As per case facts...The Bihar State Food and Civil Supplies Corporation (Corporation) and rice millers entered into agreements for paddy milling. Disputes arose when millers failed to deliver the milled ...
No Acts & Articles mentioned in this case
2025 INSC 933 1
REPORTABLE IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. OF 2025
ARISING OUT OF SLP (C) No. 10455 OF 2020
THE MANAGING DIRECTOR BIHAR STATE
FOOD AND CIVIL SUPPLY CORPORATION
LIMITED & ANR. ..APPELLANT(S)
VERSUS
SANJAY KUMAR ..RESPONDENT(S)
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J U D G M E N T
PAMIDIGHANTAM SRI NARASIMHA, J.
Contents
I. Introduction. .................................................................................................. 11
II. Facts. ............................................................................................................. 12
III. Issue. ............................................................................................................. 25
IV. Submissions. ................................................................................................ 26
V. Principles governing arbitrability in cases involving allegations of serious
fraud. ................................................................................................................... 26
VI. Scope ............................................................................................................ 34
1. Leave granted.
I. Introduction.
2. These appeals arise out of the final judgment and order
passed by the High Court of Judicature at Patna allowing
12
applications under Section 11 of the Arbitration and Conciliation
Act, 1996
1 and appointing arbitrators in several cases.
2.1 Substantial arguments were centred around the issue of
arbitrability in cases of serious fraud. We have considered this
issue and laid down the principles that govern this issue. We
have also considered the stage at which such questions are to be
raised while considering an application under Section 11 of the
Arbitration and Conciliation Act. Before we deal with these issues
the necessary facts are as follows.
II. Facts.
3. The appellant, Bihar State Food and Civil Supplies
Corporation
2, undertook the work of procurement of paddy from
the farmers in the State of Bihar under a scheme evolved by the
Food Corporation of India
3. The scheme provided that the paddy
procured by the Corporation from the farmers has to be converted
into rice and the rice shall in turn be purchased by the FCI for
distribution under PDS schemes. In furtherance of the scheme
the appellant entered into agreements with various rice millers
across the state for custom milling of paddy procured from the
1
Hereinafter referred to as the ‘Arbitration Act.’
2
Hereinafter referred to as the ‘Corporation’.
3
Hereinafter referred to as the ‘FCI’.
13
farmers. As per the agreement various quantities of paddy were
allotted to the rice millers and they were to deliver rice quantified
at 67% of the paddy supplied to them. Relevant clauses of the
agreement including clause 16 relating to arbitration, which is
the basis for filing applications under Section 11 of the
Arbitration Act is as follows:-
“15. The second party agrees that in case, any amount found
recoverable on account of default, loss, damage on the part of
the second party, the said recoverable amount with interest
will be recovered as Land Revenue under Bihar & Orissa
Public Demands Recovery Act, 1914, by instituting Certificate
case before the concerned District Certificate Officer.
16. In case of disputes both parties agree to settle the issue(s)
on mutual discussions. Failure to reach agreement the matter
will be referred to Arbitrator. It has been also agreed that the
Arbitrator will be District Collector of the concerned District
whose decision shall be final, concerning the dispute referred
to him.”
4. It is evident from the above that under Clause 15, the
agreement contemplated recovery of dues as land revenue under
the Bihar and Orissa Public Demands Recovery Act, 1914
4.
Further, under Clause 16, if an attempt to settle disputes through
mutual discussions fails, then dispute will be referred to
arbitration.
5. Within a year of entering into the contracts, the Corporation
realised that the respondents have failed to supply the agreed
4
Hereinafter referred to as the ‘Recovery Act’.
14
amount of milled rice and, therefore, initiated proceedings under
the Recovery Act as contemplated under Clause 15 o f the
agreement. Challenging the legality and validity of initiation of the
recovery proceedings, the respondents filed Writ Petitions under
Article 226 of the Constitution challenging the demand notice s
issued under the Recovery Act. These petitions came to be
disposed of by the High Court by its orders dated 22.07.2014 and
23.07.2014 by holding that there is a parallel remedy of
arbitration provided under the agreement.
6. Dissatisfied with the orders passed by the Single Judge, the
respondents approached the Division Bench of the High Court by
filing the Writ Appeals. The Division Bench disposed of the
appeals by its order dated 17.04.2015, affirming the decision of
the Single Judge by holding as under:
“If it is well established that even in cases of such nature this
Court certainly can interfere. However, one peculiar situation
that emerges in these cases is that apart from enabling
provision, i.e. Clause-15, the agreements contained Clauses
16 that provided for conciliation or Arbitration. It reads as
under:-
16. In case of disputes both parties agree to settle the
issue(s) on mutual discussion. Failure to reach
agreement the matter will be referred to Arbitrator. It
has been also agreed that the Arbitrator will be District
Collector of the concerned District whose decision shall
be final, concerning the dispute referred to him.
