Case title:
The Managing Director Bihar State Food and Civil Supply Corporation Limited & Anr. V. Sanjay Kumar
Date of Order:
August 5th, 2025
Bench:
Hon’ble Justice [PAMIDIGHANTAM SRI NARASIMHA]
Hon’ble Justice [MANOJ MISRA]
Parties:
The Managing Director Bihar State Food and Civil Supply Corporation Limited & Anr. - Appellant
Sanjay Kumar - Respondent
SUBJECT
The Supreme Court addressed whether disputes in the multi-crore Bihar Public Distribution System (PDS) Scam were non-arbitrable due to pending criminal proceedings. It held that the mere pendency of criminal cases involving simple fraud, cheating, or breach of trust did not bar arbitration. The Court reaffirmed that post sub-section (6A), referral courts were only to examine the existence of an arbitration agreement. Accordingly, the arbitration was allowed to proceed and the appeals were dismissed.
IMPORTANT PROVISIONS
- Section 11(6) – Arbitration and Conciliation Act, 1996
When parties fail to appoint an arbitrator as per their agreed procedure, a party can approach the court. The court (High Court or Supreme Court) can then appoint an arbitrator to avoid delay.
It ensures that arbitration proceedings commence even if one party defaults.
However, the court only checks the existence of an arbitration agreement, not the merits of the dispute. - Section 17 – Indian Contract Act, 1872 (Fraud)
Fraud refers to intentional deception to induce another party into a contract. It includes false statements, active concealment, and promises made without intent to perform. Even silence can be fraud in special relationships requiring full disclosure.
OVERVIEW
The Bihar State Food and Civil Supplies Corporation procured paddy from farmers under a Food Corporation of India scheme, which was converted into rice, which was then purchased by the Food Corporation of India (FCI) for distribution under PDS schemes.
The Corporation entered into agreements with rice millers for custom milling of paddy, with 67% of the supplied paddy being delivered. Subsequently, the Corporation discovered the respondents failed to supply the agreed amount of milled rice and initiated recovery proceedings. The respondents filed Writ Petitions challenging the legality of the proceedings. The High Court disposed of the petitions, but the respondents filed Writ Appeals, dissatisfied with the Single Judge's orders.
The appellants allege a massive fraud by rice millers, resulting in over a thousand crores in public exchequer loss. The Corporation initiated criminal proceedings, filing 1200 FIRs and charging respondents under Sections 420 and 409, IPC.
The High Court considered numerous applications filed by rice-millers in the PDS scam in Bihar, which involved over 19 lakh crores of misappropriation and ordered bail applications, a three-month investigation, and trial at five locations. Furthermore, the court also directed the appointment of officers and increased strength of officers, indicating a public element in the trial's efficiency and integrity.
Now, the rice millers filed similar applications under Section 11 of the Arbitration Act, which were allowed by the High Court in Sadhna Kumari v. Bihar State Food & Civil Supplies Corporation Ltd. The Corporation challenged the decision by filing Special Leave Petitions (SLPs). The High Court dismissed the SLPs on 29.01.2018. High Court relied on previous orders and affirmed its previous order appointing an arbitrator and reiterated its position, allowing the arbitrator to examine detailed arguments on limitation.
The HC ruled that allegations of criminality are simple accusations, not serious forgery or fabrication. The court also ruled that arbitration cannot be foreclosed due to the dependency of proceedings under the Recovery Act. The court emphasized that courts should not be hasty in concluding that a remedy under one law operates in derogation of another. The High Court held that arbitration would override the Recovery Act.
It was lastly ruled that the rice-millers' failure to file an arbitration application under Section 8 during certificate proceedings does not waive the arbitration clause. Also, Section 11 powers operate independently of Section 8 conditions and that mutual discussion is not a prerequisite for arbitration under clause 16.
ISSUES RAISED
I. Whether the dispute between the respondents and the appellant arising out of the agreement incorporating the arbitration clause has become non-arbitrable in view of the initiation and pendency of the criminal cases.
II. Whether invocation of the Recovery Act by the appellant-Corporation bars initiation of proceedings under the Arbitration Act.
III. Whether the application under Section 11(6) of the Arbitration and Conciliation Act, 1996 is barred by limitation.
IV. Whether the issue relating to legality and validity of invocation of arbitral proceedings under Section 11(6) is conclusively decided by the High Court in Sadhna 26 Kumari v. Bihar State Food & Civil Supplies Corporation Ltd, against which SLP was dismissed.
V. Whether the decision in the order of Bihar Public Works Contracts Disputes Arbitration Tribunal operates as res judicata. VI. Whether issues no. 1 to 5 should be left to the arbitral tribunal to decide in view of sub-section (6A) of Section 11 of the Act.
ARGUMENTS ADVANCED BY THE APPELLANT and the RESPONDENT
The counsels extensively argued on the issue of arbitrability, rather on non-arbitrability of the disputes. They further referred to a number of precedents on the issue of fraud or serious fraud involved in the dispute and also the subject matter for arbitration.
JUDGEMENT ANALYSIS
The law regarding the initiation of arbitral proceedings in cases of criminal allegations is considered in several court decisions, including A. Ayyasamy v. A. Paramasivam and Ors.
The principle is as follows - Section 28 of the Indian Contract Act, 1872 ensures access to justice for enforcement of rights and obligations through ordinary tribunal proceedings. This principle allows for dispute resolution through contract arbitration, governed by the Arbitration and Conciliation Act, 1996. The limits of dispute resolution through arbitration are statutorily incorporated in the Arbitration Act, and certain disputes may not be submitted to arbitration due to the application and operation of criminal laws and is relevant for disputes involving criminal laws.
In Rashid Raza (supra) Court established two tests for serious allegations of fraud. The first test is satisfied when the arbitration clause or agreement cannot exist in a clear case where the party against the breach cannot be said to have entered into the agreement. The second test is met when allegations are made against the State or its instrumentalities of arbitrary, fraudulent, or mala fide conduct, necessitating a writ court hearing.
Disputes involving serious fraud need more clarity to ensure certainty about the availability of remedies. At least one instance of serious fraud occurs when allegations have criminal law implications that affect nonparties, integrity in governance, accountability in public service, distribution of essential commodities, and national safety and security.
Section 11 of the Act has seen repeated reinterpretation by the Supreme Court over two decades. In response, Parliament added sub-section (6A), limiting referral courts to only verifying the existence of an arbitration agreement. Despite this amendment, clarity remained elusive. It was only after a seven-judge bench ruling in Interplay Between Arbitration Agreements... In Re that certainty was finally achieved.
The Supreme Court’s landmark ruling has since been affirmed in later cases like SBI General Insurance v. Krish Spinning and others. Courts under Sections 11(6) and 8 must now strictly limit their role to verifying the existence of an arbitration agreement, as per sub-section (6A). In this case, since such an agreement exists, no further judicial scrutiny is warranted. All other arguments are to be raised before the arbitral tribunal, in line with binding precedent.
CONCLUSION
The Court has left jurisdictional issues like limitation and non-arbitrability for the arbitral tribunal to decide. These will be addressed as preliminary matters, with all parties given a fair chance to present their case. Given the existence of a valid arbitration agreement, the appeals were dismissed.
