Supreme Court Reaffirms Limited Scope of Section 11(6) – Arbitrability Despite Allegations of Serious Fraud

Case: The Managing Director, Bihar State Food and Civil Supply Corporation Ltd. & Anr. v. Sanjay Kumar & Ors.

Citation: 2025 INSC 933

Bench: Justice Pamidighantam Sri Narasimha, Justice Manoj Misra

Date: 5 August 2025

Background

The Bihar State Food and Civil Supplies Corporation entered into agreements with rice millers for the custom milling of paddy procured from farmers under the Food Corporation of India’s procurement scheme. Each agreement contained:

• Clause 15: Authorising recovery of dues as land revenue under the Bihar & Orissa Public Demands Recovery Act, 1914.
• Clause 16: Providing for mutual discussions failing which disputes would be referred to arbitration, with the District Collector as the named arbitrator.

Soon after execution, the Corporation alleged large-scale default in supply of rice, leading to proceedings under the Recovery Act. Parallelly, the Enforcement Directorate and police initiated investigations, uncovering what came to be known as the Bihar PDS Rice Milling Scam, allegedly involving misappropriation exceeding ₹1,500 crore and over 1,200 FIRs.

High Court Proceedings

• 2014–2015: The Patna High Court dismissed writ petitions by rice millers challenging recovery notices, holding arbitration to be the agreed dispute resolution method.
• 2019: Multiple Section 11 applications were filed by rice millers seeking appointment of arbitrators.
• 03 July 2020: The High Court allowed the petitions, holding:
  
  • Disputes remained arbitrable despite allegations of criminality.
  • The Recovery Act and Arbitration Act could operate concurrently.
  • Limitation objections could be raised before the arbitrator.
  • Section 8 inaction during certificate proceedings did not waive arbitration rights.

Supreme Court – Issues for Consideration

The Court considered, inter alia:

1. Whether pending criminal proceedings render contractual disputes non-arbitrable.
2. Whether Recovery Act proceedings bar arbitration.
3. Whether Section 11(6) applications were time-barred.
4. Whether earlier decisions (e.g., Sadhna Kumari) operated as res judicata.
5. Whether such objections should be left to the arbitral tribunal under Section 11(6A).

Key Legal Principles Restated

The Court revisited the law on arbitrability where allegations of fraud exist, reiterating principles from A. Ayyasamy, Rashid Raza, and Avitel Post Studioz, including:

• Fraud simpliciter vs. serious fraud:
  
  • Ordinary contractual fraud remains arbitrable.
  • Serious fraud is non-arbitrable when it permeates the arbitration agreement itself or raises public law issues with wider implications.
• Overlap of civil and criminal proceedings: Mere pendency of criminal cases does not bar arbitration.
• Section 11(6A) limitation: Referral courts must confine themselves to a prima facie determination of the existence of an arbitration agreement, leaving merits, limitation, and arbitrability to the tribunal.

Findings

• An arbitration agreement existed between the parties; thus, under Section 11(6A), the Court’s inquiry ended there.
• All objections—including non-arbitrability due to fraud, limitation, and the effect of Recovery Act proceedings—were left open for determination by the arbitral tribunal as preliminary issues.
• The Court underscored the binding nature of its recent seven-judge ruling in Interplay Between Arbitration Agreements… In Re (2024) 6 SCC 1, reinforcing minimal judicial intervention at the referral stage.

Decision

The Supreme Court dismissed all appeals, affirming the High Court’s appointment of arbitrators, and directed that all jurisdictional objections be raised before the tribunal.

Lex Maven Insight

This ruling is a clear reaffirmation of the post-2015 Section 11(6A) regime:

• Referral courts are gatekeepers, not adjudicators of complex arbitrability questions at the appointment stage.
• Allegations of serious fraud will bar arbitration only in limited, well-defined situations.
• Even in high-profile public money scams, contractual arbitration clauses—if valid—must be honoured, with the arbitral tribunal empowered to rule on its jurisdiction.

For practitioners, the case serves as a strong reminder: if an arbitration clause exists, expect courts to refer disputes unless there is an obvious and incontrovertible bar.

Prepared by: Lex Maven – Dispute Resolution Team

Date: 9 August 2025