From a perusal of this, it becomes clear that if there exists the
dispute between the parties, the recourse must be had to
conciliation, as a first step and, if that does not fructify, the
15
steps need to be taken to get the dispute resolved through
Arbitration. It is a different matter that the Collector is the
named Arbitrator in all these cases.
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.
The plea of the appellants that the arbitration by the Collector
may not be effective, can be certainly agitated before the
proper forum, but not in the writ petition. Such a course
would invariably be available in the process of availing the
remedy of arbitration, but not outside the same.
The Learned Single Judge has taken correct view of the
matter in refusing to entertain the writ petitions after taking
note of the existence of clauses providing for arbitration. The
interests of the appellants have already been adequately
protected by stipulating time for the concerned authorities to
take action in the event of any representations in terms of
Clause 16 being made.”
(emphasis supplied)
7. Review Petitions filed against the above referred order by the
respondents were also dismissed by the Division Bench .
Subsequently, the Enforcement Directorate also initiated
proceedings against the respondents under the PMLA.
8. In the meanwhile, it is alleged by the appellant s that a
massive fraud by rice millers leading to a huge loss of more than
a thousand crores to the public exchequer came to light. The
Corporation initiated criminal proceedings by filing almost 1200
FIRs against the rice millers situated across the S tate of Bihar.
16
The relevant extract from an FIR in one of the cases is extracted
below for ready reference:
5
“In context of aforesaid subject, it is to say that, Mr. Sanjay
Kumar, age about 40 years, Proprietor, Sanjay Rice Mill,
Dubhvaliya, S/o- Mr. Avadh Bihari Sao R/o-
VillageDubhvalia, P.S.- Bagha-2, Dist.- West Champaran in
Procurement Year 2012-13 executing the Deed of Agreement,
for milling procured total 11090.80 quintal paddy, of which
67 % C.M.R. (Rice) is total 7430.83600 quintal, which was to
be deposited by him by the last date of 31.12.2013
determined by the Government of India. But by him only
2970.00 quintal C.M.R. (Rice) is deposited in the godown of
Food Corporation of India. Repeatedly warning was given to
Mr. Sanjay Kumar for depositing rice, but by him rice is not
deposited. By him against total 4460.83600 quintal C.M.R.
(Rice) @ Rs. 2165.56 per quintal costing total Rs. 9660208.00
[Ninety Six Lakh, Sixty Thousand, Two Hundred & Eight] by
the date of 20.05.2016 total 13, 00, 000.00/- [Thirteen Lakh]
rupees through Bank Demand Draft is deposited. Thus rest
amount of Rs. 8360208.00/- [Eighty Three Lakh, Sixty
Thousand, Two Hundred & Eight] are defalcated under
criminal conspiracy and heavy damage is caused to the
governmental amount. At the same time, up to date of
recovery at the rate of 8 % the amount of interest is also
recoverable.”
9. Upon completion of investigation, chargesheets came to be
filed in the year 2016, whereunder the respondents were charged
for committing offences under Sections 420 and 409, IPC. The
relevant portion from one such chargesheet is extracted
hereinbelow for ready reference:
6
5
First Information Report No. 198/16, Police Station Bagha, West Champaran, Bihar
(26.05.2016).
6
Final Report, Chief Judicial Magistrate, Kaimur Bhabua, Bihar (18.12.2016).
17
“This informant Shahnawaz Ahmed Niyazi son of Md.
Niyazuddin resident of Anand Bazar, Cantt Patna present
District Manager, Kaimur State Food Corporation, vide office
number 577 dated 7.06.2016 on this basis, F.I.R against
M/s Shiv Shanti Rice Mill through its proprietor namely
Abhishek Kumar son of Shiv Prasahan Ray village -
Panchpokhari P.S.- Kudra, District -kaimur on charges of
fraudulently embezzling government rice worth Rs
67,83,705.40. found accused, the investigation so far into the
case to be true based on the statement of informant,
supervision, and available evidences near the incident site.
