Supreme Court confirms referral to arbitration despite parallel criminal probes, confines Section 11 scrutiny to existence of arbitration agreement

A bench of Justice Pamidighantam Sri Narasimha and Justice Manoj Misra heard a batch of civil appeals arising out of Special Leave Petitions challenging orders of the Patna High Court that allowed multiple applications under Section 11 of the Arbitration and Conciliation Act, 1996 and appointed arbitrators in disputes between the Bihar State Food & Civil Supplies Corporation and several rice millers. The primary issue concerned whether disputes involving allegations of large‑scale fraud and pending criminal proceedings were non‑arbitrable and whether the referral court could go beyond a prima facie examination under Section 11(6)/(6A).

The Court dismissed the appeals and held that the referral court’s scrutiny under Section 11(6A) was limited to a prima facie examination of the existence of an arbitration agreement. The judges observed that while allegations of “serious fraud” may render a dispute non‑arbitrable in certain exceptional circumstances, the present record disclosed an arbitration clause and therefore the matter should be referred to the arbitral tribunal. The Court emphasised that “all the issues” including limitation and non‑arbitrability could be raised before the arbitral tribunal and dealt with as preliminary questions. The Court, in its reasoning, observed: Background The appeals arose from contracts executed by the Bihar State Food & Civil Supplies Corporation with rice millers for custom‑milling of procured paddy; the agreements contained clause 16 providing for arbitration (the District Collector as arbitrator) and clause 15 permitting recovery as land revenue under the Bihar & Orissa Public Demands Recovery Act. After alleged shortfalls in delivery of milled rice, the Corporation issued recovery notices and initiated certificate proceedings; affected millers invoked arbitration and challenged recovery notices by writ petitions. The Patna High Court earlier held that arbitration clauses required disputes to be referred to arbitration, and this Court had earlier dismissed SLPs against one such High Court order (Sadhna Kumari). Meanwhile criminal investigations and hundreds of FIRs and chargesheets were lodged alleging large‑scale misappropriation amounting to over a thousand crores, and this Court in related proceedings recorded the gravity of alleged public loss and directed concentrated investigation and trial infrastructure.

In 2019 many rice millers filed fresh Section 11 petitions in the High Court; the High Court allowed them on 03.07.2020, holding that arbitration clauses were freely entered into, limitation and other objections could be examined by the arbitrator, and that mere issuance of recovery notices or pendency of criminal proceedings did not oust arbitration. The Corporation challenged that order before this Court contending that the disputes were non‑arbitrable due to “serious fraud”, that recovery proceedings ousted arbitration, and that Section 11 petitions were time‑barred.

The Supreme Court reviewed authorities on arbitrability where criminality was alleged and restated that while disputes involving “serious fraud” or public law ramifications may be excluded from arbitration, ordinarily civil and contractual disputes with related criminal aspects could proceed in arbitration without prejudice to criminal processes. Applying the mandate of Section 11(6A) and the Court’s precedent, the bench found a valid arbitration agreement on the record and held that the referral court’s role was confined to a prima facie examination; complex questions, including allegations of fraud going to validity or limitation, were to be decided by the arbitral tribunal as preliminary issues. The Court left open all substantive defenses for the arbitral forum and dismissed the appeals, granting liberty to parties to agitate jurisdictional objections before the tribunal.

Case No.: 2025 INSC 933 (Civil Appeals arising out of multiple SLP(C) Nos. including SLP (C) No. 10455 of 2020 and connected matters)

Case Title: The Managing Director, Bihar State Food and Civil Supplies Corporation Limited & Anr. v. Sanjay Kumar (and connected appeals)

Appearances: For the Petitioner(s): Mr. Ranjit Kumar, Senior Advocate For the Respondent(s): Mr. Amit Sibal, Senior Advocate