The Arbitration and Conciliation Act, 1996[1] was enacted to facilitate expeditious and affordable resolution of disputes pertaining to in-personam rights arising out of contractual disputes between private parties. This raises questions on the impact that rights in-rem, such as those arising from criminal proceedings, would have on the arbitration process. This was analyzed by the Supreme Court in Managing Director Bihar State Food and Civil Supply Corporation Limited and Another v. Sanjay Kumar[2] on 5 August 2025.
Background
The Appellant, Bihar State Food and Civil Supplies Corporation, was required to procure paddy for the Food Corporation of India’s[3] scheme to distribute rice under the Public Distribution System[4] scheme and entered into agreements with various rice millers across Bihar. However, the Respondent failed to supply the requisite amount of milled rice, so proceedings were initiated under the Revenue Recovery Act, 1890[5].
The Single and Division Bench of the High Court of Patna disposed of the Respondent’s challenge to the proceedings under the Recovery Act, as well as the consequent Review Petition, due to arbitration remedies being available under the agreements. Thereafter, proceedings were initiated against the Respondents under the Prevention of Money Laundering Act, 2002[6] and multiple criminal proceedings were initiated against rice millers across Bihar due to allegations of fraud causing a loss of more than a thousand crores to the public exchequer. The Respondents were thereafter charged under Sections 420 and 409 of the Indian Penal Code, 1860[7].
However, the impugned decision of the High Court dated 03.07.2020 allowed the applications preferred by the Respondents under Section 11 of the Arbitration Act. This decision observed that the contracts which contained arbitration clauses were freely entered into by the parties, that the arbitrator could examine arguments on limitation, that there was no bar to arbitration since the allegations involved “simple accusations as against serious allegation of forgery or fabrication” and that the remedy of arbitration could not be foreclosed merely due to pendency of proceedings under the Recovery Act. Appeals were resultantly preferred before the Supreme Court.
Arbitrability of cases involving serious fraud allegations
The Supreme Court relied on several decisions, particularly A. Ayyawamy v. A. Paramasivam[8], to reiterate key principles pertaining to arbitrability of cases involving criminal disputes and allegations of serious fraud as follows:
- The Court observed that “access to justice for enforcement of rights and obligations is assured by the usual proceedings in the ordinary tribunals”, which includes the conduct of arbitral proceedings.
- Notwithstanding Section 2(3) of the Arbitration Act, a dispute which was otherwise arbitrable would not cease to be so merely because criminal proceedings could be instituted in that case.
- As held in Swiss Timing Limited v. Commonwealth Games 2010 Organising Committee[9], foreclosing the option of arbitration at the initial stage would be otiose as arbitral proceedings could always proceed simultaneously along with the criminal proceedings. Convictions during the criminal proceedings can give rise to pleas being taken at the execution and enforcement stage of the underlying contract being void, while acquittals would make it undesirable to have stalled the arbitral process during the criminal trial.
- Rashid Raza v. Sadaf Akhtar[10] provided for two tests to determine if a case dealt with “serious allegations of fraud”, the first being satisfied only if the arbitration clause or agreement itself is said to not have been in existence and the second being met when “allegations are made against the State and its instrumentalities” and relate to questions of public law. Disputes involving “serious fraud” could have profound implications on public law due to which they may not be arbitrable.
- Arbitration agreements stand independent of the contract between the parties but allegations of fraud with respect to the arbitration agreement are non-arbitrable and can be examined by the Arbitral Tribunal only for determining jurisdiction.
However, the Court observed that these principles would not be applicable in the present case due to Section 11(6) of the Arbitration Act.
Scope of enquiry when applications under Section 11(6) are opposed on grounds of serious fraud.
The landmark decision in Interplay between Arbitration Agreements under Arbitration and Conciliation Act, 1996 and Stamp Act, 1899, In Re[11] examined the separability of the arbitration agreement from the contract, the power of the Arbitral Tribunal to examine its own competence and the restrictions on the powers of scrutiny of the referral courts. It was observed that Section 11(6-A) confined the scope of consideration of the referral court to the examination of the existence of the arbitration agreement, which leaves the issue of substantive existence and validity of the arbitral agreement and jurisdictional issues within the domain of the Arbitral Tribunal under Section 16. The judgement thus observed that Courts exercising jurisdiction under Section 11(6) and Section 8 must follow the mandate of Section 11(6-A), where their “scrutiny must be “confine(d) to the examination of the existence of the arbitration agreement””. The Arbitral Tribunal could thus hear the remainder of submissions, including jurisdictional issues pertaining to barring of arbitration proceedings due to limitation or non-arbitrability. As a result, the appeals preferred before the Supreme Court in the present case were dismissed.
Takeaway
The Supreme Court articulated the principles with respect to the impact of criminal proceedings on arbitration and upheld the powers of the Arbitral Tribunal to examine all issues, including those pertaining to arbitrability of the dispute itself. This judgement thus recognizes that arbitration proceedings need not be unnecessarily halted on account of ongoing criminal proceedings, as the two can be adjudicated parallelly and simultaneously. Accordingly, this decision furthers the underlying objectives of the Arbitration Act and advocates removing fetters on the arbitral process.
[1] Arbitration Act
[2] 2025 SCC OnLine SC 1604
[3] FCI
[4] PDS
[5] Recovery Act
[6] PMLA
[7] IPC
[8] (2016) 10 SCC 386
[9] (2014) 6 SCC 677
[10] (2019) 8 SCC 710
[11] (2024) 6 SCC 1
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