This case has been found true under section 420/409 IPC
against the accused Abhishek Kumar son of Shiv Prasahan
Ray, village-panchpokhari, P.S.- Kudra, District-Kaimur, the
charge sheet received is true and order has been given to
submit the charge sheet to senior officer […]”
10. Pending disposal of criminal proceedings, large number of
applications filed by the rice- millers were considered and
disposed of by the High Court . Some of the orders were
challenged before this Court in State of Bihar v. Divesh Kumar
Chaudhry
7, decided on 28.02 .2017, this Court recording the
nature of the crime passed the following order:
“2. It has been stated by Mr Sidharth Luthra, learned Senior
Counsel appearing for the State/Corporation, that a sum of
rupees fifteen hundred crores in all has been allegedly
misappropriated by the accused for which 600 FIRs have
been filed. According to the case of the State, agreements for
milling of paddy were entered into with different rice mills in
pursuance of which paddy was handed over for milling but
the rice from the milled paddy was not returned or was
returned partly. Thus, 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.
7
(2018) 16 SCC 817.
18
3. Our attention has been drawn to the deed of agreement.
Clause 3 thereof provides for furnishing of bank guarantee
for the value of paddy, which is taken for milling, or for
pledging of the immovable property of the value of the paddy.
There is also provision in Clause 12 that in case of default of
the terms of the agreement, the bank guarantee can be
forfeited and legal action initiated for recovery of the amount
from the mortgaged immovable property.
[…]
4.3. The investigation will be completed within a period of
three months.
4.4. All the accused will be tried only at five places viz.
Patna, Gaya, Chhapra, Darbhanga and Purnia by officers of
the appropriate rank determined by the High Court within
one week from today. The High Court may specify the area of
jurisdiction of the said five courts by a public order. If
required by the High Court, the State Government may
sanction extra strength of officers with requisite
infrastructure so that normal work of courts is not disturbed
on account of the special arrangement for these cases.
4.5. The officers posted will deal with these cases
exclusively. If free from their work, any other work may be
assigned to the said officers.
4.6. The authorities concerned will be at liberty to encash the
bank guarantee(s) after holding that there is a breach of
terms of the agreement which decision will be subject to
appropriate remedies of the parties.
4.7. If not otherwise encashed, the bank guarantee will be
kept alive till the trial is over. However, deposits/furnishing
of bank guarantees will be abide by further orders of the trial
court, interim or final.
4.8. If any amount is deposited by the accused, the said
amount will be adjusted in the amount of the bank
guarantee, which is to be furnished by the accused.
4.9. The accused will surrender their passports to the
respective courts within a period of four weeks from today
and will not leave the country without prior permission from
the court concerned.”
11. It is evident from the above that this Court recorded that the
PDS scam in the State of Bihar involves misappropriation of more
19
than a thousand crores by the accused rice- millers, against
whom some 600 FIRs have been filed. Having considered the
matter in detail, this Court passed orders i n certain bail
applications and further directed that the investigation should be
completed within a period of 3 months. This Court has also
directed that all the accused will be tried only at 5 places i.e. at
Patna, Gaya, Chhapra, Darbhanga and Purnia for effective
conduct of the trials. The High Court was directed to identify and
post officers of appropriate rank within one week for conduct of
trial. There was also a direction to increase the strength of the
officers and provide necessary infrastructure. All these directions
indicate that there is public element involved in the conduct of
trial efficiently and with integrity.
12. It is also important to mention that, considering the
enormity and magnitude of the public money involved, the High
Court directed the constitution of a Special Investigation Team
(SIT) at the state- level for focussed and concerted action.
Concerned about the fact that misappropriation of large amounts
in one financial year could not have taken place without a larger
conspiracy at the higher level within the Corporation itself, the
High Court directed monitoring of the case under the guidance of
20
the Additional Director General, CID. The relevant portion of the
order dated 10.03.2017 in Satyendra Kumar Keshri v. State of
Bihar
8 is extracted hereinbelow for ready reference.
“2. There are at least 1202 criminal cases pending
throughout the State of Bihar in its every District, having
common features, all based on allegation of large scale
bungling and misappropriation of public property in the
matter of procurement of paddy and supply of Customized
Milled Rice (CMR).
3. Considering the enormity and magnitude of public money
involved, which is said to have been misappropriated and
bungled, while hearing this application, I intended to
consider possibility of constituting a Special Investigating
Team at the State level for more focused and concerted
investigation into all the cases. 4. The allegations made in all
these First Information Reports are almost identical and
show involvement of the personnel of Bihar State Food &
Civil Supplies Corporation, State Government
Officials/personnel, Rice Mill Owners and other persons
connected in the said transactions. This Court had noticed
that despite the fact that the allegations in all such cases
were Identical in nature, the cases are being investigated by
the concerned police Officers on case to case basis. Being of
the view that misappropriation of this magnitude Involving
more than one thousand crores (nearly 1500 crores) in one
financial year could not have taken place simultaneously,
through different transactions, throughout the State of Bihar,
without there being a larger conspiracy at some higher level,
by order, dated 08,02.2017, I had observed that
investigation into all the cases should be monitored under the
guidance of the Additional Director General, Criminal
Investigation Department, Bihar, Mr. Binay Kumar. In the
said order, dated 08.02.2017, the Additional Director
General, C.I.D. was asked to report to this Court to suggest a
tentative team, which he would like to constitute for carrying
out the exercise of monitoring all investigations in all such
cases, so that it could be convenient for the Court to pass
8
Crim Misc. No. 52242 of 2013.
