Corporation Ltd. & Anr. v. Sanjay Kumar 2025 INSC 933.
2. Sadhna Kumari v. Bihar State Food & Civil Supplies Corporation Ltd. [Request Case No. 8 of 2016 (High Court of Judicature at Patna)].
3. Interplay Between Arbitration Agreements under the Arbitration and Conciliation Act, 1996 and the Stamp Act, 1899, In Re (2024) 6 SCC 1.
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