21
appropriate order constituting Special Investigation Team for
the said limited purpose.
5. In compliance with the said order, dated 15.02.2017, Mr.
Binay Kumar, Additional Director General, C.I.D, Bihar has
filed a detailed affidavit. From the said affidavit it is evident
that out of said 1202 cases at least 9 involve
misappropriation of Government property worth more than
Rs. 8 crores; 18, between 8 crores to five crores; 55, between
5 crores to 3 crores; 261, between 3 crores to 1 crore and
854, one crore and below. It also appears from the said
affidavit that at least 9 cases are being investigated by
Economic Office Unit of the State of Bihar.”
13. Before we refer to the initiation of proceedings under
Section 11 of the Arbitration Act in the year 2019, from which the
present appeals arise, it is necessary to mention that similar
applications under Section 11 of the Arbitration Act were filed by
some rice millers and they came to be allowed by the High Court
on 19.04.2017 in Sadhna Kumari v. Bihar State Food & Civil
Supplies Corporation Ltd.
9 The decision of the High Court allowing
the Section 11 applications was challenged by the Corporation by
filing Special Leave Petitions (SLPs) before this Court. By its order
dated 29.01.2018, this Court dismissed the SLPs
10. However, we
are informed that the appellants filed Review Petitions
11 against
the said order dated 29.01.2018 and the same are pending
9
Request Case No. 8 of 2016 (High Court of Judicature at Patna).
10
Special Leave to Appeal (C) No. 450 of 2018 .
11
Bihar State Food and Civil Supplies Corpn. Ltd. v. Sadhna Kumari, Review Petition (Civil)
D. No. 17336 of 2020.
22
consideration before this Court. In fact, there is a direction by
this Court on 15.10.2020 that the Review Petition s should be
listed after disposal of the present batch of appeals.
14. Similarly, some of the respondents had previously filed
applications requesting appointment of an arbitrator, and the
High Court referred the dispute to the Bihar Public Works
Contracts Disputes Arbitration Tribunal. The Tribunal dismissed
the reference on jurisdictional grounds on 25.09.2019. The
appellant contends that these orders have become final as they
were not been challenged under Section 34 of the Arbitration Act.
15. All the above- referred facts span over a period of six years,
commencing from the time when agreements were executed in the
year 2013 and culminate with the filing of the present
applications under Section 11 of the Arbitration Act in the year
2019.
16. Impugned Order: By way of the impugned order dated
03.07.2020, the High Court allowed all the Section 11 petitions
filed by the respondents. The High Court held that it is
undisputed that the agreements, including the arbitration
clauses, were entered into freely by both the parties. At the
outset, the High Court considered and rejected the argument of
23
limitation advanced by appellant on the ground that while cause
of action commenced from the issuance of a demand notice under
the Recovery Act in 2015, arbitration was invoked only in the year
2019. The High Court relied on one of its previous orders passed
in the case of other rice- millers titled Sadhna Kumari v. State of
Bihar, to reject the argument. The High Court also noted that its
previous order appointing arbitrator was affirmed by this Court
vide its order dated 29.01.2018 in Bihar State Food & Civil
Supplies Corporation Ltd v. Sadhna Kumari . In the impugned
order, the High Court reiterated the same position and held that
detailed arguments on limitation can be looked into by the
arbitrator.
17. As regards the objection of non-arbitrability of dispute due
to allegations of criminality, the Court felt the allegations are
simple accusations as against serious allegation of forgery or
fabrication and as such there is no bar. The High Court also held
that arbitration as a remedy cannot be foreclosed due to the
pendency of proceedings under the Recovery Act as there was no
conflict between the two laws. It observed that while Recovery Act
operating an independent field provides for a mechanism for
determining and recovering a public debt, arbitration, on the
24
other hand deals with a resolution of wide range of disputes
arising out of a contract. The High Court also held that mere
issuance of a notice under the Recovery Act cannot lead to the
conclusion that claims made thereunder are public debts and
subject to exclusive consideration under Recovery Act. It therefore
held that courts should not be hasty in concluding that remedy
under one law operates in derogation of a remedy under another.
Even if there is any conflict, the High Court held that the
Arbitration Act would override the Recovery Act since the former
is a central legislation.
18. The High Court also stated that the omission on the part of
the rice-millers to file an application under Section 8 of the
Arbitration Act during the certificate proceedings does not
amount to a waiver of the arbitration clause. It was held that
powers under Section 11 operate independently of the conditions
flowing from Section 8. Lastly, the High Court also held that
attempting settlement of disputes through mutual discussion is
not a pre-condition for invoking the arbitration under clause 16 of
the agreement.
19. We have heard Mr. Ranjit Kumar, learned s enior counsel
appearing for the appellant and Mr. Amit Sibal, learned senior
25
counsel appearing on behalf of the respondents- Rice Millers. The
submissions of the learned counsels can broadly be divided into
four parts, though there are two other incidental submissions
which may not have a direct bearing on our final decision. The
broad submissions can be formulated as the following issues:
III. Issue.
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 a rbitral
tribunal to decide in view of sub-section (6A) of Section
11 of the Act.
IV. Submissions.
20. Mr. Ranjit Kumar and Mr. Amit Sibal have extensively
argued on the issue of arbitrability, rather on non-arbitrability of
the disputes as contended by Mr. Ranjit Kumar. They 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.
V. Principles governing arbitrability in cases involving
allegations of serious fraud.
21. In view of our decision, it is unnecessary to delve deep on
this issue, but sufficient to restate the law on the subject. T he
position of law as it applies to initiation of arbitral proceedings in
27
the teeth of allegations of criminality involved in the dispute,
where criminal proceedings are either pending or to be initiated is
considered in several decisions of this Court.
12 In A. Ayyasamy v.
A. Paramasivam and Ors.
13, this Court has considered the matter
in detail and laid down certain principles. As the relevant
portions of the decision in Ayyasamy (supra) have been extracted
in the subsequent decisions of this Court in Ameet Lalchand
Shah v. Rishabh Enterprises
14, Rashid Raza v. Sadaf Akhtar ,
15
and Avitel Post Studioz Limited v. HSBC PI Holdings (Mauritius)
Limited
16
, we are of the opinion that our judgment need not be
burdened by extracting excerpts from the judgment all over
again. Instead, we seek to restate the principles as follows:-
I. Access to justice for enforcement of rights and obligations
is assured by the usual proceedings in the ordinary
tribunals.
17 It is for this reason that S ection 28 of the
Indian Contract Act, 1872 while prohibiting agreements in
12
Abdul Kadir Shamsuddin Bubere v. Madhav Prabhakar Oak, 1961 SCC OnLine SC 138; N.
Radhakrishnan v. Maestro Engineers, 2010 (1) SCC 72; Swiss Timing Ltd. v. Organising
Committee, Commonwealth Games 2014 (6) SCC 677; Meguin Gmbh v. Nandan
Petrochem Ltd., (2016) 10 SCC 422; A. Ayyasamy v. A. Paramasivam and Ors (2016) 10 SCC
386; Ameet Lalchand Shah v. Rishabh Enterprises, (2018) 15 SCC 678; Rashid Raza v. Sadaf
Akhtar, (2019) 8 SCC 710; Avitel Post Studioz Limited v. HSBC PI Holdings (Mauritius)
Limited, (2021) 4 SCC 713; Deccan Paper Mills v. Regency Mahavir Properties, 2021 (4) SCC
786.
13
(2016) 10 SCC 386.
14
(2018) 15 SCC 678.
15
(2019) 8 SCC 710.
16
(2021) 4 SCC 713.
17
Section 9 of the CPC and Cox and Kings Ltd. v. SAP India Pvt. Ltd. [2023 INSC 1051].
28
restraint of legal proceedings saves resolution of disputes
through contract, i.e., by arbitration. The conduct of
arbitration is governed by the Arbitration and Conciliation
Act, 1996.
II. The limits of dispute resolution through arbitration are
statutorily incorporated in the Arbitration Act itself.
Section 2(3) provides that, “This part shall not affect any
other law for the time being in force by virtue of which
certain disputes may not be submitted to arbitration.”
18
Disputes that shall not be submitted to arbitration have
been recognized in a large number of decisions of this
Court.
19 Of these, for the present purpose we are
concerned with disputes which shall not be submitted to
arbitration due to application and operation of criminal
laws to the dispute in question.
18
It is important to note that the statutory incorporation of the limits of dispute resolution
through arbitration is not noticed in many judicial precedents. However, it is true that
categories of cases that are not arbitrable are not enumerated in Section 2(3) of the Act. The
position as noticed in Ayyasamy is as follows, “it has to be kept in mind that in so far as the
statutory scheme of the Act is concerned, it does not specifically exclude any category of cases
as non- arbitrable. Such categories of non- arbitrable subjects are carved out by the courts,
keeping in mind the principle of common law that certain disputes which are of public nature,
etc. are not capable of adjudication and settlement by arbitration and for resolution of such
disputes, i.e. public fora are better suited than a private forum of arbitration…” See Para 25
Ayyasamy (supra).
19
Booz-Allen & Hamilton Inc v. SBI Home Finance Ltd., 2011 (5) SCC 532; Vidya Drolia v.
Durga Trading Corpn. (2021) 2 SCC 1; and National Insurance Co. Ltd. v. M/s Boghara
Polyfab Pvt. Ltd. (2009) 1 SCC 267.
29
III. Same set of facts may lead to civil and criminal
proceedings. A civil dispute could involve questions of
coercion (section 15 of Contract Act), undue influence
(section 16 of Contract Act), fraud (section 17 of Contract
Act), misrepresentation (section 18 of Contract Act) for
example, and such disputes can be adjudicated as civil
proceedings for determination of civil or contractual
liabilities between the parties. The same set of facts could
have their co-relatives in criminal law. 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.
20
IV. The reason for permitting submission of such disputes to
arbitration is well explained in Swiss Timing
21 as, “To shut
out arbitration at the initial stage would destroy the very
purpose for which the parties had entered into arbitration.
Furthermore, there is no inherent risk of prejudice to any of
the parties in permitting arbitration to proceed
20
Avitel Post Studioz Limited v. HSBC PI Holdings (Mauritius) Limited, (2021) 4 SCC 713,
para 43.
21
2014 (6) SCC 677. Also see similar reasoning by Justice B.N. Srikrishna in the context of
Section 45 of the Arbitration Act in Shin-Etsu Chemical Co. Ltd. v. Aksh Optifibre Ltd; (2005)
7 SCC 234 at 267, para 74.
30
simultaneously to the criminal proceedings. In an
eventuality where ultimately an award is rendered by the
Arbitral Tribunal, and the criminal proceedings result in
conviction rendering the underlying contract void, the
necessary plea can be taken on the basis of the conviction
to resist the execution/enforcement of the award.
Conversely, if the matter is not referred to arbitration and
the criminal proceedings result in an acquittal and thus
leaving little or no ground for claiming that the underlying
contract is void or voidable, it would have the wholly
undesirable result of delaying the arbitration [...].”
V. For an important policy consideration, our Court has
drawn a distinction between “serious fraud” and “fraud
simpliciter” to segregate and exclude disputes involving
serious fraud from arbitrability
22. Disputes involving
serious fraud may not be submitted to arbitration as
explained, to some extent in Ayyasamy (supra) as they,
22
The position in our country is different from global practices which do not draw such
distinction as noticed by Gary B. Born in his Book commentary where he was observed
“Indian courts have adopted a comparable, albeit less expansive, treatment of fraud claims, at
least in a domestic context. The Indian Supreme Court has held that at least some claims of
“serious fraud,” in a domestic setting, are nonarbitrable, while claims of “ordinary” fraud are
arbitrable. The Indian approach, although undesirable from a policy perspective and out-of-
step with that of most national courts, is arguable consistent with the Convention’s treatment
of the nonarbitrability doctrine” See Gary B. Born, International Commercial Arbitration
Volume 1, § 6.04 (O) (3
rd
edn, Kluwer Law International B.V., 2021).
31
“
are very serious allegations of fraud which make a virtual
case of criminal offence or where allegations of fraud are so
complicated that it becomes absolutely essential that such
complex issues can be decided only by the civil court on the
appreciation of the voluminous evidence that needs to be
produced, the court can sidetrack the agreement by
dismissing the application under Section 8 and proceed
with the suit on merits […]”
VI. “Serious allegations of fraud” is to be understood in the
context of facts. In Rashid Raza (supra)
23 this Court laid
down two tests. The first test is satisfied only when it can
be said that the arbitration clause or agreement itself
cannot be said to exist in a clear case in which the court
finds that the party against whom breach is alleged
cannot be said to have entered into the agreement relating
23
(2019) 8 SCC 710, para 4; as subsequently affirmed in Avitel Post Studioz Ltd & Ors. v .
HSBC PI Holdings (Mauritius) Ltd; (2021) 4 SCC 713, para 35 at pg. 753 .
“35. After these judgments, it is clear that “serious allegations of fraud” arise only
if either of the two tests laid down are satisfied, and not otherwise. The first test is
satisfied only when it can be said that the arbitration clause or agreement itself
cannot be said to exist in a clear case in which the court finds that the party
against whom breach is alleged cannot be said to have entered into the agreement
relating to arbitration at all. The second test can be said to have been met in cases
in which allegations are made against the State or its instrumentalities of
arbitrary, fraudulent, or mala fide conduct, thus necessitating the hearing of the
case by a writ court in which questions are raised which are not predominantly
questions arising from the contract itself or breach thereof, but questions arising in
the public law domain.”
32
to arbitration at all. The second test can be said to have
been met in cases in which allegations are made against
the State or its instrumentalities of arbitrary, fraudulent,
or mala fide conduct, thus necessitating the hearing of the
case by a writ court in which questions are raised which
are not predominantly questions arising from the contract
itself or breach thereof, but questions arising in the public
law domain.
VII. Disputes involving allegations of serious fraud need more
clarity so that there is certainty about the availability of
the remedy. At least one instance of serious fraud will be
where disputes involving allegations having criminal law
implications transcend inter se disputes between the
contracting parties and attain public implications, where
the ramifications could directly or indirectly affect non -
parties and impact, integrity in governance, accountability
in public service, distribution of essential commodities,
safety and security of the nation for example.
33
Consideration of such disputes have public law
implications and shall ‘not be submitted to arbitration ’.
24
VIII. Arbitral Tribunal will be within its jurisdiction to consider
allegations of fraud even with respect to the specific terms
or clauses in the contract as an arbitration agreement
stands independent of the contract and continue to bind
and govern the parties even if the contract is terminated
or challenged and this question is no more res integra.
There is however an exception , the following is its
articulation
25.
IX. However, the allegations of fraud with respect to the
arbitration agreement itself stand on a different footing.
This position is generally recognized as a dispute which is
in the realm of non- arbitrability
26. In such cases , the
arbitral tribunal will not examine the allegation of fraud
but will consider the submission only for the purpose of
examining exclusion of jurisdiction. This principle, in its
24
See: A. Ayyasamy v. A. Paramasivam and Ors.; (2016) 10 SCC 386 para 25, Rashid Raza
v. Sadaf Akhtar; (2019) 8 SCC 710 para 4, Avitel Post Studioz Limited v. HSBC PI Holdings
(Mauritius) Limited, (2021) 4 SCC 713, para 35.
25
Interplay Between Arbitration Agreements; (2024) 6 SCC 1.
26
Ayyasamy (supra), para 25; It is explained that the Court can do so in cases “where there
are serious allegations of forgery/fabrication of documents in support of the plea of fraud or
where fraud is alleged against the arbitration provision itself or is of such a nature that
permeates the entire contract, including the agreement to arbitrate, meaning thereby in
those cases where fraud goes to the validity of the contract itself of the entire
contract which contains the arbitration clause or the validity of the arbitration
clause itself…”
34
application, can be seen in the judgment of this Court in
Avitel.
27
X. The burden of proof is on the party who raises the plea.
28
XI. When a plea of non-arbitrability is raised, the Court will
examine it as a jurisdictional issue only to enquire if the
dispute has become non-arbitrable due to one or the other
reason as indicated by us hereinabove.
22. Though we have referred in detail to the facts of the case
and have formulated the general principles of non-arbitrability on
the basis of the decisions referred to by Mr. Ranjit Kumar and
Mr. Amit Sibal learned senior counsels, there is a fundamental
barrier that would disable us from applying the said principles to
the facts of the present case.
VI. Re: Issue No.6: Scope of enquiry by the referral court
when an application under Section 11(6) of the Act is
opposed on the grounds of serious fraud.
23. Section 11 of the Act has perhaps been the only provision
which would have been interpreted and re- interpreted by the
Supreme Court for the longest time ever. After two decades of its
27
Avitel (supra); “54.1. That there is no such fraud as would vitiate the arbitration clause in
the SSA entered into between the parties as it is clear that this clause has to be read as an
independent clause. Further, any finding that the contract itself is either null and void or
voidable as a result of fraud or misrepresentation does not entail the invalidity of the
arbitration clause which is extremely wide […]”
28
Ayyasamy (supra), para 45.1.
35
interpretation commencing from 1996, Parliament intervened and
supplied sub- section (6A) to Section 11 of the Act as per which
the consideration by a referral court shall be confine(d) to the
examination of the existence of an arbitration agreement.
24. Even after the introduction of sub-section (6A), it took
almost a decade for us to have clarity and certainty till the seven
judges bench decision of this Court in the case of Interplay
Between Arbitration Agreements under Arbitration and Conciliation
Act, 1996 and Stamp Act, 1899, In Re
29 was delivered.
25. In the seven judges bench decision, this Court considered in
detail the separability of the arbitration agreement from the
contract, the empowerment of the a rbitral tribunal to examine its
own competence and finally the limits of referral courts scrutiny.
The relevant portions are as under:
“165. The legislature confined the scope of reference under
Section 11(6-A) to the examination of the existence of an
arbitration agreement. The use of the term “examination” in
itself connotes that the scope of the power is limited to a
prima facie determination. Since the Arbitration Act is a self-
contained code, the requirement of “existence” of an
arbitration agreement draws effect from Section 7 of the
Arbitration Act. In Duro Felguera [Duro Felguera,
S.A. v. Gangavaram Port Ltd., (2017) 9 SCC 729 : (2017) 4
SCC (Civ) 764] , this Court held that the Referral Courts only
need to consider one aspect to determine the existence of an
arbitration agreement — whether the underlying contract
contains an arbitration agreement which provides for
arbitration pertaining to the disputes which have arisen
29
(2024) 6 SCC 1.
36
between the parties to the agreement. Therefore, the scope of
examination under Section 11(6-A) should be confined to the
existence of an arbitration agreement on the basis of Section
7. Similarly, the validity of an arbitration agreement, in view
of Section 7, should be restricted to the requirement of formal
validity such as the requirement that the agreement be in
writing. This interpretation also gives true effect to the
doctrine of competence-competence by leaving the issue of
substantive existence and validity of an arbitration
agreement to be decided by Arbitral Tribunal under Section
16. We accordingly clarify the position of law laid down
in Vidya Drolia [Vidya Drolia v. Durga Trading Corpn., (2021)
2 SCC 1 : (2021) 1 SCC (Civ) 549] in the context of Section 8
and Section 11 of the Arbitration Act.
166. The burden of proving the existence of arbitration
agreement generally lies on the party seeking to rely on such
agreement. In jurisdictions such as India, which accept the
doctrine of competence-competence, only prima facie proof of
the existence of an arbitration agreement must be adduced
before the Referral Court. 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. The determination of the
existence and validity of an arbitration agreement on the
basis of evidence ought to be left to the Arbitral Tribunal. This
position of law can also be gauged from the plain language of
the statute.
167. Section 11(6-A) uses the expression “examination of the
existence of an arbitration agreement”. The purport of using
the word “examination” connotes that the legislature intends
that the Referral Court has to inspect or scrutinise the
dealings between the parties for the existence of an
arbitration agreement. Moreover, the expression
“examination” does not connote or imply a laborious or
contested inquiry. [ P. Ramanatha Aiyar, The Law
Lexicon (2nd Edn., 1997) 666.] On the other hand, Section 16
provides that the Arbitral Tribunal can “rule” on its
jurisdiction, including the existence and validity of an
arbitration agreement. A “ruling” connotes adjudication of
disputes after admitting evidence from the parties. Therefore,
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, including the
issues pertaining to the existence and validity of an
arbitration agreement. A similar view was adopted by this
Court in Shin-Etsu Chemical Co. Ltd. v. Aksh Optifibre
Ltd. [Shin-Etsu Chemical Co. Ltd. v. Aksh Optifibre Ltd.,
(2005) 7 SCC 234].”
37
26. The above referred decision is followed in subsequent
decisions of this Court in SBI General Insurance Co. Ltd. v. Krish
Spinning
30, Aslam Ismail Khan Deshmukh v . ASAP Fluids Private
Ltd & Anr.
31 and Office for Alternative Architecture v. Ircon
Infrastructure and Services Ltd.
32
27. The curtains have fallen. Courts exercising jurisdictions
under Section 11(6) and Section 8 must follow the mandate of
sub-section (6A), as interpreted and mandated by the decisions of
this Court and their scrutiny must be “confine(d) to the
examination of the existence of the arbitration agreement”.
28. We have examined the matter in detail. There is an
arbitration agreement. The matter must end here . While we agree
with Mr. Ranjit Kumar submissions that his client has much to
say, let all that be said before the a rbitral tribunal. It is, as we
have said elsewhere, just as necessary to follow a precedent as it
is to make one.
29. All the issues raised by Mr. Ranjit Kumar, senior counsel
are kept open for being raised and contested before the a rbitral
tribunal. The issues that we have not taken up and left it to the
arbitral tribunal are jurisdictional issues, involving barring of the
30
2024 SCC OnLine SC 1754.
31
(2025) 1 SCC 502.
32
2025 SCC OnLine SC 1098.
38
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.
30. In view of the above discussions, the appeals stand
dismissed. There shall be no order as to costs.
………………………………....J.
[PAMIDIGHANTAM SRI NARASIMHA]
………………………………....J.
[MANOJ MISRA]
NEW DELHI;
AUGUST 05, 2025
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